Monday, May 4, 2009

A Short History of the Gold Cartel

By James Turk
Free Gold Money Report
Monday, May 4, 2009

http://www.fgmr.com/history-of-gold-cartel.html

This week Bill Murphy and Chris Powell, co-founders of the Gold Anti-Trust Action Committee (www.gata.org), will be in London, England. Their trip is part of GATA’s ongoing effort to raise awareness of the gold cartel and its surreptitious intervention in the gold market.

Bill and Chris will meet with the British media to explain GATA’s findings. They will also attend an important fund raising event being held in support of GATA’s work. Their trip is another important step by GATA aimed at creating a free market in gold, one which is unfettered by government intervention.

Governments want a low gold price to make national currencies look good. Gold is recognizable the world over as the ‘canary in the coalmine’ when it comes to money. A rising gold price blurts the unpleasant truth that a national currency is being poorly managed and that its purchasing power is being inflated.

This reality is made clear by former Federal Reserve chairman Paul Volcker. Commenting in his memoirs about the soaring gold price in the years immediately following the end of the gold standard in 1971, he notes: “Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.” It was a mistake because a rising gold price undermines the thin reed upon which all fiat currency rests – confidence. But it was a mistake only from the perspective of a central banker, which is of course at odds with anyone who believes in free markets.

The US government has learned from experience and taken Volcker’s advice. Given the US dollar’s role as the world’s reserve currency, the US government has the most to lose if the market chooses gold over fiat currency and erodes the government’s stranglehold on the monopolistic privilege that it has awarded to itself of creating ‘money’.

So the US government intervenes in the gold market to make the dollar look worthy of being the world’s reserve currency when of course it is not equal to the demands of that esteemed role. The US government does this by trying to keep the gold price low, but this aim is an impossible task. In the end, gold always wins, i.e., its price inevitably climbs higher as fiat currency is debased, which is a reality understood and recognized by government policymakers. So recognizing the futility of capping the gold price, they instead compromise by letting the gold price rise somewhat, say, 15% per annum. In fact, against the dollar, gold is actually up 16.3% p.a. on average for the last eight years. In battlefield terms, the US government is conducting a managed retreat for fiat currency in an attempt to control gold’s advance.

Though it has let the gold price rise, gold has risen by less than it would in a free market because the purchasing power of the dollar continues to be inflated and also because gold remains so undervalued notwithstanding its annual appreciation this decade. These gains started from gold’s historic low valuation in 1999. Gold may not be as good a value as it was in 1999, but it nevertheless remains extremely undervalued.

For example, until the end of the 19th century, approximately 40% of the world’s money supply consisted of gold, and the remaining 60% was national currency. As governments began to usurp the money issuing privilege and intentionally diminish gold’s role, fiat currency’s role expanded by the mid-20th century to approximately 90%. The inflationary policies of the 1960s, particularly in the US, further eroded gold’s role to 2% by the time the last remnants of the gold standard were abandoned in 1971. Gold’s importance rebounded in the 1970s, which caused Volcker to lament the so-called mistakes of policymakers. Its percentage rose to nearly 10% by 1980. But gold’s percent of the world money supply thereafter declined, reaching about 1% in 1999. Today it still remains below 2%.

From this analysis it is reasonable to conclude that gold should comprise at least 10% of the world’s money supply. Because it is nowhere near that level, gold is undervalued.

So given the ongoing dollar debasement being pursued by US policymakers, keeping gold from exploding upward to a true free-market price is the first thing they gain from their interventions in the gold market. The other thing they gain is time. The time they gain enables them to keep their fiat scheme afloat so they can benefit from it, delaying until some future administration the scheme's inevitable collapse.

So how does the US government manage the gold price? They recruit Goldman Sachs, JP Morgan Chase and Deutsche Bank to do it, by executing trades to pursue the US government’s aims. These banks are the gold cartel. I don't believe that there are any other members of the cartel, with the possible exception of Citibank as a junior member. The cartel acts with the implicit backing of the US government to absorb all losses that may be taken by the cartel members as they manage the gold price and further, to provide whatever physical metal is required to execute the cartel's trading strategy. How did the gold cartel come about?

There was an abrupt change in government policy circa 1990. It was introduced by then Federal Reserve chairman Alan Greenspan in order to bail out the banks back then, which like now were insolvent. Taxpayers were already on the hook for hundreds of billions to bail out the collapsed ‘savings & loan’ industry, so adding to this tax burden was untenable. He therefore came up with an alternative.

Greenspan saw the free market as a golden goose with essentially unlimited deep pockets, and more to the point, that these pockets could be picked by the US government using its tremendous weight, namely, its financial resources for timed interventions in the free market combined with its propaganda power by using the media. In short, it was easier to bail out the insolvent banks back then by gouging ill-gained profits from the free markets instead of raising taxes.

Banks generated these profits by the Federal Reserve’s steepening of the yield curve, which kept long-term interest rates relatively high while lowering short-term rates. To earn this wide spread, banks leveraged themselves to borrow short-term and use the proceeds to buy long-term paper. This mismatch of assets and liabilities became known as the carry-trade.

The Japanese yen was a particular favorite to borrow. The Japanese stock market had crashed in 1990, and the Bank of Japan was pursuing a zero interest rate policy to try reviving the Japanese economy. A US bank could borrow Japanese yen for 0.2% and buy US T-notes yielding more than 8%, pocketing the spread, which did wonders for bank profits and rebuilding their capital base.

Gold also became a favorite vehicle to borrow because of its low interest rate. This gold came from central bank coffers, but they refused to disclose how much gold they were lending, making the gold market opaque and ripe for intervention by central bankers making decisions behind closed doors. The amount lent by central banks has been reliably estimated in various analyses published by GATA to be 12,000 to 15,000 tonnes, nearly one-half of central banks total holdings and 4-to-6 times annual new mine production of 2500 tonnes. The banks clearly jumped feet first into the gold carry-trade.

The carry-trade was a gift to the banks from the Federal Reserve, and all was well provided the yen and gold did not rise against the dollar because this mismatch of dollar assets and yen or gold liabilities was not hedged. Alas, both gold and the yen began to strengthen, which if allowed to rise high enough would force marked-to-market losses on those carry-trade positions in the banks. It was a major problem because the losses of the banks could be considerable, given the magnitude of the carry-trade.

So the gold cartel was created to manage the gold price, and all went well at first, given the help it received from the Bank of England in 1999 to sell one-half of its gold holdings. Gold was driven to historic lows, as noted above, but this low gold price created its own problem. Gold became so unbelievably cheap that value hunters around the world recognized the exceptional opportunity it offered, and demand for physical gold began to climb. As demand rose, another more intractable and unforeseen problem arose for the gold cartel.

The gold borrowed from the central banks had been melted down and turned into coins, small bars and monetary jewelry that were acquired by countless individuals around the world. This gold was now in ‘strong hands’, and these gold owners would only part with it at a much higher price. Therefore, where would the gold come from to repay the central banks?

While yen is a fiat currency and can be created out of thin air by the Bank of Japan, gold in contrast is a tangible asset. How could the banks repay all the gold they borrowed without causing the gold price to soar, further worsening the marked-to-market losses on their remaining positions?

In short, the banks were in a predicament. The Federal Reserve’s policies were debasing the dollar, and the ‘canary in the coalmine’ was warning of the loss of purchasing power. So Greenspan's policy of using interventions in the market to bail-out banks morphed yet again.

The gold borrowed from central banks would not be repaid because obtaining the physical gold to repay these loans would cause the gold price to soar. So beginning this decade, the gold cartel would conduct the government’s managed retreat, allowing the gold price to move generally higher in the hope that, basically, people wouldn’t notice. Given its ‘canary in a coalmine’ function, a rising gold price creates demand for gold, and a rapidly rising gold price would worsen the marked-to-market losses of the gold cartel.

So the objective is to allow the gold price to rise around 15% p.a., while at the same time enable the cartel members to intervene in the gold market with implicit government backing in order to earn profits to offset the growing losses on its gold liabilities. Its trading strategy to accomplish this task is clear. The gold cartel reverse engineers the black-box trend-following trading models.

Just look at the losses taken by some of the major commodity trading managers on their gold trading over the last decade. It is hundreds of millions of dollars of client money lost, and gained for the gold cartel to help offset their losses from the gold carry-trade. All to make the dollar look good by keeping the gold price lower than it should be and would be if it were allowed to trade in a market unfettered by government intervention.

There are only two outcomes as I see it. Either the gold cartel will fail in the end, or the US government will have destroyed what remains of the free market in America. I hope it is the former, but the continuing flow of events from Washington, D.C. and the actions of policymakers suggest it could be the latter.

James Turk is founder and chairman of GoldMoney, which provides a convenient and economical way to buy and sell gold, silver and platinum online using the digital gold currency for which he was awarded four US patents.

Saturday, May 2, 2009

Book Review: The End of Money and the Struggle for Financial Privacy

Timothy Terrell of Liberty University published an excellent book review in The Quarterly Journal of Austrian Economics (Summer 1999) of Richard Rahn's The End of Money and the Struggle for Financial Privacy (1999).

Terrell writes:
"Two key technologies give the impetus to Rahn’s encouraging predictions. Only in the last five years have they both come into common use, and Rahn believes that they now will force major reductions in the size and scope of civil government."

"The first development was public-key cryptography, which appeared in the mid-1970s. Public-key cryptography is now easy to use, and allows secure transmissions over telephone lines. Rahn, in a primer on public-key cryptography, shows that it is relatively simple to make a code that is practically unbreakable even by governments."

"The second development was the Internet (which Vice President Gore apparently intends us to believe was his brainchild). In combination with strong public key cryptography, the Internet essentially allows any two modem-equipped computers in the world to trade information that is inaccessible by any government."

"Because of these complementary technologies, it is possible for digital money substitutes to be created (publicly or privately) and exchanged worldwide without the knowledge or consent of government regulators. Paper currency will become obsolete as privacy-seekers turn to secure, instantaneous digital transactions."
"International private exchange of money substitutes over the telephone allows businessmen to avoid some taxes and government regulations, which are typically geographically constrained. Many services, such as software development, architectural design, legal services, and banking services, can be provided from a distance over the Internet and service providers can move to free-market jurisdictions to avoid taxes."
Terrell rightly understands that laws against money laundering also reduce the financial privacy of non-criminals. Terrell states:
"Because financial privacy is absolutely essential to liberty, it is refreshing to see Rahn hopeful about the restoration of privacy to individuals worldwide. Governments have enjoyed the ability to monitor the slightest detail of electronic financial transactions, and in some places have legally required reporting of large cash transactions. The well-worn excuse that government snooping is necessary to suppress organized crime and money laundering is spurious, Rahn shows. Suppressing organized crime through money laundering statutes is ineffective, and any small benefit that may accrue is not worth the certain loss of privacy for non-criminals."

"Rahn opposes money laundering statutes and encryption controls of all sorts, declaring that, in any event, any attempt to limit financial privacy will soon become an absurdity."
From the Other Reviews:

"Richard Rahn is that rare, rare bird, an economist who can explain arcane matters in easy-to-understand language. Get the latest dope, in plain language, on the world banking and currency crisis, the techniques and importance of "foreign" bank accounts, and how modern technology may spell the ultimate demise to intrusive and totalitarian governments." -- Henry G. Manne, founder of the Law and Economics Center, and former Dean of George Mason University Law School

"Richard Rahn persuasively argues how the coming digital money revolution will make lower tax rates and radical tax simplification inevitable." -- Jack Kemp, Co-Founder of Empower America

"The End of Money is a call to arms to defend individual liberty. Than demonstrates how inextricably linked financial privacy is to our fundamental freedoms, and why we must fight for it." -- Mack F. Mattingly, former US Senator and Ambassador

For further reading:
"Report on Financial Privacy, Law Enforcement and Terrorism", Task Force on Information Exchange and Financial Privacy, March 25, 2002
"Don't Sacrifice Financial Privacy to the War on Terrorism", Veronique de Rugy, Cato Institute, October 25, 2001

"The Counter-Money Laundering Act: An Attack on Privacy and Civil Liberties", Scott C. Rayder, The Heritage Foundation, August 31, 2000
"Laundering Digital Money", Kristen May, June 1, 2000
"The Future of Money and Financial Privacy", Richard Rahn, The Future of Financial Privacy, December 31, 1999

Thursday, April 30, 2009

Robert Hettinga and Digital Bearer Settlement

The path-breaking work of Robert Hettinga was published in a series of newsletters issued by FT Virtual Finance Report during 1998-1999. Bob is well-known for starting the famous e$ and e$pam mailing lists, to which I was an early subscriber, and as the founder of the Internet Bearer Underwriting Corporation (IBUC). Along with fellow privacy stewards, Vince Cate and Ray Hirschfeld, he launched the world's first conference on financial cryptography, FC97, on the island of Anguilla.

Table of Contents
FT Virtual Finance Report (and related private articles):
  • "Digital Bearer Settlement" - April 1998
  • "The Geodesic Market" - June 1998
  • "How to Underwrite a Digital Bearer Security"- July 1998
  • "'All the bonds in Christendom': Digital Bearer Bonds"- September 1998
  • "Russell's Revenge: Digital Bearer Equity"- October 1998
  • "Digital bearer derivatives - mathematics of polite fiction" - November 1998
  • "One-Way Hash and Micromoney Mitochondria: Digital Bearer Micropayment"- December 1998 (private)
  • "Hit 'em where they ain't': deploying digital bearer transactions"- February 1999
  • "Internet bearer underwriting: it's time"- April 1999
  • "Endpiece: How to build a bearer underwriting revenue model"- May 1999 (private)
  • "How will the regulators work in the new net economy?"- July 1999
  • "Divine Providence - Internet content without transfer pricing"- September 1999
  • "The Geodesic Economy" - December 1999 (private)
For further reading:
"The Ricardian Contract", Ian Grigg, July 6, 2004
"Formalizing and Securing Relationships on Public Networks", Nick Szabo, September 1997
"Money and Currency in the 21st Century", Geoffrey Turk, July 1997
"The Internet as Buttonwood Tree", Robert Hettinga, Wired, August 1996

Wednesday, April 29, 2009

How DigiCash Blew Everything

By Unknown Author
NEXT! Magazine
January 1999

http://www.jya.com/digicrash.htm

In September 1998 the high-tech company DigiCash finally went bankrupt. The office in Palo Alto, California remained open for a while but it was merely a stay of execution. Two months ago the company filed for Chapter 11.

Nobody realises, but with the "pending failure" of DigiCash, a bit of Dutch Glory died. The company made a brilliant product. Even Silicon Valley was jealous of the avant garde technology invented in the Amsterdam Science Park. Internet "guru" Nicholas Negroponte went so far as to call the electronic payment system, ecash1, "the most exciting product I have seen in the past 20 years." The rise and fall of DigiCash: a story of paranoia, idealism, amateurism and greed.

David Chaum

The name of one man stands out way above anyone else in the history of DigiCash: David Chaum, US citizen, born into a wealthy family, brilliant mathematician and one who had to always have things his own way2. After travelling around the world he ended up in Amsterdam in the late 80's. Here, he became head of the cryptography department of the CWI (Centre of Mathematics and Information Science). Cryptography is the science of encoding and decoding of data, in order to maintain privacy. Chaum had built a big reputation in this field in the previous few years. Insiders estimated he was in the top 5 of the world at the time.

And at the CWI, they also worked on electronic payment systems. In the early 90s, Rijkswaterstaat3 became interested as they were thinking about introducing automatic toll-collection roads. Chaum got together a few researchers, mainly from earlier contacts with the university of Eindhoven. All guys who knew each other through a "young researchers" programme sponsored by Philips. They had all spent their youth programming behind a computer. Enthusiastically they started, and within little over a week the job was done.

DigiCash

Rijkswaterstaat was satisfied and the team got another assignment. That was the moment when Chaum smelt money. Why couldn't he turn the patents he claimed in the 80s into money? On the 21st of April, 1990, the company DigiCash first saw light of day. Unfortunately Rijkswaterstaat decided to put the advanced system on the shelf and to continue with the old standby, number plate recognition. Chaum could have divested himself of the company and continued his work at the CWI, but he had apparently tasted the forbidden fruit of business. He decided to market his research other ways: smart cards, point-of-sale applications, cash registers and tele-banking. Of course, he had to quit his job at the CWI because of the risk of conflict of interest.

Financing of the company was done privately by the American. Former DigiCash employees agree that Chaum and his wealthy family had at least contributed a few million.

It all started out quite nicely. The brand new company sold a smart card for closed systems which was a cash-cow for years. It was at this time that the first irritants appeared. Even if you are a brilliant scientist, that doesn't mean you are a good manager. David Chaum was a control freak, someone who couldn't delegate anything to anyone else, and insisted upon watching over everybody's shoulders. "That resulted in slowing down research," explains an ex-DigiCash employee who wished to remain anonymous. "We had a lot of half-finished product. He continuously changed his mind about where things were headed."

This drove a few people crazy and it didn't take long before the first few turned their back and started their own company. In 1992 Boudewijn de Kerf and Eduard de Jong quit the company and went to Silicon Valley where they invented and sold an operating system to Sun Microsystems for a substantial sum.

Ecash

Annoying as he was, David Chaum had brilliant ideas. In 1993 he invented the digital payment system ecash. According to insiders, it was a technically perfect product which made it possible to safely and anonymously pay over the Internet. This was a field in which a lot of work needed to be done, according to the ever-paranoid cryptographers. They considered that to pay with your credit card was extremely insecure. Someone only had to intercept the number to be able to spend someone else's money. Credit cards are also very cumbersome for small payments. The transaction fees are simply too high. Ecash however was perfectly suited to sending electronic pennies, nickels and dimes over the Internet.

It was especially this idealism that prevented people from leaving the stubborn Chaum. Enthusiasm waxed for the elegance of his perfect inspirations. There were even people flying in from the US to witness the birth of something this beautiful, which was unusual, as this is usually only associated with big pay checks plus leased Mercedes in the parking lot4. An ex-employee: "And no nonsense like 'We are going to make this company as big as possible, as soon as possible, and cash out'. No, we really wanted to make this product as big as possible." People who visited and walked around the Matrix building of the Amsterdam Science Park acknowledged that there was a young and dynamic atmosphere. No fast suits, but more like a school-yard gang. Real whiz kids who got coffee from the machine with their own electronic gadgets.

Legendary Suspicion

But even this enthusiasm was unable to withstand the bad feelings generated out of decisions made by CEO David Chaum. Almost every ex-DigiCash employee who you ask is able to tell you a story of his legendary suspicion. "Paranoid" is a word frequently heard. Raymond Stofberg, nowadays owner of the Internet company EURO RSSG Interactive, was responsible for DigiCash financial affairs until August 1996. He explains the story from the beginning. A few years ago Stofberg came to an agreement with Henderson Investment Management. They would invest two tranches for a total of 10 million dollars. When Chaum saw the agreement, he immediately faxed it to all the other venture capitalists which he was negotiating with. Via message drums, word leaked out to Henderson, and the agreement was cancelled.

A little later ING Investment Management was interested. This deal was about twenty million guilders5. The plans were all laid out. ING Barings together with Goldman Sachs would also bring DigiCash to the stockmarket within two years. "The day we were all set to sign, David didn't want to", tells Stofberg. "He was so paranoid, that he always thought something was wrong. There were 8 people from ING, including the CEO, and David simply refused to sign!"

Earlier Chaum was contacted by the unavoidable Bill Gates of Microsoft. He would integrate ecash in every copy of Windows 95. Rumor had it, the giant from Seattle offered something like 100 million dollars. David Chaum refused to sell it for less than 1 or 2 dollars per sold copy and that stubborn attitude killed another agreement. "A really sad story," reflects Stofberg. Chaum killed an agreement with another American company, Netscape, in the same way, by insisting straight away that everybody sign non-disclosure agreements, even before negotiations had started. Exit Netscape.

DigiCash was also involved in the first version of I-Pay6. The contracts were there, just the signatures were missing. But a week before the deal was made Chaum decided to tell a large Dutch newspaper that the Chipper and Chipknip systems7 were absolutely insecure. "The smartcard is broken," he said. The banks had just invested 250 million guilders in the system, so it wasn't surprising that ABN-Amro executive De Ribourdouille personally killed the DigiCash deal.

David Chaum always bailed out at the last moment. Early 1996 there were negotiations with credit card company Visa. The Americans wanted to invest forty million dollars in the company. "But David suddenly demanded 75 million," Raymond Stofberg recalled. "Get lost," was Visa's reply. Retrospectively, a lot of ex-DigiCash employees understand why Chaum was so paranoid. As a cryptographer you have to assume the whole world is trying to rip you off. A certain amount of paranoia is part of the job. Chaum had also worked for intelligence agencies, and that didn't fortify his faith in the good intentions of humankind. His vision of the privacy of the individual was almost an obsession. In 1996 he said, in the relations magazine of Honeywell-Bull: "The difference between a bad electronic cash system and well-developed digital cash will determine whether we will have a dictatorship or a real democracy."

Whilst David might have had little faith in humankind, the employees were getting annoyed with their director. In the beginning they forgave him if another promising deal didn't go through, because David always said there were bigger fish to catch. The world was at their feet. It had to be, because in the whole world there was no product that could even come close to DigiCash. It was this feeling of technological superiority and arrogance that would kill DigiCash. The employees weren't only annoyed with the deals that were cancelled a few days before being closed, but also about the work environment. "David is a real nice guy and you can have a lot of fun with him, but at the same time he abused this employees," tells an ex-employee who wants to stay anonymous. "He always expected an enormous commitment8; once every few weeks you had to work for nights on end." "And there was nothing to compensate for that. Once you were lured inside, you never received pay rises, no extras, nothing. That was very frustrating, but they kept the carrot in front of the donkey9 with the promise that 'once we make that big deal, we'll all be rich.' " "But we never got any shares. It was a hollow promise."

The Coup

In March 1996, tensions had reached a critical level. The irritation over a series of blunders led to a meeting of eleven important employees. They decided to give David a simple choice: "You're out or we're out." "That was the only way David could no longer fuck up the company," said one of them. The plan was to set up their own company, it had been done before, ex-DigiCash people had set up their own company with success. Accepted tradition10 has it that two out of the eleven members - Jelte van der Hoek and Wouter Habraken - went to David who panicked and immediately made them interim-managers. He then disappeared into the background, and eventually returned to the US a year later.

The remaining nine co-conspirators were not happy, but they accepted it for the moment. They had achieved their objective of getting rid of Chaum. But this acceptance was soon replaced with anger at the two new managers. "Jelte was a technical guy, who had been programming since he was seven, he couldn't manage at all. And Habraken wasn't suited either. He was too much a deal-maker, not a manager," according to an ex-employee.

Wouter Habraker wasn't impressed with the criticism. From Australia he emailed: "DigiCash was founded by crypto-people, and good crypto-people are a bit paranoid. That's why it's not surprising there are different views on the Jelte's and my reasons. That's a pity, but our objective was to get investment and find a new manager. And that's what we did." Nonetheless frustrations grew. "Three weeks later, I found out they wanted to bypass me and get rid of me," said Raymond Stofberg. "From that time on I knew for sure that Chaum had trusted the wrong people." Other employees shared that belief and hardly 3 months after things had settled down there was a exodus of employees. Since then there is an in-joke that goes: "If you can survive DigiCash, you can handle anything that life throws at you." Amazingly enough DigiCash was still a very sexy company for the rest of the world. A rising star in a world where Internet companies like Netscape and Yahoo showed there were enormous risks, but also enormous benefits. DigiCash was hot and venture capitalists were stampeding to invest in it. Early in 1997 it received an investment of a total of sixteen million guilders from Gilde Investment, a daughter company of the Rabobank, and also Nicholas Negroponte, director of the Media Lab of MIT and writer of visionary books about the Internet. Also included was the well-known venture capitalist, David Marquardt, general partner at August Capital.

A new CEO

The new investors immediately appointed a new Chief Executive Officer: Michael Nash, an American from the credit card company Visa. Most employees didn't really like Nash. "Fast guy, smooth talker, but no content," said one. Nash came from a big bureaucratic company and had no clue on how to run a small company that had to fight in the front line. There were also angered at the fact that Nash immediately opened an office in Palo Alto. You could justify the decision from a marketing point of view, but the result was that the development was split. The costs sky-rocketed to a completely new heights, because the communications between the two departments was slow and cumbersome. The salaries in Silicon Valley were of course much higher than in the Amsterdam Watergraafsmeer11. And the American programmers absolutely didn't do a better job then their Dutch colleagues. According to an ex-employee, Nash had his head in the clouds12. Everyone had to work on avant garde products like ecash, for which there was only a very slowly growing market. Real products, with which good money could be made, like smart cards and road-toll systems, were left to slowly die. "Mike would rather talk to Swatch, because he wanted ecash in watches. That didn't help us at all, because ecash is made for a PC. You are allowed to shout about futuristic things, but you should not believe in the hype you have yourself created." DigiCash did have a very impressive board with, for example, David Chaum - who had disappeared into the background - and the influential Nicholas Negroponte. But what good did those names do for the company? "A guy like Negroponte is only there for his image," says yet another ex-employee. "For relatively little money he had a share in a high profile company. But that doesn't help with the management of the company itself. Negroponte is just like any ordinary rock star, he gets out of the plane and when he walks down the stairs he still doesn't know which country he is in. That's been very destructive."

The Credit Card Triumphs

Meanwhile the management tried very hard to sell the ecash system to banks and was more or less successful in it. The Mark Twain Bank, in America, was the first to experiment with ecash. Later, another 7 banks followed, banks like Deutsche Bank and Credit Suisse. Banks are very conservative, they did business with DigiCash to prevent them from falling behind, not to storm ahead and be the first. DigiCash never dealt with the "normal" departments but always with a "special product" department. And why would the banks be in any hurry to implement the revolutionary new systems of DigiCash? The electronic payment market was dominated by credit cards, and plenty of money was made off them.

Neither were consumers so unhappy with the current situation. They weren't too convinced about the possibilities of fraud; even if something did go wrong, they weren't the ones to pay, the credit companies were. No worries there. They didn't really care about anonymity either, and certainly with the delivery of physical products this was completely irrelevant.

Everything was in stalemate. The banks were not in a hurry, the consumers didn't see any advantages. Although providers were the ones who would profit mostly from micropayment systems like ecash, they couldn't do anything but wait and be patient. Imagine: CNN receives millions of hits on their website every day. If you could ask one cent every time someone requests a page, that would make millions every year.

Halfway through 1998 everything seemed lost. The high salaries - estimates were that they were shelling out a million a month - quickly ate away reserves and there were no revenues to compensate for that. The company never had a clear marketing strategy. It wasn't till June 1998 that the sales manager at the time, Jan Kees Dunning, chose to change tactics. The dogma of Chaum, that DigiCash should aim for the virtual world, was abandoned. It was no use trying to compete against the credit card companies; they would squash you if you upset them.

Citibank

Jan Kees Dunning explains that from now on, ecash should be offered as a part of a complete range of payment methods. "No longer as the money maker for banks, because it was never that. All banks suffer losses on the traditional payment systems, and with a much cheaper system you could only minimize those losses." "Nowadays, a consumer isn't that loyal anymore. He demands from his bank that it offers all services, if they don't he'll just switch to another bank. Ecash has to be one of those services."

At least that was a clear strategy. But once again things were ruined, this time because of never-ending negotiations with the big American CitiBank. Citibank was a very attractive partner for DigiCash. In the first place, there was a large amount of clients: seventy million. Just as important, the backing of Citibank might convince the other, more skeptical, banks. Citibank is known as very aggressive. In the 70s they introduced a universal payment system which enabled them to have very competitive fares and services. If they had started with ecash, none of the other banks could have afforded to lag behind.

But at the crucial moment Citibank decided to merge with the Traveler Group, which focused attention away from DigiCash. At the same time, the stock market valuation of CitiBank dropped to about half of recent values and at times like that, knee-jerk management rules in the US. So much for DigiCash.

Jan Kees Dunning is convinced that the business could have turned out differently to the fatal chain of events that seems to have happened. He estimates that DigiCash needed only another six months to secure a breakthrough. But the American venture capitalists had had enough at this point. They first pulled the plug on the Amsterdam team, and the Palo Alto team is currently floating between life and death13. Only six people remain with the company, and the one thing the new CEO Scott Loftesdale [sic]14 - Mike Nash was fired in August of 1998 - has left to do is announce the firesale of the DigiCash patents. Which are getting cheaper every minute, because the people who developed the product have all found work elsewhere. The ecash project now conjures up a feeling of history, dead and buried15. There has not been any product maintenance, and that's fatal in an environment where everything is changing this rapidly. The future of especially ecash is very uncertain. Either it is sold for a maximum of five million guilders to a company like IBM, who has lagged two years behind with a similar product, according to Dunning, or it disappears. A sad fate for a path-breaker in a digital technique which will have completely eliminated regular cash in, say, twenty years. Everybody is convinced of that; the days of cash are numbered. It's too expensive, too cumbersome and too old-fashioned. David Chaum has since been seen around Berkeley, walking with his soul under his arm16. He was far ahead of his time. Too far.

Translators Notes

1 In the original article, the two words "e cash" were used.

2 "Tot op het bot."

3 Dutch Department of Public Works. Responsible for waterways and roadways.

4 "Lease-bak" is a derogative term in Dutch.

5 About 10 million dollars. The guilder trades at 1.8 to 2 per dollar.

6 A Dutch payment system operated by a cartel of all major Dutch banks.

7 Smartcard systems operating competitively in the Dutch market.

8 "Inzet."

9 "Hielden aan het lijntje."

10 "Volgens de overlevering."

11 Suburb in Amsterdam where the Science Park was located.

12 "Met zijn hoofd in de wolken."

13 "Zweven tussen leven en dood."

14 Scott Loftesness.

15 (German) "Das war einmal."

16 "Lopen met zijn ziel onder de arm."

Editor's note. This was translated by some Dutch natives, and then edited by myself for style. Tricky job really as translation should be done into one's native language. No promises as to accuracy! --Ian Grigg

For further reading:
"Past currency", Steve Bowbrick, Guardian, February 25, 2003
"Digging Those Digicash Blues", Declan McCullagh, Wired, June 14, 2001
"DigiCash: Failure is Interesting", Felix Stalder, December 1999
"Behold the Automated Till", Peter Cassidy, December 1999
"FM Interviews David Chaum", Jens-Ingo Brodesser, First Monday, July 5, 1999
"Digicash files Chapter 11", Tim Clark, CNET News, November 4, 1998
"E-Money (That's What I Want)", Wired, December 1994

The Siege on the Greenback

By Josh McHugh
Forbes
Monday, September 8, 1997

http://www.forbes.com//forbes/97/0908/6005176a.html

IN A BUREAU OF ENGRAVING & PRINTING building just across the Potomac's Washington Channel from the Jefferson Memorial, printing presses the size of moving vans grind out sheets of dollar bills. Ink-spattered workers tend the machinery with screwdrivers and oilcans.

That operation, along with the green paper it produces, may soon fall victim to the computer age. If so, the federal government will lose a lucrative source of revenue. "The Federal Reserve is the most profitable business there is," says Walter Wriston, former Citibank chairman. "They don't have to pay for their inventory." Here's why: As long as the public holds paper money, it is, in effect, giving the federal government an interest-free loan. The dollars are simply a non-interest-bearing IOU issued by the Federal Reserve.

For most of recorded history monarchs and central banks have considered it their divine right to control the money supply. When they succeed in doing so, they can finance their operations in part by skimming some of the money. "Seigniorage" is what the economists call the process. In the old days seigniorage took the form of coin clipping;the royal mint would issue a sovereign with less than a sovereign's worth of gold in it. Nowadays seigniorage takes place when the government issues bills that erode with inflation.

In a digital world cybermoney becomes an ever-greater threat to the government's monopoly over dollar issuance.

Over the last three decades it has become easier to move and hold money in noncash forms. American Express first stole away some of the government's float by persuading tourists to replace paper money with travelers' checks. Later, instead of holding a no-interest checking account at a bank, which in turn holds a no-interest account at a Federal Reserve bank, you could own shares in a money market fund and use those shares like money.

Credit cards, too, cut down on the need to carry paper money.

Frequent-flier miles could be next. If the airlines made these mileage accounts freely transferable, they would turn into a dollar alternative that would hold their value much better than a greenback.

Next in the evolution of the dollar competitors: digital cash, exchanged over the Internet and stored on disk drives or microchip-enhanced smart cards. In principle the technology gives anyone with a server, a network connection and a command of cryptographic protocols the ability to mint money. Your unit of account doesn't have to be non-interest-bearing dollars; it could be a claim on a pile of interest-bearing Treasury bills or shares in the Magellan Fund.

The Internet's global reach solves the acceptance problems that private currencies used to encounter in the 19th-century days of free banking. And the Web is the perfect place to post a rating newsletter that could tell potential users whose currency is the most trustworthy or widely accepted.

Robert Hettinga, who runs the Boston Digital Commerce Society, predicts that digital cash will first gain currency as a medium for small on-line transactions, such as payments for downloading inexpensive software. Once people gain confidence in the banks that issue digital money and the software that moves it, they will trust them with larger sums.

Among the companies working on digital cash systems: Citicorp, Microsoft, Digital Equipment Corp. and Nomura. The systems all have one thing in common: The U.S. Treasury gets cut out of the float.

Could the federal government attempt to regulate or tax competing money systems away? The issuers could simply relocate to Zurich or Singapore.

Politics for the Really Cool

By Josh McHugh
Forbes
Monday, September 8, 1997

http://www.forbes.com/forbes/1997/0908/6005172a.html

"THIS IS A COOL HOLIDAY," says Sameer Parekh over a July 4 breakfast in a cafe near the University of California at Berkeley. "It's the day we celebrate overthrowing the government."

A disheveled 22-year-old, 135 pounds, shirttails down to the knees of his jeans, with a 4-inch black goatee hanging from a cherubic face, Parekh is no violent revolutionary out to establish a dictatorship of the proletariat. Parekh is a libertarian of a new sort. His weapon: software.

Parekh traffics in a substance known among his peers as "strong crypto," cryptographic software massively stronger than the stuff American companies are allowed to export. Cryptography is the science of scrambling messages so they cannot be read by prying eyes. It is the lifeblood of telephone commerce;credit card verifications, bank teller machine transactions, wire transfers. It is useful to crooks. And it is magnificently antiauthoritarian.

Encrypted with a sufficiently powerful code, a cellular phone conversation becomes untappable, a written message or computer file indecipherable. Federal authorities are attempting to limit the spread of this technology abroad. But they are no match for Parekh and other rebels with his programming skills.

For the last three years Parekh has been mixing sophisticated computer science with libertarian philosophy, selling a cryptographic product made in an undisclosed foreign country through an Anguillan subsidiary. His company, C2Net, thereby skirts U.S. export restrictions.

Looking further out, cryptography's challenge to Washington's authority;indeed, to that of all governments;is daunting. Even if the federal government can somehow keep strong crypto out of the hands of Muammar Qaddafi; extremely doubtful at this point;it would still have all manner of domestic users to worry about.

"I realized that protection of privacy on the Internet couldn't be viable without a viable business behind it."-Sameer Parekh

Cryptography is very useful to anyone who can't afford to leave behind a paper trail. That could be someone running an illegal gambling business or doing insider trading or distributing child pornography or arranging the details of a cocaine shipment. It could also be someone who is a perfectly legitimate business operator except that he doesn't want to pay income taxes or otherwise submit his transaction to the prying eyes of increasingly intrusive governments.

Parekh envisions a revolution in which federal buildings don't burn to the ground but rather just run out of money. There would still be a government, but it would not be the expansive welfare state we have today. It would be a minimalist version of the sort seen in a place like Hong Kong;strong on law and order, sanctity of contract and minimal social security but that's about it.

Walter Wriston, former chairman of Citibank, devoted a chapter of his brilliant 1992 book The Twilight of Sovereignty to the history of cryptography. Wriston foresaw the weakening of national governments through the power of technology and recognized that cryptography would play a key role. He knew something about it from personal experience. During World War II he was responsible for the electromechanical devices used by the Allies to encrypt their messages. Wriston sees encryption technology as a key ingredient in the transfer of social and economic power from the governments of nation-states to the PC-packing populace. Since the success of Internet commerce depends on strong cryptography, its proliferation is inevitable. "The government can't do much about it," says Wriston. "It's another thing slipping through their fingers."

Rejoice, libertarians. Lament, Hillary Clinton and partisans of the nanny state. If you want to participate in the cryptographic revolution against Big Government, you don't have to traffic with an arms merchant in a dark alley. Go to the Internet. Pretty Good Privacy (PGP), from $99 to $249, is a popular program. Another one is SynCrypt, by SynData Technologies Inc., just out.

Using this off-the-shelf stuff you can transact business in total privacy. Don't worry about spies. With what is presently known about code cracking, it would take a supercomputer a billion years to divine your message.

There is another dimension to the spread of crypto. The same mathematical tricks used to encode a message can be run in reverse, to generate a so-called digital signature. This is a computer stamp of authenticity. It can be used to prove that an electronic document originated with a particular sender, such as a bank depositor or a bank officer. Assemble a few digital signatures in a clever fashion and you have created a mechanism for digital cash;a system of electronic payments akin to Visa or MasterCard but with the added feature that it can be made anonymous.

Think about that. Money transfers that are genuine but untraceable. Anonymous, secure E-cash could give rise to a blossoming of commerce on the Internet and a reduction in the billions of dollars spent annually processing paper checks and paper credit-card chits.

Bad news, of course, for the Internal Revenue Service and its 3,570-page maze of a tax code. And what happens to the Fed's control of the money supply when more and more money takes the form of digital blips on a satellite in the sky? How do you stop money laundering once cash is invisible and leaves no paper trail?How do you catch tax dodgers?

"It's easily the most important privacy issue of the decade, and perhaps the most important policy issue."-David Friedman

The IRS figures that it is already losing $120 billion a year on income that goes unreported. When E-cash becomes commonplace, that number is going to get larger. The underground economy, after all, does surface at times. Dogs can sniff the traces of cocaine in a satchel of bills. In the ionosphere economy there is no odor for dogs to sniff.

For the libertarian set, today's encryption technology is the best thing to come along since the right to bear arms. After all, why risk getting arrested for dumping tea into the harbor when you can just order the tea from a tax-free jurisdiction over the Net, encrypt the purchase order and pay with anonymous digital currency? Libertarians see encryption technology as the weaponry for a bloodless grassroots revolution in which revenue streams replace street barricades as the fields of battle.

"We are looking at kidnappers, we are looking at terrorists, we are looking at banking integrity, we are looking at propriety interests and economic secrets," Louis Freeh, director of the Federal Bureau of Investigation, told members of the International Cryptography Institute two years ago. Freeh has been stumping for tougher government controls on encryption technology. He wants a "key escrow" bureaucracy that would hold cryptographic keys that could, if law enforcement deemed it necessary, be used to unscramble any encrypted message.

But do we want to put that much power in the hands of bureaucrats? "Back in England, when the king wanted to smoke out people we'd call terrorists today;the people we see in retrospect as patriots;he wanted to steam open envelopes," scoffs Wriston. "Nothing has changed;now governments want to steam open your E-mail. If I were the national drug czar, I'd want to, too. The problem is, none of us trust the government to limit that interception to those particular messages."

If the FBI is threatened, that doesn't entirely dismay the libertarian crowd that seems to be overrepresented in the hacker community. "With the Internet being ubiquitous and crypto being cheap and easy to get, it's going to be more and more difficult for governments to control transactions between people," declares Adam Shostack, a 24-year-old cryptography consultant whose clients include Fidelity Investments. In February he instructed attendees at a financial cryptography conference in the finer points of using encryption to protect large networks from attackers and con men. Site of the conference: the Caribbean tax haven of Anguilla.

It's too early to give it a name, but computer technology and modern communications are at the threshold of creating a new kind of political movement. Talk to David Friedman, a professor of economics at the University of California at Santa Clara. Friedman espouses an anti-big-government philosophy a little stronger even than that of his famous father, Milton Friedman. He calls the set of questions raised by encryption "easily the most important privacy issue of the decade, and perhaps the most important policy issue." He concedes the downside to a technology that will be useful to lawbreakers. But he says the advantages of pervasive privacy outweigh the disadvantages: "On the whole, it'll be a change to a freer and more interesting society."

Cryptography, the craft of secret writing, has been around almost as long as writing itself. Bad guys have always used it. So have rebels. Its better-known applications through the ages have been in making secure military plans and espionage communiques. Today's biggest user is, if not the government, the bank industry. Encryption safeguards the more than $1 trillion a day that flows over the Fedwire and the Chips systems.

Modern cryptography was born two decades ago at Stanford University with the invention of so-called public key encryption by Whitfield Diffie and Martin Hellman. In classic cryptography, keys were kept private. The sender would use a key, or formula, to encode a document; the receiver would use a closely related formula to decode. To communicate, the sender and receiver would have to share a key. This was usually the weak spot. A messenger sent to transfer the key could be intercepted or compromised.

With public-key encryption, this problem is finessed. The receiver of confidential messages simultaneously creates an encoding and a decoding key. The peculiar arithmetic of these keys, perfected by a trio of MIT mathematicians, is such that the one cannot be divined from the other: Knowing the encrypting formula tells you absolutely nothing about how to unscramble a message. So the receiver need not be particular about his choice of messenger to deliver the encrypting key. Indeed, he can afford to publish the key for all the world to see. Modern-day practice is to dump the key onto an Internet home page or server.

What makes encryption a killer application just now? The MIT algorithm requires that both sender and receiver do several billion calculations on each message, a practical impossibility not too long ago. Moore's Law to the rescue. The doubling of computing power every 18 months has placed the ability to process virtually unbreakable cryptographic algorithms within reach of anyone with a 166-megahertz Pentium.

Legitimate users? Any company planning on doing business on-line. When you send an order over the Internet, the contents of your message pass through a series of network routers and servers before reaching their final destination. Anyone who gains control of one of the machines along the way could intercept your credit card information. You're not going to send in the order unless you know it is secure.

Illegitimate ones? This is an imaginary scenario. You work at Apple and know, two days before it is to be announced, that Microsoft is going to pump in some cash and probably give a kick to the stock price. You're going to tip off your brother-in-law, who is going to feed the tip to a third party, an active trader in technology stocks. Do this with phone calls and you stand a fairly high risk of being caught, even though you have never met the trader.

So you encrypt the stock tip with your brother-in-law's public key and publish it on the Internet, perhaps in the middle of a chat room that lots of people visit. Your brother-in-law does the same, using the trader's public key. Both of these messages look like meaningless garbles to an outsider. They betray nothing about whose key was used to encrypt them.

Convicted insider trader Dennis Levine used a secret account in the Caribbean. But how do you use an offshore account without going through customs or making tappable phone calls? Given the power of encryption and digital signatures, a modern-day Levine could do anonymous E-trading from the comfort of his home PC, without making any suspicious phone calls or getting on a plane. Might the government have to throw up its hands someday, accepting the libertarian view that laws against insider trading just impede the efficiency of the marketplace?

"With crypto being easy to get, it's going to be difficult for governments to control transactions between people."-Adam Shostack

Someday it might. In the meantime, the government is trying to put the crypto genie back into the bottle. The current export controls permit the sale of weak crypto (the sort that could be cracked by the National Security Agency) but not crypto that would take the NSA a trillion years to crack.

The problem is that the basic tricks are widely known; indeed, the equation that drives these public key systems was published by a Swiss mathematician in the 1760s. Any reasonably competent Russian programmer can reinvent the software from scratch, and that is just what is happening (see box, p. 174). At this point, trying to regulate cryptography is like trying to cut the murder rate by regulating the sale of kitchen knives.

The next battleground will be fought over digital cash. One system, Mondex, has been adopted by an international consortium of banks led by National Westminster. The system, however, includes a digital trail that could be subpoenaed.

Not good enough, says cryptographer David Chaum, whose rival product is anonymous and untraceable;except to the spender. Customers want anonymity, he says;that's why 2.6 billion $100 bills are in circulation.

Chaum distances himself from the libertarian crowd, but his preaching about getting snoops off our backs is music to their ears. His invention may very well lead to the society espoused by Friedman and Parekh, in which widespread encryption forces the government to accept a less intrusive role in information flow.

Now the government polices what can be claimed about a prescription drug, what can be said in a real estate ad, who can talk about a publicly traded stock and when, and who can finance a political ad. Is all this necessary to preserve the union and insure domestic tranquility? The answer depends on your politics. If you are a Big Government liberal or Big Government right-winger, the answer is yes. But not everyone thinks we need as much government as we currently have.

When he was a 16-year-old high-school student in Libertyville, Ill., Sameer Parekh typed Henry David Thoreau's 9,000-word essay "Civil Disobedience" into an Apple II GS computer and posted it to an electronic bulletin board. The treatise begins: "I heartily accept the motto 'That government is best which governs least,' and should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe,;'That government is best which governs not at all.'"

Look Thoreau's "Civil Disobedience" up on the World Wide Web and chances are you'll see "typed by: Sameer Parekh....1/12/1991" at the end of the text. Over the years, scores of people have made copies of the document and posted them, complete with Parekh's name and typos, on their own Web sites.

Thoreau's essay paraphrases another hero of Parekh's, Thomas Jefferson. It happens that one of Jefferson's many passions, along with fighting to keep the fledgling U.S. government as small as possible, was cryptography. In the 1790s he invented an elegant, handheld rotary cipher machine. What could he have done with a laptop!

There is something about the Internet that brings out resistance to authority. "Libertarianism is much more important in cyberspace than in real space," says David Friedman. "Nearly all political discussion on-line is pro- or antilibertarian. Libertarianism is the central axis."

Libertarianism as a central axis? Perhaps. The cyberheads have always been defiant of authority, going back to the Phone Phreaks of the 1970s, who used their knowledge of electronics to beat Ma Bell out of long-distance charges. Some of the phone acrobats evolved into today's self-styled "cypherpunks," a term combining the science fiction genre cyberpunk with the British spelling of "cipher." The cypherpunk clan (check out the Internet newsgroup "alt.cypherpunks") includes John Gilmore, one of the first employees at Sun Microsystems and an early member of the Electronic Frontier Foundation. The libertarian axis is particularly strong in the EFF, which defends hackers and cryptographers against their federal adversaries.

At Berkeley, Parekh programmed E-mail servers to allow subscribers to send and receive E-mails anonymously or under pseudonyms, and to surf the Web through a specially programmed "anonymizer" server without leaving the electronic trail that could let the Web site operators;or an enforcer for the Securities & Exchange Commission; know who visited and when. After dropping out of Berkeley in 1995, he went full time into the business of protecting Web surfers' identities.

Realizing that his subscribers' privacy was only as secure as the servers their accounts sat in, Parekh invited his friends in the hacker community to try to break into Web servers sold by Microsoft and Netscape. Successful break-ins were rewarded with T shirts. The results ("I had to stop giving T shirts out") convinced him that the real money to be made was in selling crackproof, Web-server software.

With Microsoft and Netscape restrained by U.S. law from exporting server software with strong encryption, Parekh saw an opportunity. He took a copy of Apache, a popular server software package available free on the Internet, and set about the arduous task of weaving heavy-duty encryption programs into the server software. Once he had figured out how to do that, Parekh contracted with programmers in a country he won't name (lest the U.S. lean on the country to tighten up its cryptography export laws) to write the software and formed a sister corporation in the Caribbean tax haven of Anguilla to sell it to the rest of the world.

If you don't like the tax rate or export laws in your native country, set up a Web server in a Caribbean tax haven, on the Isle of Man or on Vanuatu, incorporate there and run your business from anywhere over the Internet. Countries like those use low taxes and secrecy protection to compete for corporate custom.

As the world economy becomes less land- and factory-based and increasingly server-based, expect more nations to welcome boundary-jumping business. Encryption provides two essential functions in this sort of economy: It keeps transactions secure as they course along the world's networks, and it makes the nature of the transactions invisible to the prying eyes of border guards and tax collectors.

After less than a year, C2Net's encryption-studded software is running on about 30,000 domains;more than any other commercial software outside of the stuff sold by Netscape and Microsoft. In the process, the U.S. lost a few high-tech jobs, not to mention the taxes on the sales of the software.

As more and more business transactions are hidden from the IRS by encryption, Parekh predicts, tax revenues will decrease. Declining tax revenues will lead to the privatization of many of the government's present functions, and people will be more free to choose what services to spend their money on. They will even be free to choose what kind of money they will use.

Maybe it won't be the Federal Reserve's notes. Curiously enough, Fed Chairman Alan Greenspan is not entirely unsympathetic to the libertarian aim of taking money out of the exclusive control of the federal government. Greenspan was a libertarian in his youth;a regular in the salon of Ayn Rand (1905-1982). Greenspan predicts that electronic commerce will give rise to private currencies.

"As the international financial system becomes ever more complex," Greenspan said at a Treasury conference last year, "we, in our regulatory roles, are being driven increasingly toward reliance on private market self-regulation similar to what emerged in more primitive forms in the 1850s in the United States."

Greenspan made it clear that he did not think the government should seek to stem the tide, even though it will undermine the authority of organizations like his Federal Reserve Board. "I am especially concerned," he went on, "that we not attempt to impede unduly our newest innovation, electronic money, or, more generally, our increasingly broad electronic payments system."

Ian Goldberg is working on that very innovation, folding encryption schemes together to create a universal digital currency that will incorporate all the disparate forms of digital cash in the electronic marketplace. Goldberg, 24, a Canadian graduate student at Berkeley, spends most of his time tinkering with and poking into cryptosystems.

In September 1995 Goldberg sent a chill down Netscape's spine (and a ripple through its stock price) when he announced that he and a colleague, David Wagner, had found a major vulnerability in the security layer of the Navigator Web browser. Sixteen months later, in response to a challenge by security software company RSA, Inc., Goldberg devised a program that harnessed the spare computing cycles of about 250 assorted workstations in Berkeley's computer science department to attack a message encrypted with a 40-bit key, the government's limit on unregistered encryption software for export. Trying 100 billion keys an hour, Goldberg's gang broke the cipher in 31/2 hours. The experiment got noticed.

Where does all this end? Goldberg predicts that tax laws and commercial regulations will need to change to adapt to the world of encrypted on-line business. The FBI will have to go after bombers by keeping an eye on ammonium nitrate rather than its ear on phone lines. "Taxes will have to be based more on physical things like land; assuming one believes in taxation at all," he says. "With encryption, not only can you hide your transactions, but your assets as well. Intellectual property can be hidden easily."

As for governmental restrictions on encryption, Goldberg finds them more ridiculous than pernicious. "I don't think terrorists will say, 'Since there's a law against strong cryptography, we won't use it.'"

Against all this governments are fighting a battle they have no prayer of winning, says Walter Wriston. Fortified with strong cryptography and growing exponentially, Wriston says, the Internet will irrevocably weaken governments as we know them. "They haven't got a chance in hell with that thing," he chuckles. "There's no way anybody can control it."

We do not know where all this will end, and neither does anyone else, but for better or worse, the implications for politics, for economics and for human freedom are enormous. The 20th century was the century of Big Wars and Big Governments; fascist, communist, welfare state. The 21st century is going to be something quite different.

This was the cover story for the September 1997 issue of Forbes.

Tuesday, April 28, 2009

Dow Jones Interview with Jon Matonis

Nilly Ostro interviewed me for the Dow Jones Markets Magazine in June 1997 for an article entitled "The Future of Money". At the time, I was employed by VeriSign and I had just completed the original "Digital Cash and Monetary Freedom" for the Internet Society's INET '95 Conference in Honolulu, Hawaii.