The Future of Electronic Payments: Roadblocks and Emerging Practices

Statement of Thomas P. Vartanian
Subcommittee on Domestic and International Monetary Policy of the Committee on Banking and Financial Services
U.S. House of Representatives
Tuesday, September 19, 2000

http://financialservices.house.gov/banking/91900var.htm

Mr. Chairman, ladies and gentlemen of the Subcommittee. I appreciate the opportunity to be here to discuss electronic payment systems.

In March of 1996, I experienced first hand the Mondex smart card pilot program in Swindon, England.⁽¹⁾ It initially characterized itself as "money." The card contained a microprocessor chip that could hold and transfer electronic value, as well as record the last ten transactions involving that value. In addition, the electronic wallet that accompanied the card allowed the value on the card to be transferred from person-to-person in a manner that was both immediate and final. The product was crisp, clean, efficient and easy to use. As my wife and I experimented with the Mondex-enabled phones in the city and dipped the card in Mondex point of sale ("POS") terminals throughout the city, we concluded that this form of money would revolutionize payments systems and would be immediately embraced by the consuming public. Four years later, neither has occurred.

Since then, I have represented banks, diversified financial services companies, payments systems participants, governmental entities and trade groups in a variety of matters involving the development of alternative payment instruments and systems. Based on these experiences, I offer the following views for the Subcommittee's consideration.

Since the debut of Mondex, there have been dozens of electronic payment products and systems introduced to the public, such as VisaCash, Digicash, CyberCash, Millicent, Proton, PayPal, eMoneyMail, BillPoint, Payme.com, PayTrust and Propay. While each of these products are efficient and innovative, to date, most have attracted customers only in limited consumer and business applications. At the same time, electronic bill presentment and payment products and systems are beginning to infiltrate the payments landscape. There are significant and traditional reasons for the relatively glacial evolution of electronic payment instruments and systems in a world that is eager to adopt any new technological product that comes along.

1. The current money and payments infrastructure is well-established, reliable, and businesses and consumers understand it and feel comfortable with it.

2. New products and systems usually require the creation or adoption of standards so that every machine and network is speaking the same language.

3. Businesses and consumers are slow to change their financial habits without compelling reasons.

4. The value proposition for businesses and consumers to shift to new electronic value systems is not yet clear and may not come into focus sharply until there is a supporting infrastructure and a critical mass of users.

5. The online movement of money may not yet be as reliable, convenient, safe and easy as it needs to be.⁽²⁾

6. Unfamiliarity with new payment instruments and systems, concerns over the potential loss of funds in accounts, increasing apprehensiveness about the loss of privacy, and the temptation to offer new payment products before they are perfected create an environment that makes both businesses and consumers wary.

7. There is significant market competition and controversy concerning what entities can control the point of customer entry for these products.

8. Current laws are often ill-suited to, or incompatible with the way that electronic payment instruments and systems work.

As I discuss electronic money and payments systems today, I use the term loosely to include a wide array of electronic money (card, chip and PC-based), electronic checks, new credit card and electronically based person-to-person money products.

The Comfort Factor

There is one immutable and daunting truth that affects the acceptance of all new financial products and systems: every human being has an emotional attachment to his or her money. That usually means their use, investment and transfer of money fall into behavioral patterns that they are comfortable with and that change only when the cost, convenience and confidence factors related to these products become overwhelming. When I was in Swindon, I asked a woman in a drug store why she wasn't using a Mondex card. She told me that she didn't need it; she had real money and it worked just fine, thank you. She also said that she was not interested in becoming addicted to a form of money that she would actually have to pay to use.

The lesson here is clear. Just because technology provides a new, glitzy product to the public does not necessarily mean that consumer and business acceptance will automatically follow. Many will not use it until they fully understand it or absolutely need it.⁽³⁾ Looking back at periods where other financial services evolved at a much slower pace, we see that even with a clearly worthwhile product, staying power is essential since it may take a generation in order to reach a loyal audience.

Examples of this in the financial services history are numerous. In September 1958, the Bank of America introduced the BankAmericard, the predecessor of the Visa card. Some very bright people in the bank developed the revolving credit card idea and a way of marketing it to a generation of post-depression consumers who were emerging from the dominant pay-as-you-go economic memories of that era.⁽⁴⁾ Bank of America made a bold move. It printed and mailed 60,000 credit cards to every customer in the Fresno, California market. This event, known as the "Fresno Drop," primed the credit card pump. While consumer and business acceptance eventually followed, economic success was slow in coming. Within fifteen months, the BankAmericard lost $8.8 million, a huge sum of money at that time.⁽⁵⁾ Nine years later, the predecessor to MasterCard was formed and the rest, as they say, is history. Today, the credit card is one of the most successful financial products ever created. That might suggest that the pioneers of the credit card probably had their names enshrined in the financial services hall of fame. Hardly. At Bank of America, many were reassigned or quietly left their jobs because of the enormous losses the bank suffered, since it distributed the card indiscriminately without underwriting the creditworthiness of its users. Initially, the BankAmericard was considered a failure.⁽⁶⁾

This story is important and may suggest some lessons for the future of electronic payment instruments. Consumers, businesses and governments will eventually become comfortable with new forms of money and payments systems, but it will take time to build both the physical and emotional infrastructure. Perhaps not the time it took for credit cards and ATMs to be accepted. But, history teaches us that some fraction of a generation must mature with a new financial product in order for it to find its way into the lexicon of consumer financial markets.

Cost

For new electronic payment instruments and systems to be attractive to consumers and businesses, they should save money and reduce the costs in the current systems. In short, if consumers can spend their money more cheaply, they will be more likely to adopt the new electronic products that let them do so. It appears that the savings are there for the picking in the electronic money and payments area. The cost of dipping a smart card, which requires no closed proprietary or open network to transmit its electrons from chip to chip, is less than $0.01. An ATM transaction costs about $0.27, while a teller generated transaction in a financial institution costs about $1.07.⁽⁷⁾ The average cost of swiping a credit card ranges from $0.08 to $0.15.⁽⁸⁾ Squeezing as much as $1.06 out of the trillions of financial services transactions that occur each year is a very meaningful reason why electronic payment instruments and systems will change.

The instantaneous movement of money is a phenomena that will change many of the conventions to which we are currently accustomed. For example, new payments systems could challenge and disenfranchise the sponsors and owners of the current system, including the banking industry and governmental entities like the Federal Reserve. They will also change revenue and expense models to the extent that payments systems are connected from the current overnight or several day batch processing and netting systems to real time finance. Gone will be traditional money-making strategies that have relied upon the float in the system and the incompatibility of parallel payments networks. At the same time, the government could lose the profit it makes on seigniorage.⁽⁹⁾

Convenience

As the speed at which transactions increase with the pace of life in a technologically charged environment, new financial products will have to be easy to use and save businesses and consumers time, computing space and resources. But the fact that they are quicker won't necessarily make them viable. They will have to fit naturally into the current structure of financial services, as the logical outgrowth of where businesses and consumers would go, left to their own devices.

In Crossing the Chasm, Geoffrey Moore refers to this issue, drawing distinctions between what he calls "discontinuous innovations" -- changes that require the consumer to change a behavioral pattern -- and "continuous innovations."⁽¹⁰⁾ While it does not require disruption of one's traditional behavioral patterns to buy the new and improved Tide, for example, -- it's in the same spot on the shelf that the old unimproved Tide was -- it may require a shift in consumer behavior to begin banking online or to pay bills electronically. Electronic payment instruments and systems will become a part of the financial environment, but it will take time, and it will require the confluence of the needs of all of the constituents in the financial marketplace.

Confidence

No payment instrument or system can work without the trust and confidence of its users. The money that we have in our pockets is no more and no less than a symbol of a trusted system that works. Green dollars could as easily be pink pineapples, as long as people trusted the underlying value of those pineapples.

Interestingly enough, because of the trust factor, which forms the backbone of money and payments systems, governments and quasi-governmental entities play a critical role in making them work. In the final analysis, businesses and consumers have to know that the form of value that they are using will be accepted and that the system that handles it does so without delays, disruptions or challenges.

This necessary confidence factor translates into governments playing a more prominent role in the development of new electronic payment instruments and systems. For example, if the federal government required the 30 million Americans who receive some form of financial assistance to use smart cards to receive and transfer that value, smart card technology would be more readily salable to the public by private businesses for a wide variety of purposes. When federal and state governments require the use of digital signatures for governmental transactions (e.g., to apply for a license, pay taxes or receive a student loan), the use of digital signatures will become more widely accepted by the public, and private sector businesses will be able to more easily market other electronic signature applications to them.

Money and payments systems, therefore, require a unique blend of governmental, business and consumer participation in order for them to succeed. Until those factors are all aligned at the right time and in the right place, what may seem to be significant developments in financial services products may limp along, garnering market acceptance on an evolutionary rather than a revolutionary pace.

Current Electronic Payments Institutions

Let's fast forward from Fresno in 1958, to the Upper West Side of New York City in 1998. In the Upper West Side pilot, two of the city's largest banks teamed up to experiment with the deployment of electronic value cards. The project followed the Atlanta Olympic pilot of 1995, as another attempt to achieve consumer and merchant acceptance of card-based electronic value. In the Upper West Side pilot, consumers reportedly found modest value in placing value on a card that could only be used a limited number of locations. Merchants encountered operational and training difficulties.

On the other hand, consumers have shown much more enthusiasm for a wave of person-to-person, Internet-based, money transfer services. These services, which vary widely in their structure, have apparently found a niche that is attractive to buyers and sellers in online auctions and to individuals who are looking for an online-based method to send funds to other individuals.

The Future of Electronic Money and Online Payments Systems

There are, in my view, critical reasons why electronic payment instruments and systems will eventually be accepted and find their niche in the payments environment.

1. The cost savings are substantial, and businesses and consumers will not be able to ignore that fact once other issues are resolved.

2. The exponential growth of electronic commerce, online financial services, electronic bill presentment and payment products, and new financial communication networks will demand greater velocity in the movement of value which are efficient and instantaneous.

3. The proliferation of business-to-business ("B2B") electronic commerce will force payments systems to adapt to even greater speeds and standards of efficiency.

4. The adults of the future will not be wed to bricks and mortar, checkbooks or passbooks or even ATM cards.

But we should not be fooled into thinking that 21st century electronic payments products will totally replace checks, credit and debit cards, or cash. They will simply find their niche in the financial products landscape like very other product did in the 20th century.

Legal Considerations

There are a variety of policy, operational and legal considerations confronting any entrepreneur who attempts to tackle the challenge of creating a new form of value or a new way to transmit it. Because most current banking and payments systems laws and regulations have been constructed to deal with more traditional payment mechanisms, they often do not provide a clear picture of whether and how they apply to new payment vehicles or systems. That creates a sense of uncertainty that is not helpful to developing markets. If the government does anything in the near future, it should foster legal predictability in this area.

Jurisdictional Considerations

Money and payments systems are by their vary nature, multi-jurisdictional products. If there is one thing that is meant to be in commerce, it is money. Thus the creation of new global electronic payment instruments and systems raises a threshold issue - whose laws apply? While today, there is a well worn path of understanding regarding the application of check clearing, ACH, credit card, Fed Wire and other traditional payments systems rules, the development of new forms of money and new payments systems that are based in Cyberspace necessarily raise jurisdictional questions. Which state or country will regulate the activities of the entity or the movement of the electronic value it creates?

This, among other things, has been the subject of a two-year study and Report issued by the American Bar Association, which I chaired.⁽¹¹⁾ To the extent that new forms of money and payments systems are to succeed, a certain level of predictability and certainty is necessary so that the sponsors and participants can fairly evaluate the rules that will apply and estimate their obligations and liabilities.

State Banking Laws

The creation of a new electronic payment product raises the possibility that it may unknowingly conflict with banking laws in one of the fifty states. To the extent that a non-bank creates a payment product that is linked to an "account," that entity may be engaging in the business of banking without a license under state law. It may also have established an illegal deposit relationship with its customers that subjects it to criminal penalties under federal law.⁽¹²⁾ When Florida State University issued a smart card to its students, which could be used in a variety of ways at a variety of places, it probably did not anticipate that it would be considered to be improperly engaging in the business of banking without a license to do so.⁽¹³⁾ But the State of Florida thought so. The "account" issue also raises interesting questions in this regard in relation to the status of certain person-to-person money transfer services.

State Money Transmitter Laws

Most of the states have money transmitter laws and regulations that require licenses and impose regulatory burdens, obligations and rights upon non-banking entities that are involved in the movement, distribution or clearing of payments.⁽¹⁴⁾ Conformity with these laws on a nationwide basis creates a significant regulatory consideration for anyone contemplating the development of electronic payment products and networks. State regulators have recognized that their laws were not designed to address this new range of Internet and card-based payment instruments that have begun to emerge. They are seeking a uniform law that will establish a consistent nationwide approach for dealing with such payment mechanisms.⁽¹⁵⁾

FDIC Insurance Considerations

The extent to which funds are insured is generally a question of whether they are a "deposit" as that term is defined by the Federal Deposit Insurance Act. There are two different considerations in this regard: (1) some sponsors of new products may not want their products to be insured, so that they can create their product outside the purview of federal banking regulators; (2) others may want their product to be insured so that they can market that feature to the public. The extent to which an electronic payment product is insured by the FDIC is generally a question of "where the money actually is."⁽¹⁶⁾ If it resides in an account, notwithstanding the transmission of a representative digital equivalent of that value, it is likely that the value remains insured.⁽¹⁷⁾ Like most other situations in which "old economy" banking laws are applied to new electronic products, they may not translate well, and there may be confusion as to the application of those laws. Another important issue in this regard is the extent to which consumers and businesses appreciate the relationships they have established, who holds their money, how it moves to other parties and the risks that they face based on the conduct and solvency of those parties.

Regulation E

Another significant issue presented in connection with electronic money and payment systems is the application of the Federal Reserve Board's Regulation E, which implements the Electronic Funds Transfer Act. In circumstances where Regulation E applies, consumers are entitled to certain disclosures and protections, financial institutions and other parties are subject to certain responsibilities and obligations. In many areas of electronic financial services, the application of Regulation E remains unresolved or open to dispute. For example, no final action has yet been taken with respect to this on the Federal Reserve Board's ("FRB") 1996 proposal regarding the treatment of various types of stored value systems for purposes of Regulation E. Similarly, it is unclear how Regulation E may apply to various types of Internet-based payment services. At the same time, the FRB is currently considering how Regulation E may apply to data aggregation services that permit consumers to execute transactions in their financial institutions accounts.

State Escheat Laws

Electronic payments, like other forms of money, may be subject to the escheat laws of the various states. However, the application of such abandoned property laws to electronic assets raises interesting questions, such as how one knows when a non-traceable electronic asset, like an electronic dollar, is subject to escheat, when it is not possible to tell where it is, where it's been or if it has been abandoned?⁽¹⁸⁾

Law Enforcement

While the issue of anonymous, non-traceable economic value in the form of electronic money and payments systems may raise complex questions concerning the application of network rules, significant concerns have also been expressed by law enforcement agencies, which conceivably could hinder the development of new payment products.⁽¹⁹⁾ Clearly, law enforcement agencies that are responsible, for example, to monitor money laundering, are very concerned about the development and proliferation of anonymous, non-traceable electronic payment products. To the extent that organized crime figures can merely email electronic money around the globe or load it on to a smart card or a piece of jewelry containing a microprocessor chip, their jobs get significantly more difficult. In this regard, one of the most difficult decisions that Congress and the agencies responsible for combatting money laundering will have to make is how to balance the interests of the private sector in developing more efficient money and payments systems, and the interests of law enforcement agencies who are charged with protecting the public.

Who Should Facilitate Electronic Payments?

In a similar vein, there are intriguing legal, regulatory and policy questions that must be answered when it comes to the question of who may mint, distribute, circulate and transmit electronic payments? While most systems really aren't creating money in the technical legal sense, in the economic and practical sense, they may be. If the medium of exchange is trusted and the scale of acceptability is large, several critical questions arise:

1. Do electronic payment products affect the money supply?

2. Should non-regulated companies be permitted to mint, distribute, circulate and transmit electronic money?

3. What protections should be constructed to deal with the failure of companies that create, distribute or clear electronic money and liquidity crises in the resulting electronic payments markets?

4. How should new electronic payments systems be protected, regulated and made safe and secure?

5. Who provides the ultimate liquidity and stability that makes these new money and payments systems work?

Most governments do not generally allow anyone but governmental entities to create money. While private entities are able to create and distribute substitute money products such as travelers checks, generally, they are viewed as special purpose instruments and are not used in the same frequency, volume or scale as traditional money. Indeed, if one form of electronic money offered by a private company or consortium of companies, became ubiquitous, there would be economic downsides to consider alongside the economic benefits it might confer. For example, if most Americans used electronic money on smart cards, any hint that the sponsor of the system was in financial difficulty or that the security of the system had been broken could result in a "run" on that form of money. Merchants might refuse to accept the card. Card holders would rapidly retreat to the bank whose name was co-branded on the smart card and demand "real money" in exchange for their electronic money. If on the way to their bank, they passed an off-line vending machine that accepted the card, they might use it to purchase a car load of sodas to wipe out the value on the card, thus shifting the risk of loss to the owner of the vending machine. Such monetary crises have not occurred in this country. While regulators are well equipped to handle bank failures, the collapse of a form of currency is another matter altogether.

Similarly, the emerging area of electronic bill payment and presentment raises new issues for payments systems. Today, a growing number of consumers pay their bills electronically (electronic bill payment) without writing a check, finding an envelope or licking a stamp. They may also receive their bills electronically (electronic bill presentment) without ever receiving a paper bill in the mail. This system potentially offers enormous cost savings to both consumers and billers. Yet, it also raises new issues as to who bears responsibility should payments not be made. As the system has evolved to date, the third party processors that facilitate electronic bill payment and presentment, and through which a consumer's funds may travel, typically are not insured financial institutions. Once value leaves the insured banking system and becomes the property of such processor, even overnight, the failure of such entity raises significant financial issues for businesses and consumers, each of whom would assert a claim to the funds. In short, new products, players and systems implicate new rules of management and risk.

The Stamp Payments Act of 1862

The Stamp Payments Act of 1862 declared it to be a felony for anyone to create or circulate any coin, token or obligation in a denomination of less than one dollar if it is meant to circulate as "money."⁽²⁰⁾ This statute is still on the books. It was referenced by the Department of Treasury in its 1996 review of electronic money,⁽²¹⁾ but was not considered when the Comptroller of the Currency approved the acquisition of an electronic money business by several national banks in December 1996.⁽²²⁾ To the extent that the statute raises questions that may discourage the development of electronic payments instruments and systems, its status and application should be considered and/or clarified.⁽²³⁾

* * * * *

Recommendations

We are at the beginning of perhaps the most radical revolution in the adoption of electronic payment instruments and systems. The government plays a critical role in this process, as does the private sector.

1. Governmental agencies and instrumentalities should do whatever they can to facilitate and encourage the private sector to develop cost effective electronic payment instruments and systems that correlate to the movement of financial services on to the Internet.⁽²⁴⁾

2. Regulators should seek to clarify the law and create greater predictability regarding the application of financial services laws to new financial products.

3. Financial regulators should be encouraged to meet with their counterparts around the world and agree upon the manner in which jurisdiction will be determined.

4. Laws and regulations should enable the development of electronic payment instruments and systems, rather than establish regulatory bureaucracies before there is an industry or accepted product to regulate.

5. Governments and regulators should thoroughly explore the new risks and security challenges that electronic payment instruments and systems create and address the economic, political and legal risks that are suggested.

Again, I appreciate the invitation to appear before you today and look forward to your questions.

Thank you.

Notes:

1. Thomas P. Vartanian, Mondex's Swindon Test Points to Future of Electronic Cash, Am. Banker Future Banking, April 15, 1996, at 14A.

2. See, e.g., Fried, Frank & Peter Wayner, The Management of Risks Created by Internet-initiated Value Transfers (NACHA 1997).

3. Businesses should not make the mistake of confusing the enthusiasm of "Early Adaptors" with the much more conservative approach displayed by the market segments one expert labels as the "Late Majority" and the "Laggards." See Geoffrey A. Moore, Crossing the Chasm 46 (Harper Business 1995).

4. Joseph Noscera, A Piece of the Action 20-21 (Simon & Schuster 1994).

5. Id. at 31.

6. Id.

7. Loretta J. Mester, The Changing Nature of the Payments System: Should New Players Mean New Rules, Bus. Rev. (Fed. Res. Bank of Philadelphia), March/April 2000, at 3. See also Thomas P. Vartanian, Robert H. Ledig, & Lynn Bruneau, 21st Century Money, Banking & Commerce 286 (1998).

8. Kevin P. Sheehan, Electronic Cash, Banking Rev. (FDIC) 1 (Vol. II, No. 2 1998).

9. The Department of the Treasury defines seigniorage as the difference between the face value of a coin and the coin's cost of production. See H.R. 534, One Dollar Coin Act of 1995: Hearing Before the Subcomm. on Domestic and International Monetary Policy of the House Comm. on Banking and Financial Services, 104th Cong. (1995) (testimony of L. Nye Stevens, General Accounting Office). Of course, if traceable electronic payments become the norm and replace cash, the government should see increased tax revenues from the sudden appearance of cash income that has often been "off the books."

10. See Moore, Crossing the Chasm, supra note 3, at 10.

11. American Bar Association, Achieving Legal and Business Order in Cyberspace: Jurisdictional Issues Created by the Internet (July 2000), available at ; see also Thomas P. Vartanian, Georgia Internet Law Raises Jurisdictional Questions for Electronic Commerce, Electronic Banking L. & Com. Rep., Feb. 1997, at 15; Thomas P. Vartanian, The Confluence of International, Federal, and State Jurisdiction over E-Commerce, J. of Internet L., Nov. 1998, at 11; Thomas P. Vartanian, The Confluence of International, Federal, and State Jurisdiction over E-Commerce,, J. of Internet L. (Dec. 1998); Thomas P. Vartanian, A US Perspective on The Global Jurisdictional Checkpoints in Cyberspace, Internet L. & Reg. (Pike & Fischer), May 1999, at JU-A11; Thomas P. Vartanian, It's a question of jurisdiction; irreconcilable differences in cyberspace, Bus. L. Today, July/August 1999, at 22.

12. See 12 U.S.C. § 378. Section 21a of the Glass-Steagall Act, which states:

[I]t shall be unlawful -

(1) For any person, firm, corporation, . . . to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of the depositor . . . .

13. See Inter-Office Communication from J. Ashley Peacock, Assistant General Counsel to Terry Straub, Director, Division of Banking (Nov. 16, 1990); see also Thomas P. Vartanian & Robert H. Ledig, The Business of Banking in the Age of the Internet: Fortress or Prison, Banking Pol'y Rep., March 4-18, 1999, at 6.

14. See State Legislation: Sales of Checks/Money Transmitter Statutes - Part I - Alabama to Kentucky, Electronic Banking L. & Com. Rep., Nov. 1996, at 13; State Legislation: Sales of Checks/Money Transmitter Statutes - Part II - Missouri to Wyoming, Electronic Banking L. & Com. Rep., Jan. 1997, at 12.

15. See Unif. Money Services Business Act (2000 Annual Meeting Draft) (July/Aug. 2000), available at (visited Sept. 15, 2000).

16. Thomas P. Vartanian, Key Questions for Emerging Systems: Where is the Money?, Am. Banker Future Banking, June 17, 1996, at 6A.

17. General Counsel's Opinion No. 8; Stored Value Cards, 61 Fed. Reg. 40490 (1996) (indicating that some stored value products would be eligible for deposit insurance while others would not).

18. Unif. Unclaimed Property Act (1995), available at (visited Sept. 15, 2000).

19. See Internet Fraud; Illegal False Identification Web Sites: Hearing Before Subcomm. on Investigations of the Senate Comm. on Governmental Affairs, 106th Cong. (2000) (testimony of Brian L. Stafford, Department of the Treasury, Secret Service).

20. Act of July 17, 1862, ch. 196, sec. 2, 12 Stat. 592 (codified at 18 U.S.C. § 336):

Whoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation, for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.

21. See U.S. Department of The Treasury, An Introduction to Electronic Money Issues (Sept. 1996).

22. See OCC Corp. Decision, Conditional Approval No. 220 (Dec. 2, 1996).

23. Thomas P. Vartanian, Robert H. Ledig, & Yolanda Demianczuk, Echoes of the Past with Implications for the Future: The Stamp Payments Act of 1862 And Electronic Commerce, Banking Rep. (BNA), Sept. 23, 1996, at 465.

24. Organizations such as the National Automated Clearing House (www.nacha.org) and the Financial Services Technology Consortium (www.fstc.org) have conducted important pilot programs dealing with digital signatures, electronic checks etc. Such pilot programs are vital to the efficient modernization of payments systems.

Thomas P. Vartanian is the Chairman of the Electronic Commerce & Financial Services Transactions practice in the Washington, D.C. office of the law firm of Fried, Frank, Harris, Shriver & Jacobson. He is the Chairman of the American Bar Association’s Cyberspace Law Committee and its Transnational Jurisdiction Project, which produced a report on global jurisdictional principles entitled Achieving Legal and Business Order in Cyberspace: A Report on Global Jurisdiction Issues Created by the Internet. He is an Adjunct Professor of Law at Georgetown University Law Center and Boston University Law School and is the author of numerous books and articles, including his latest technology book entitled 21st Century Money, Banking and Commerce.

Mr. Vartanian is testifying on his own behalf as an electronic commerce expert and attorney and represents no entity for this purpose.

Giving Carnivore the Slip

By Jon Matonis, President and CEO, Hush Communications Corp.
Special to ZDNet.com
Friday, August 25, 2000

There has been much debate recently surrounding the FBI's latest snooping software, Carnivore.

Carnivore is a type of information-gathering software housed in a computer that can be connected to your ISP's servers. It mines all incoming and outgoing mail for information. It's like a wiretap that cuts through all the other phone noise except for the phone of the person under surveillance.

A wide net: The FBI intends to use the software to locate and monitor specific e-mail addresses for evidence of criminal activity. In the process of monitoring one account, Carnivore must sift through all available account information on a given server.

Because Carnivore must be hooked directly to an ISP's servers, the government essentially would have the ability to eavesdrop covertly on all digital communications by the ISP's customers.

As an advocate for personal privacy, I believe we have a fundamental right to protect our personal data and communications from unwanted third-party intruders.

This new technology raises many important Internet legal issues and privacy concerns. One such question is: "Can we, as individuals, maintain our right to privacy in cyberspace?"

The answer is yes. There are several secure e-mail and anonymous browsing options available in the marketplace that have the ability to keep intruders at bay. These products make the transfer of personal communication and information on the Internet as secure as transferring it via a heavily guarded armored car.

A good example is our own HushMail.Com, an easy-to-use, Web-based e-mail service that encrypts or scrambles a message guaranteeing that only the sender and the receiver are able to read it.

The service is free and makes a user's encrypted messages untouchable, so no ISP, employer, snoop or government can decode messages. Several other quality security products are also available on the market.

Technology to protect our e-mail from unwanted intruders such as Carnivore does exist. Most often, Internet security products are free of charge and accessible to all. In fact, technologies like Hush's are available for a wide variety of applications, not just e-mail.

Unfortunately, many people, even leaders in the field of technology, fail to take advantage of the tools that can so easily protect them. In a survey conducted by the Computer Security Institute, 64 percent of companies who responded said that they had experienced an e-mail security breach during the past 12 months. Respondents added that losses sustained from such security breaches ranged from $300,000 to $25 million. Had these companies been using a secure e-mail service, their e-mail would have been undecipherable.

I believe that we have an innate right to personal privacy, and with this freedom, a duty to act responsibly. The technology needed to ensure an individual's right to privacy on the Internet is available.

However, it is up to each individual to access it. My goal is to give people the tools they need to protect themselves so that, someday, debates about Internet privacy will be unnecessary.

Jon Matonis, President and CEO of Hush Communications Corp., has more than 15 years' management experience in the areas of security and encryption technology, embedded software systems, international payment systems, and foreign exchange.

Welcome to Sealand, Now Bugger Off

By Simson Garfinkel
Wired
July, 2000

http://www.wired.com/wired/archive/8.07/haven.html

Hunkered down on a North Sea fortress, a crew of armed cypherpunks, amped-up networking geeks, and libertarian swashbucklers is seceding from the world to pursue a revolutionary idea: an offshore, fat-pipe data haven that answers to nobody.

Ryan Lackey, a 21-year-old MIT dropout and self-taught crypto expert, sees fantastic things for himself in 2005. For starters, he'll be filthy rich. But his future is animated by more than just money - to wit, the exploration of a huge idea he thinks will change the world. Lackey's big concept? That freedom is the next killer app.

Before you get too choked up, you should know that Lackey means giving corporations and frisky individuals the "freedom" to store and move data without answering to anybody, including competitors, regulators, and lawyers. He's part of a crew of adventurers and cypherpunks that's working to transform a 60-year-old gunnery fort in the North Sea - an odd, quasi-independent outpost whose British owner calls it "the Principality of Sealand" - into something that could be possible only in the 21st century: a fat-pipe Internet server farm and global networking hub that combines the spicier elements of a Caribbean tax shelter, Cryptonomicon, and 007.

This summer, with $1 million in seed money provided by a small core of Internet-fattened investors, Lackey and his colleagues are setting up Sealand as the world's first truly offshore, almost-anything-goes electronic data haven - a place that occupies a tantalizing gray zone between what's legal and what's ... possible. Especially if you exist, as the Sealanders plan to, outside the jurisdiction of the world's nation-states. Simply put: Sealand won't just be offshore. It will be off-government.

The startup is called, fittingly, HavenCo Ltd. Headquartered on a 6,000-square-foot, World War II-era antiaircraft deck that comprises the "land" of Sealand, the facility isn't much to look at and probably never will be. It consists of a rusty steel deck sitting on two hollow, chubby concrete cylinders that rise 60 feet above the churn of the North Sea. Up top there's a drab building and a jury-rigged helicopter landing pad.

Soon, Lackey believes, powerful upgrades will transform Sealand into something amazing. The huge support cylinders will contain millions of dollars' worth of networking gear: computers, servers, transaction processors, data-storage devices - all cooled with banks of roaring air conditioners and powered by triple-redundant generators. HavenCo will provide its clients with nearly a gigabit per second of Internet bandwidth by year's end, at prices far cheaper than those on the overregulated dry land of Europe - whose financial capitals sit a mere 20 milliseconds away from Sealand's electronic nerve center. Three speedy connections to HavenCo affiliate hubs all over the planet - microwave, satellite, and underwater fiber-optic links - will ensure that the data never stops flowing.

HavenCo's onboard staff will come and go on helicopters and speedboats. Four security people will be on hand at all times to maintain order; six computer geeks will run the network operations center. The security personnel, heavily armed and ready to blast anybody who shouldn't be around, will make sure that unauthorized boats and aircraft keep their distance. The geeks will perform maintenance tasks like replacing failed hard disks and installing new equipment. These routine chores will be a little more challenging than usual, given the maritime setting and Sealand's obsession with privacy. Fall over the edge of Sealand's deck, for instance, and you'll probably drown. Simply entering one of the machine rooms will require putting on scuba gear, because the rooms will be filled with an unbreathable pure nitrogen atmosphere instead of the normal oxygen mix - a measure designed to keep out sneaks, inhibit rust, and reduce the risk of fire.

HavenCo will be "offshore" both physically and in the sense that its clients - who will purchase preconfigured "colocation" computers maintained and secured by HavenCo - will basically be able to tell the rest of the world to shove it. The essence of offshore Internet services, as defined by sort-of-offshore places like Anguilla and Bermuda, is that when you base an operation in such a locale, you can claim to be governed only by the laws that prevail there. So if Internet gambling is legal (or overlooked) in Country A but not in Country B, you set up in A, and use the Web to send your site to B - and to the rest of the world.

Similarly, companies using Sealand to house their data can choose to operate according to the special laws of Sealand, and those laws will be particularly lax - though not quite anarchic. Lackey says the general idea is to allow a little naughtiness, while forbidding criminal activity that could generate international outrage.

Meaning? Basically, that HavenCo wants to give people a safe, secure shelter from lawyers, government snoops, and assorted busybodies without getting tangled in flagrant wrongdoing. So if you run a financial institution that's looking to operate an anonymous and untraceable payment system - HavenCo can help. If you'd like to send old-fashioned, adults-only pornography into a grumpy country like Saudi Arabia - HavenCo can help there, too. But if you want to run a spamming operation, launder drug money, or send kiddie porn anywhere - forget it.

To visualize a typical HavenCo customer circa 2005, imagine a company we'll call MacroMaxx, a Berlin-based construction giant that has offices throughout the world. MacroMaxx wants a secure new data center for its European offices, so the firm clicks on to the www.havenco.com Web site and purchases access to a Sealand-based server hooked up to an IBM RAID machine, which gives it a terabyte of online storage. The system is already installed and running in HavenCo's machine room. After putting through a confirmed bank transfer, MacroMaxx instantly gets the computer's password. Its technicians configure the standard set of server applications, then start building user accounts. Within an hour, email is moving.

The server's location on Sealand means MacroMaxx won't have to worry about fires, earthquakes, tornadoes, thefts, bomb threats, industrial sabotage, or killer-bee attacks. Or, for that matter, the discovery process in civil suits. If MacroMaxx is embroiled in a legal tussle and doesn't feel cooperative, it could use Sealand's unique status as a way to dig in its heels. Say, for example, that a pesky court official shows up at the company's Berlin office with a disk-duplicating device, demanding all company email for the past year. MacroMaxx execs could say, "Gee, we don't have that here." The official would be stymied, because the email simply wouldn't be on the premises, and it's up to MacroMaxx whether it keeps any backups around. The primary data would be housed only at Sealand.

And should the authorities find out and call Sealand demanding to come aboard and access MacroMaxx's machines? No problem, says Lackey: They'll be told to bugger off.

That's the vision, anyway. The current reality is more mundane. Sealand does exist - it's a real, live, passport-issuing, artificial micronation that's been around since 1967, arguably the only remotely credible place like it in the world. But there's a lot of work left to be done, as I saw firsthand on a dim and stormy day in March.

HavenCo will allow online gambling, pyramid schemes, and adult pornography - but spamming and corporate cybersabotage are out.

Sealand was originally called Roughs Tower; it was built as part of a complex of no-frills antiaircraft forts designed for shooting down Nazi planes on bombing runs to England. The old battle station stands in 24 feet of North Sea brine, 6 miles east of Felixstowe, an industrial port on the southeast coast of England. Abandoned after the war, the structure was occupied in '67 by Roy Bates, a British war veteran who renamed it Sealand, declared its independence from Great Britain, and appointed himself its "prince."

He got away with it, too - sort of. Officially, the UK doesn't recognize Sealand, but except for a few dustups now and then, the government has left the strange little fief alone.

The bigger challenge for Bates has been figuring out what to do with it. Over the years, Roy (the royal patriarch, now 78), his wife, Joan (also known as Princess Joan, 70), and his son, Michael (the dauphin-style heir apparent, 47), have earned their livings through fairly ordinary pursuits - like commercial fishing and fish processing - while shuttling back and forth between the platform and the mainland and styling themselves dual citizens of Sealand and the UK. They've theorized about various moneymaking plans - pirate radio outposts, tax havens, pleasure dens, casinos - but in the end, Sealand has been a money pit. The Bateses say they've spent huge amounts on upkeep, supplies, legal fees, and improvements.

When Sealand does blip on the geopolitical radar, it usually involves a brand of low comedy that has made it a favorite of Fleet Street journalists. In 1997, for example, an Andrew Cunanan/Sealand connection surfaced. After Gianni Versace's killer committed suicide on a Miami houseboat, police discovered that the man who owned the boat was in possession of a purported Sealand passport. Nothing more came of it, but as it turns out, lots of people have Sealand passports who shouldn't - the things apparently self-replicate without the Bateses' knowledge. This past spring, Sealand made the news again: Law-enforcement officials in Spain busted a Madrid-based gang allegedly tied to international drug trafficking and money laundering. The gang appeared to be using a fake Sealand Web site and thousands of phony Sealand passports as part of its criminal activity.

Questioned by Interpol, Roy wailed about the injustice of anyone using the Sealand name for black deeds. "[Sealand] has all been a game, an adventure, and it is very unfortunate to see it take this turn," he told one reporter.

"Nobody is more honest than my husband," Joan said at the time. "He's so honest he creaks."

Whether or not HavenCo counts as creakingly honest, it isn't the sort of enterprise you'd expect to come from a 78-year-old fisherman, and it didn't. In this deal, Roy is a cheerful cosignatory, but it was Michael who forged the pact with the cypherpunks. Michael is also the only "royal family" member on board when I go along for the weekly resupply mission to Sealand, which shoves off from the town of Southend-on-Sea - where Michael and a partner run a shellfish-processing factory - at 4:30 am sharp.

Our boat, the Paula Maree, pulls away from the coast toting enough canned food and drinking water to feed Sealand's current two-man crew for another week. Today the vessel is carrying more interesting stuff, including steel girders, a winch, an electric arc welder, an oxyacetylene torch, and a welding tank. The construction materials are for use in building a new crane that will hoist aboard still more building supplies, generators, power conditioners, batteries, and fuel tanks. If all goes according to plan, Sealand will support millions of dollars worth of networking equipment and computer racks by late summer.

It takes 15 minutes to get to Sealand by helicopter, but our trip will take five hours because we're starting 45 miles southwest of the site. The Paula Maree's captain, a clean-shaven, compact fisherman named Mason West, guides the vessel using a combination of navigational beacons and GPS. Ryan Lackey and Michael Bates are on board, along with two burly security guards, Alan Beale and Bill Alen, who will spend the next week doubling as construction workers.

The cockpit is jammed, so Bates sends Lackey and me down below. Lackey is short and pudgy, with the requisite shaved head of a new media hipster. He's obviously intelligent, and seems driven to do something major before he's 25. After scoring 1,580 on his SATs, he skipped his last year of high school and entered MIT in 1996. But he quit after three years for lack of tuition money - he now describes himself as a "crypto-hacker/crypto-anarchist who happened to be attending MIT" - and went to work as a programmer for a highly secretive electronic payments startup that he cofounded, then abandoned, on the Caribbean island of Anguilla. After his failed stint there, he moved to San Francisco, his home base during the busy period leading up to the HavenCo launch.

Michael Bates comes down the ladder. He and Lackey start talking about pending renovations to Sealand's electrical system. Lackey, thinking big, wants to buy three large generators, a couple of industrial-size power conditioners, and a hefty bank of batteries to run the computers in an emergency. "I'd like to shoot for five minutes of battery backup," he says, explaining that if two of the running generators simultaneously fail, five minutes should be enough time to get the third operational. "We'll use gel cells."

"How many thousand pounds?" Bates asks. He means the weight, not the price: HavenCo's existing crane can barely lift 800 pounds.

Lackey shrugs: dunno. He shrugs again when I recommend conventional lead-acid batteries, because gel cells have a limited shelf life. "Five years from now," he says, hitting me with a serious gaze, "we are either going to be completely broke or we're going to be fantastically wealthy."

Sounds far-fetched, but who knows? HavenCo has collected its key employees, studied the relevant (and confusing) international law, and scooped up the money needed to get going. Along with Lackey, major personnel include Sean Hastings and his wife, Jo, who have experience in programming, offshore financing, and online gambling. Another important player is Sameer Parekh, a computer security specialist who launched the crypto software company C2Net and is now HavenCo's chair. Parekh confidently predicts HavenCo will pull in between $50 million and $100 million in profits by the end of its third year in business.

That remains to be seen - Lackey says he has plenty of clients lined up, but for "security reasons," he can name only one of them: Tibet Online, the Net presence of Tibet's exiled government, which is eager to escape the clutches of the Chinese government. Lackey also intimates an impending partnership with a major corporation he expects will resell HavenCo colocation space to customers with the highest security demands. Before HavenCo had even signed any clients, the project attracted decent investment money from serious people. Two Internet millionaires have publicly jumped aboard: Avi Freedman, Akamai's 30-year-old VP of network architecture, is investing $500,000; and Joichi Ito, the 34-year-old chair of Infoseek Japan, is kicking in $200,000. (A group of anonymous backers has also ponied up $400,000.) That's not a lot as startups go, but HavenCo doesn't need much to get off the ground. Both public investors are serious about HavenCo, complete with its dicier aspects. "I think it's a great project and I hope to see it test some of the edges of our geopolitical economy," says Ito. "The idea has great potential to force governments and other organizations to look at issues surrounding the regulation of commerce and the Internet."

Freedman says he's fully on board and enthused about the project. "If this was just about secure colocation, I wouldn't be investing," he says. "I have a firm belief that countries that encourage and foster open communication will prosper. Those that don't, won't. I see the establishment of a company to focus on the data haven aspect as an important first step. There is idealism involved. This is not strictly economic."

As the principals sketch it out, HavenCo will succeed because it has an unbeatable two-pronged business plan. First, it will operate as a traditional colocation facility - that is, a company that rents space to store servers and provides Internet connections to companies' computers and servers. Colocation is a multibillion-dollar-a-year business currently dominated by outfits like Santa Clara, California-based Exodus Communications, which builds large, earthquake-proof buildings with redundant power supplies, speedy Internet connections, and rows and rows of equipment racks housed in a secure setting. These enterprises put a premium on security, because that's exactly what clients demand. Last spring I visited an Exodus facility in Santa Clara, and my guide proudly pointed out the multiple video cameras, bulletproof glass, and palmprint readers used to verify the identity of people coming to service their equipment. Business is booming: Exodus earned $134 million during the first three months of 2000, a 32 percent increase over the previous quarter.

Nevertheless, Lackey believes HavenCo can do the job better. "Exodus looks secure, but it isn't," he insists, comparing it to a walled city that's protected against outsiders but not insiders. Neither customers nor computers entering Exodus are physically searched or x-rayed, he says, so it would be possible to smuggle in a bomb or simply walk in and shut off the power.

HavenCo won't have these vulnerabilities, Lackey says, because even its customers won't be allowed to visit Sealand or to provide their own equipment. Instead, HavenCo will offer a range of standardized, preconfigured machines, purchased directly from the manufacturer and installed by HavenCo employees. "For us," says Lackey, "security means ensuring customers that their data will be safe from anyone and everyone, even themselves and our own employees."

It also means a willingness to laugh off legal challenges, which is part two of the master plan. For people wanting more than just colocation - who salivate over the tangy protections that a real data haven allows - HavenCo is ready to serve. Having spent time working in Anguilla, Lackey went away unimpressed, because a company operating there can still be shut down by court order if the local government decides to intervene. "Among the things that are illegal in Anguilla are pornography and any type of gambling," he sniffs. "As it stands today, Anguilla is useful only for incorporating nonresident companies and relaxing on the beach."

HavenCo will allow for gambling, pyramid schemes, adult porn, subpoena-proof email, and untraceable bank accounts. But not everything will fly. In addition to the spam and child-porn ban, corporate cybersaboteurs are forbidden. The reason, says Jo Hastings, HavenCo's chief marketing officer, is a policy dictated by Avi Freedman: Don't do anything that would inspire law enforcement officials or ISPs to shut down HavenCo's mainland Internet connections. "We will reserve the right to drop any Web site or service that would threaten our access to the Net," Hastings says.

Still, it's obvious from Lackey's gung-ho pronouncements that HavenCo will stand tough when clients need it most. Consider a real-life example from the mid-'90s, when the Church of Scientology convinced Finnish police to raid the home of a Helsinki resident, who was hosting an anonymous remailer service, anon.penet.fi. (See "alt.scientology.war," Wired 3.12, page 172.) The Scientologists wanted to know who was posting church documents on the Internet. The police showed up at the host's door and forced him to give up the name. If that remailer service had been located on Sealand, the Sealanders simply would not have complied.

But what if the church sent in a private gunboat and demanded the data? "This is how we'd deal with any battle group threatening to destroy us over a server," says Lackey, emphasizing Sealand's foursquare commitment to customer satisfaction. "We'd power off the machine, optionally destroy it, possibly turn over the smoking wreck to the attacker, and securely and anonymously refund payment to the owner of the server."

Two hours from Sealand, the water turns muddy and starts to get rough. The North Sea forecast calls for a very windy morning with rain in the afternoon; soon there are so many waves breaking over the bow that we can't see out the windows.

For "security reasons," HavenCo will mention the name of only one client: Tibet Online, the Net presence of the exiled government, which is eager to escape the clutches of China.

"I see that we are coming up against Sealand's defenses," jokes Alan Beale.

As we get closer, the water calms down and, back upstairs in the pilot's cockpit, I get my first glimpse of Sealand in the distance: Looming taller and taller as we approach, dwarfing our tiny boat, it looks like an industrial-age Stonehenge. Clearly, the structure's best defense isn't the weather, but its height. When I visit, there are only two ways onto Sealand: landing by helicopter or getting hoisted up in a bos'n chair. I'll be taking the chair express, and, as I admit to Michael Bates, I'm nervous.

"Don't worry, you'll love it!" he roars, laughing. Beale hands me a white hard hat and a self-inflating life vest. He doesn't use these himself, but he brought them along especially for Lackey and me. "It seemed a good idea," he says gently.

High above us on the deck, two men lower what looks like the red seat from a child's swing set attached to the end of a long cable. Bill Alen takes his place on the plank of wood, grabs the ropes, and is winched 60 feet into the air and lowered onto the platform's deck.

When my turn comes I sit, hold on tight, and watch the boat fall away underneath me as I'm jerked skyward. Halfway up, the wind gains force and I'm tossed around violently. The hard hat, I realize, is there to protect my skull in case the wind bops me against the platform. It's blowing so furiously that the crew stops the winch until I stabilize. They start the motor again and soon I'm level with the railing that surrounds the deck.

"Raise your legs!" somebody shouts. I do, the crane swings around, and I'm momentarily suspended a few feet over the deck. I jump down and come face-to-face with a menacing sight: Sealand's 3.7-inch antiaircraft gun. It's covered with rust and will never fire again, but it seems like an apt symbol of the micronation's defiant future.

Not to mention its certifiably defiant past: Sealand wouldn't be what it is today without the hotspur energies of Roy Bates, who rose to the rank of major in the British army, fought in North Africa, Sicily, and Italy, and was wounded in action several times. After the war, he started various enterprises, including an import-export business, a wholesale meat business, and a 30-boat fishing fleet.

In 1965, the Bates family embarked on a project that Joan cheerfully describes as "pioneering commercial radio." Others called it pirate radio, because at the time the BBC was the only licensed broadcaster in England. Inspired in part by the success of another radio pirate, and ignoring the law, Roy set up a station on Fort Knock John, one of the abandoned WWII sea forts where he started broadcasting music and advertisements.

Called Radio Essex, the station's 5-kilowatt broadcast blanketed roughly a quarter of England. But the British government wasn't a fan: Bates received a summons in September 1966 for operating a transmitter without a license. Unfortunately for him, he had picked a tower that was just inside England's territorial limit, which was then set at 3 miles out from the coast. He was fined £100 and forced to shut down.

Roy wouldn't make the same mistake again. On Christmas Eve that year, he and Michael, 15 at the time and home from boarding school, dismantled their station and hauled everything to Roughs Tower, which was 6 miles out and therefore beyond the existing territorial limit. There wasn't much the British government could do to stop them, but the military did blow up another fort that stood beyond the 3-mile boundary, to prevent a similar takeover there.

A few months later, Roy and Joan were out with friends in a local pub. Joan mentioned casually that she wanted to have "a flag and some palm trees" to go with the "island" her husband had won for her. Their friends started listing all the things Roy and Joan could do with a sovereign property. Roy hired an attorney to do further research, and learned that a loophole in international law left room for the Bates family to claim Roughs Tower as its own.

"It's called dereliction of sovereignty," explains Michael. "We took over the sovereignty that the British government had derelicted."

On September 2, 1967, Roy proclaimed the independence of Sealand. He pegged the country's currency to the US dollar, minted gold and silver coins, issued passports, and printed a series of stamps honoring great discoverers like Christopher Columbus and Sir Walter Raleigh.

Britain basically ignored the "country" until 1968, when, in a move that helped force the sovereignty issue, Michael fired warning shots at workmen who were servicing a navigational buoy near the platform. The next time Michael and Roy set foot on British soil, they were promptly arrested for weapons violations. But in October of that year, a British court acquitted them, ruling that since Sealand was "about 3 miles outside territorial waters," the Crown's firearms laws didn't apply there. The authorities, perhaps sensing that an embarrassing precedent was taking shape, decided not to appeal.

The British government extended its territorial limit to 12 miles in 1987, but Sealand has been allowed to plod on. Over the years, other legal cases have seemed to bolster the Bateses' sovereignty claim, though the government's stance is still nonrecognition. In 1984, the British Department of Health and Social Security issued a written ruling that Michael Bates did not have to pay his national health insurance for the periods he resided on Sealand. In 1990, Sealand once again fired shots at a boat that came too close. Local authorities investigated, but the matter was quickly dropped.

Sealand itself was never used for pirate broadcasting, due to changes in English law and a broadcasting environment that caused Roy to lose interest in pirate radio by the late '60s. Roy looked around for outside investment in the '70s and '80s, but little came of it except misadventure. Michael says that a number of "undesirables" have contacted the family over the years hoping to use the place for various schemes - from setting up some sort of "pleasure island" to smuggling. Roy claimed he was approached during the Falklands War by a group of Argentineans who wanted to buy Sealand and set up camp "right on Britain's doorstep."

"Of course I sent them away," he told The Independent in 1990. "I'd never do anything that would pose a threat to the UK."

The most raucous moment in Sealand's history occurred in 1977, when the Sealanders were approached by a German and Dutch consortium of shadowy lawyers and diamond merchants.

"They wanted to be part of what we were doing, and they wanted to develop it as well," Joan recalls. "Then they asked us to go to Austria" for a meeting. Roy was wary, but Joan persuaded him, saying, "What have we got to lose?"

When Roy and Joan arrived in Austria, five men greeted them and arranged a meeting for later. The men never showed. Suspicious, Roy and Joan tried to contact Sealand. "In those days it was very difficult," says Joan. "We had no radio communication and no telephone communication. We phoned different people who worked in the area - fishermen and the Coast Guard. One of them said, 'I saw a big helicopter hovering over Sealand.' It didn't feel right."

It wasn't. Michael was at Sealand when the helicopter showed up. As he remembers it, the mystery party lowered a man who claimed to have a telex from Roy confirming that a deal had been made. Michael didn't buy that. Then the helicopter lowered a man who whimpered that "he was sick and needed a glass of whiskey." Michael let the helicopter land, but it was all a trick. Once on the deck, the men locked Michael up without food or water for three days. He says his attackers finally put him on a Dutch fishing boat that they "controlled," took him to Holland, and left him there without a passport or money.

Michael made his way back to Southend, where he met up with Roy and Joan. They hired a helicopter (and a dashing pilot who'd worked on a few James Bond flicks), assembled some men, and set out to recapture their country. When they arrived, Michael, shotgun in hand, slid down a rope and fired a shot - apparently by accident - and the intruders surrendered.

Swashbuckling stuff. But as the Bates admit, life on Sealand hasn't always been a thrill, and in recent years the tiny country has been sliding into obscurity. Michael lives in Southend, where he runs his business. Roy spent most of the '90s living on Sealand by himself, ready to defend its sovereignty with rifle and shotgun. Joan, afflicted with arthritis, retired to Southend, keeping in touch with Roy by cell phone. All these changes have made Sealand more than a little depressing: a geriatric experiment in nation-building, doomed to die a slow death, beaten into the sea by wind and waves.

And then came the cypherpunks.

The idea for a data haven has been around in science fiction for a while," says Sean Hastings, HavenCo's 32-year-old CEO. John Brunner's 1975 novel, The Shockwave Rider, features a communications haven that is invulnerable to the US government. More recently, Neal Stephenson's 1999 novel, Cryptonomicon, is the story of a fictional data haven on a Pacific atoll, unbreakable codes, and a brilliant protagonist coincidentally named Avi. HavenCo's founders say their inspiration didn't come from a novel, but from a chance meeting at a financial cryptography conference held in 1998.

Sean Hastings dropped out of the mathematics undergraduate program at the University of Michigan in 1989 with one semester to go because he didn't care to meet his humanities requirements. He spent eight years kicking around New York and San Francisco, where he played poker and did some programming. By 1998, he and Jo were living in New Orleans, where he wrote order-entry and automated voice-response software for legal sports-betting operations, while Jo did market studies for riverboat and tribal casinos all over the US. One day they got a call from a group of gamblers Sean knew in New York. The gamblers said they wanted to set up their own touch-tone sports-betting system - but this one would be offshore.

"They were looking for people who knew computers and knew the gambling industry," Sean says. "We said, 'That sounds fun.' So we went all through the Caribbean - went to various places - and then made our recommendation."

Sean and Jo decided that the combination of cheap telephone rates, high tech infrastructure, and easy regulations made Costa Rica an ideal spot. "Then we were told that there was this 'Cousin Bob,' and he said, 'Go to the Dominican Republic,'" and so Costa Rica was out. In the end, Cousin Bob screwed things up by insisting that the operation be headquartered at his favorite resort, which had lousy telephone connections. Eventually the project fell apart.

The Hastingses had already put their stuff in storage, rented out their New Orleans home, and bought plane tickets, so they decided to go to the Caribbean anyway. They contacted Vince Cate and Bob Green, two expatriates and high tech entrepreneurs on Anguilla, a hot spot for foreign businesses eager to take advantage of the country's tax haven status. (See "Plotting Away in Margaritaville," Wired 5.07, page 140.)

"Vince and Bob were really excited that two other people with computer knowledge might come to Anguilla," recalls Sean, who partnered with Cate on a secure payment firm. Cate, who eventually bought out Sean's share of the company and remains on amiable terms, adds that while the HavenCo idea sounds risky, he thinks Sean and Lackey might be able to pull it off.

Anguilla turned out to be a lousy location for running offshore data services. The government prohibits gambling and pornography - even on Internet servers. Sean ended up quitting because he couldn't get a work permit, but not before he found time to attend that year's Financial Cryptography Conference, an annual event that attracts bankers and cypherpunks. There, he and Jo met Ryan Lackey and Sameer Parekh.

The four decided that running Internet services from an offshore location was a fundamentally sound notion, but that Anguilla was all wrong. They needed a place with no laws regulating the Internet, cryptography, finance, or labor. Their idea was to find a small nation - some place like Tonga - whose government could recognize the wisdom of setting up a "free Internet zone."

But where? After the conference, Sean came across How to Start Your Own Country, a 1984 book about "new-country projects" by fringe-history buff Erwin S. Strauss. Over the years, various people have made stabs at creating a new nation out of thin air - some people have tried to do it on existing-but-unclaimed land masses, others have hatched far-fetched plans like building artificial islands and tethering them to sea mounts. Strauss catalogs them all. His book's cover shows a picture of Prince Roy and Princess Joan standing on the deck of Sealand, which he describes as "perhaps the most successful new-country venture known."

The Sealanders are arming themselves for self-defense: Plans call for "50-caliber heavy machine guns, 5.56 automatic rifles, and 12-gauge shotguns."

Sean and Jo went back to the United States intrigued by Sealand. In July 1999, Sean sent an appropriately statesmanlike email - addressed to "the royal family of Sealand" - in which he invited Sealand to participate in "a data haven project which seeks to locate servers in as many different free information jurisdictions and extranational areas as possible."

The response came four days later from Michael Bates, who was primed for a meeting, but, as a self-described "computer philistine," wanted to know more. Sean and Michael started swapping email. At the same time, Sean studied the history of Sealand and its pirate radio past. "I told Michael we were basically doing pirate Internet, which meant doing whatever people want to do, without government restrictions."

That fall, negotiations started in earnest with a face-to-face meeting involving Michael, Ryan, Sean, and Jo. What emerged was an arrangement in which the Bateses would receive an initial payment of $250,000 in cash and stock for leasing Sealand to HavenCo. And included in the deal was an option to purchase the platform at some point in the future. The Bates family members would continue to provide for Sealand's security and contribute their expertise to the endeavor. Things moved quickly after that. By this February, HavenCo had its first investor.

In March, Sean and Jo Hastings packed their possessions into a shipping container and sent it to the Sealand platform. With more than a million dollars in first-round funding - and $2.5 million more in the pipeline - they've been slowly transforming the dingy hulk into a high tech facility. The plan is to relocate there permanently by early summer, so they've been sprucing things up with creature comforts, including exercise machines, a satellite TV receiver, DVD players, and a library.

Michael Bates and Ryan Lackey, meanwhile, have been assembling new hoists for lifting heavy objects onto Sealand's deck, bringing in generators, building a fuel tank large enough to hold a year's supply of diesel, and setting up the machine rooms in the platform's cylinders.

To be sure, the old fort needs work. During my visit, Lackey and I take a quick tour. Lackey wanders around exhibiting both awe and surprise - this is his first visit, and Sealand is smaller than he expected. A steep staircase leads down each cylinder, making it difficult to imagine bringing computers in and out. Each of the seven floors in each cylinder is actually a single concrete room, 22 feet in diameter, without storage areas or even electrical outlets. In many rooms, lighting is provided by a single bulb. The south cylinder's rooms are almost completely empty. The north cylinder contains a generator, a machine shop, and a lot of junk - mostly scrap metal.

HavenCo will start by renovating the cylinders and packing them full of computer equipment and racks. Heavier stuff like generators will sit on deck. The cylinders - the plan is to fill the south one first - are already equipped with "blast doors" to withstand explosive charges.

Internet connectivity will come from a combination of fiber, microwave links, and satellite connections. The links will carry data from Sealand to London's Telehouse and the Amsterdam Internet Exchange - two colocation providers where HavenCo itself has already rented several racks of equipment space and installed high-powered routers from Juniper Networks. At the exchanges, HavenCo can easily purchase "transit" - basically, a promise from one Net provider to another to carry its packets to their destinations - from practically any provider in Europe.

Sealand's Net connection will consist of a trio of high-speed data pipes. The first will be the satellite link - significantly slower and with a higher latency than a terrestrial connection, but a useful backup all the same. This was installed in mid-May. The second, slated for mid-June, will consist of a pair of 155-Mbps microwave links operated by Winstar Communications, which will send the data across the water to the English coast, where a line leased from British Telecom will take it to Telehouse. The third link will be a ring of high-speed fiber-optic cables installed by Flute, a UK-based corporation that builds undersea optical cable rings and then sells the fiber to its customers. According to Avi Freedman, the cable from Telehouse to the shore should be installed by June, and the fiber to the platform will be in place by September.

Obviously, any equipment located in England or the Netherlands could open up HavenCo to legal action in those countries, maybe even forcing a clampdown on its terrestrial links. But HavenCo's execs don't seem particularly worried. The important point, says Sean Hastings, is that HavenCo won't be running the servers - as is the case with Exodus, HavenCo will simply be running the colocation facility and providing the Internet connectivity. The computers on Sealand will be owned by HavenCo's customers, who are responsible for their own actions.

And even if some angry third party convinced Telehouse to cut HavenCo's link, Sealand will be rigged to instantly reroute the data. "With three satellite connections, many transit providers, and lots of peering," says Freedman, "it's going to be very hard to shut HavenCo down."

Hastings and Lackey believe they can deal with any threat to their system that might be mounted over the Internet. But physical attacks are another matter. Lackey talks tough - telling me that plans call for "50-caliber heavy machine guns, 5.56-mm automatic rifles, and 12-gauge shotguns." But so what? A handful of guns wouldn't do much against an assault by a real nation. Which raises the biggest question of all: Can Sealand really get away with this?

Only time will answer that one, but opinions are all over the map.

Great Britain continues to maintain there is no Sealand - the 1987 expansion of her territorial limit ended the whole charade. "Although Mr. Bates styles the platform as the Principality of Sealand, the UK government does not regard Sealand as a state," says Dewi Williams, a press officer with the British Consulate in New York.

The US concurs. According to a US State Department official, who declined to be identified, "There are no independent principalities in the North Sea. As far as we are concerned, they are just Crown dependencies of Britain."

Jim Dempsey, senior staff counsel at the Center for Democracy and Technology, a Washington, DC-based civil liberties think tank, says the Sealanders are living in a dream world. "Any attempt to avoid the geographical jurisdiction of governments is ultimately futile," he insists. "There are a handful of people on Sealand who, at the very least, are nationals of some country, and that country can assert jurisdiction over them - or just send someone out to arrest them. If they are violating US laws, you wouldn't send out an Exocet missile, you'd send out a Coast Guard cutter with five policemen."

Erwin Strauss, the author of How to Start Your Own Country, isn't so sure. He says Britain's 1987 expansion does not change Sealand's status: If Sealand was sovereign before the change was made, it should be sovereign after. You can't take away its independence just by moving the goalposts. "From a strictly legal point of view," he says, "Roy Bates was there and claimed sovereignty, so that takes precedence."

Clearly, there's a difference of opinion, but both Michael Bates and Sean Hastings are quick to point out that there is a big difference between what Britain is saying and what it is doing. "If Britain thought they had jurisdiction over Sealand, they have been ignoring serious weapons violations under British law all this time," says Hastings. "They're pretty much saying that 'Sealand is not part of our country,' because England is normally very hard on weapons."

Ultimately, this constructive ambiguity might play to Sealand's advantage. If the UK doesn't enforce laws or collect taxes on the platform, Sealand's residents can basically do as they wish as long as they don't overly anger their nearest neighbor. On the other hand, if China, Russia, or whoever sends a destroyer to shut the place down, that boat (or at least its weapons) would have to enter British territorial waters, which would likely set off a military response from the UK.

Caroline Bradley, a professor at the University of Miami School of Law who has closely studied the international statutes affecting micronation schemes, says Sealand is in a stronger position than most new micronations, whose struggles usually involve scams or libertarian bluster that don't amount to anything. Unlike all the other wannabes chronicled by Strauss, Sealand has a population - albeit a small one - and it's about to start having an economy.

"So the question is whether other countries are going to be able to exercise any jurisdiction over Sealand to shut it down," says Bradley. She expects a bumpy road. "Countries don't like data havens. They don't like any sort of secrecy, because people who want to take advantage of such secrecy must be up to no good."

Avi Freedman responds to such criticism with a smile, arguing that if the legal going gets rough, Sealand can always fall back on being a first-rate colocation facility. "Even if you factor out all the questions about jurisdiction and history, you still have a damn fine, secure colocation business with a good economic model."

Ryan Lackey's response is, well ... Ryan Lackey-like. Whatever happens, he's ready to go for it, and true to form, he's already looking ahead and thinking big. No, bigger.

"In 10 years, we'll be investing profits in turning Sealand into a larger island," he says. "It's unclear right now whether it will be a hotel/casino space or purely a larger secure colocation facility. We hope to be in operation everywhere by then ..." Everywhere?

"By then I hope any free country in the world will have a HavenCo secure facility in major cities of commerce," Lackey continues. "No doubt we'll also have servers on ships, on the moon, and on orbiting satellites. Assuming computers continue to get smaller, a single box on the moon could serve a huge bunch of customers!"

Simson Garfinkel is the author of Database Nation: The Death of Privacy in the 21st Century.

For further reading:
"Sealand on the Roughs Navel Fort", Bob Le-Roi, Photo Archive, August 2003 - October 2006
"Has 'haven' for questionable sites sunk?", Declan McCullagh, August 4, 2003
"HavenCo: what really happened", Ryan Lackey, Defcon 11, August 3, 2003
"Another Country", NPR, August 11, 2001

The Malicious Myth of the 'Libertarian' Fed

By Thomas J. DiLorenzo
LewRockwell.com
Friday, May 8, 2009

http://lewrockwell.com/dilorenzo/dilorenzo171.html

In the history of American politics the statists have always been advocates of a central bank, whereas the defenders of liberty – libertarians – have opposed it. Legalized governmental counterfeiting has always been every totalitarian’s dream and every right-minded libertarian’s nightmare.

A Federal Reserve publication entitled "A History of Central Banking in America" correctly calls Alexander Hamilton "the founding father of central banking in America." His nemesis, Thomas Jefferson, strongly opposed Hamilton’s Bank of the United States as a mortal threat to liberty and economic stability. So did Jefferson’s political heir, Andrew Jackson, who vetoed the re-chartering of Hamilton’s Bank of the United States. By that time (the late 1830s) the face of the Hamiltonian/statist cabal in American politics was the face of the Whig Party, and no one was a more strident advocate of a central bank than the young Whig Abraham Lincoln. After being snuffed out by the 1840s, central banking was revived by Lincoln’s National Currency Acts in the 1860s, and then finally cemented into place fifty years later with the creation of the Fed.

The great libertarian Austrian School economists Mises, Rothbard and Hayek (among others) all opposed central banking, whereas the "mainstream" of the economics profession has always played the part of court historian, assuring the public in their publications that the Fed – a secret organization that is responsible to no one and which has never been audited – always acts purely in "the public interest" by "stabilizing" the economy. Read any edition of Paul Samuelson’s famous textbook, Economics, if you’re skeptical of this claim. Or read any "mainstream" introductory economics textbook for that matter.

So it is curious, if not outright bizarre, that several commentators are now blaming the current economic crisis on the "libertarian" Fed! Business historian John Steele Gordon absurdly argued in the Wall Street Journal several months ago that the cause of the current crisis is "the baleful influence of Thomas Jefferson" and his anti-central bank philosophy, which lives on to this day. The Fed is "too libertarian," in other words, and not enough of a central planning institution according to Gordon. That would certainly be news to the most famous libertarian political figure in the world, Congressman Ron Paul.

Stockbroker Henry Kaufman of Henry Kaufman and Company recently wrote in the Financial Times that "libertarian dogma led the Fed astray." This absurd claim is being repeated by other Wall Street establishment mouthpieces, even including the disgraced former governor of New York, Eliot Spitzer. Spitzer recently went on MSNBC to argue that because Alan Greenspan associated with "Ann Rand" fifty years ago, the Fed is a "libertarian" institution. All of these commentators conclude that what is needed, therefore, is even more central planning and regulation by the central bank.

All the layman has to do to recognize what a big fat lie the "libertarian Fed" story is, is to go online and Google a Fed publication entitled "The Federal Reserve System: Purposes and Functions." In addition to recklessly manipulating the money supply and causing boom-and-bust cycles for more than ninety years (including the Great Depression and the current one), the Fed "has supervisory and regulatory authority over a wide range of financial institutions and activities." That’s an understatement if ever there was one. Among the Fed’s "functions" are the regulation of:

• Bank holding companies
• State-chartered banks
• Foreign branches of member banks
• Edge and agreement corporations
• U.S. state-licensed branches, agencies, and representative offices of foreign banks
• Nonbanking activities of foreign banks
• National banks
• Savings banks
• Nonbank subsidiaries of bank holding companies
• Thrift holding companies
• Financial reporting procedures
• Accounting policies of banks
• Business "continuity" in case of economic emergencies
• Consumer protection laws
• Securities dealings of banks
• Information technology used by banks
• Foreign investment by banks
• Foreign lending by banks
• Branch banking
• Bank mergers and acquisitions
• Who may own a bank
• Capital "adequacy standards"
• Extensions of credit for the purchase of securities
• Equal opportunity lending
• Mortgage disclosure information
• Reserve requirements
• Electronic funds transfers
• Interbank liabilities
• Community Reinvestment Act sub-prime lending demands
• All international banking operations
• Consumer leasing
• Privacy of consumer financial information
• Payments on demand deposits
• "Fair Credit" reporting
• Transactions between member banks and their affiliates
• Truth in lending
• Truth in savings

All of this financial market regulation and regimentation was in full force during the Greenspan era. None of it could conceivably be considered to be "libertarian" or "free market" in any way. The Fed is a government central planning agency, period. As such, it is as far away from being a libertarian institution as one can imagine. That’s why the Barney Franks of the political world are staunch Fed defenders whereas "Mr. Libertarian," Congressman Ron Paul, is its fiercest critic.

Thomas J. DiLorenzo is professor of economics at Loyola College in Maryland.

Justice, Policing, and E-Gold

By Michael S. Rozeff
LewRockwell.com
Saturday, August 30, 2008

http://www.lewrockwell.com/rozeff/rozeff215.html

The criminal case of E-Gold, an internet company that allows users to make exchanges using gold as currency, highlights basic questions about both justice and the proper scope of policing.

America is very far from being a free country. Indeed, America is moving in the opposite direction. At some point – and I, for one, would say that point is now – the U.S. becomes a police state or, at the very least, a "soft" police state.

The E-Gold case dramatically illustrates the lack of monetary freedom in the U.S. and many other countries with similar laws. A person with monetary freedom can transact in any currency of his choice with anyone else willing to transact in that currency. He can transmit any amount of money in any form he wants to use to any place in the world where another party stands ready to accept it. A free person can use any available method of transmission to transmit the medium of exchange of his choice.

With monetary freedom, legal tender does not exist. People choose the media of exchange that they prefer to use, and no authorities force them to use the dollar, the euro, the won, the yen, the rupee, the renmimbi, the ruble, or any other money. They can use cowrie shells if they wish (used widely in Africa until the 20th century). Dr. Roger McCain writes that "The colonies were required to use European money, and they did – but when the European monetary systems collapsed in hyperinflation, the West African people went back to using their cowrie-money to get past the crisis. It was the cowrie-money that proved most reliable for many years of the twentieth century."

Monetary freedom also entails freedom for those in business who deal in money. They are free to provide the service of privacy to their clients who want it. Monetary freedom means that businesses are not compelled to spy on their clients. It means that they are not forced to report transactions to the authorities, and that they are not compelled to become part of a network looking for activities that the authorities have deemed to be suspicious. Monetary freedom means that if a business service permits it, a person can withdraw or deposit any amounts in any form he wants to without being subject to the prying and spying eyes of the authorities who have forced the business into being part of their police apparatus.

All of this can be re-stated in terms of rights. A free person has the right to choose the medium of exchange (money or currency) that he prefers. He has the right to choose any form of currency or money he prefers. His rights are being invaded when the State compels him to use a national currency, like the dollar, or not to use a currency like gold. His rights are being invaded when he is forced to accept a particular kind of money in transactions. A free person has the right to send any amount of money in any form whatever to wherever he wants to. He has the right to send it in secrecy and privacy if he can find an obliging carrier or transmitter. Conversely, his rights and those of financial institutions are being invaded if those businesses are forced by the authorities or anyone else into inspecting and reporting upon his financial dealings. Businesses that cannot operate or get licenses unless they agree to become spies for the authorities are having their rights invaded. They are being subject to extortion by the State.

This is by no means a complete catalogue of what monetary freedom entails. It serves as an introduction to the case of E-Gold.

The E-Gold Case

On July 21, 2008, the U.S. Department of Justice released a document with the headline: "DIGITAL CURRENCY BUSINESS E-GOLD PLEADS GUILTY TO MONEY LAUNDERING AND ILLEGAL MONEY TRANSMITTING CHARGES."

Paragraph one noted "E-Gold, Ltd., (E-Gold) an Internet-based digital currency business, and its three principal directors and owners, pleaded guilty to criminal charges relating to money laundering and the operation of an illegal money transmitting business..."

The principal person involved is the company’s founder, Dr. Douglas Jackson, 51, of Melbourne, Florida. He "pleaded guilty to conspiracy to engage in money laundering and operating an unlicensed money transmitting business."

Sentencing is due on November 20, 2008. "Douglas Jackson faces a maximum prison sentence of 20 years and a fine of $500,000 on the conspiracy to engage in money laundering charge, and a sentence of five years and a fine of $250,000 on the operation of an unlicensed money transmitting business charge." Additionally, as part of the plea, E-Gold and Gold & Silver Reserve have "agreed to forfeiture in the amount of $1.75 million in the form of a money judgment for which they are joint and severally liable." On top of that, at sentencing, the companies also face a maximum fine of $3.7 million.

Questions

The case raises such questions as these. Did E-Gold violate the rights of others? Or have the monetary rights of E-Gold been violated?

Suppose that a department store has a restaurant, and suppose that several criminals transact business at a table while having lunch there. Is the store guilty of a crime? Suppose that criminals communicate using newspaper ads. Is the newspaper company guilty of a crime? Did it violate the rights of the criminals’ victims? Suppose that criminals communicate secretly using some advanced telephone or internet communications device. Are the manufacturers of that device responsible for the crimes that these criminals commit? Are internet providers guilty of conspiracy?

Suppose that a bank receives deposits from criminals. Is the bank responsible for the crimes these criminals have committed? Is it responsible for knowing its customers and for detecting those who are criminals? Is it responsible for reporting monetary transactions to the authorities?

Should racetracks, gambling houses, and internet gaming companies be required to report large money bets and large winnings? Should stores, auto dealers, and real estate agents be required to report large purchases for cash?

Should every company be made to detect and report possible criminal activities on its premises or among persons using its products or services? Should every company be made to monitor everyone with whom it deals in order to detect possible criminal activities?

Answers

A free person is certainly not free if he is forced into becoming a police spy. A person is not free if he is forced to monitor all the people and their activities that he encounters. The same statements hold for a business. If there is a law against dealing in drugs, that becomes a matter for the police, not a bank or a stock broker or a mutual fund, all of whom are being forced into reporting to the authorities.

Everyone has a right to his life, liberty, and property. To be forced into using one’s time, money, and property in order to detect possible criminal behavior is clearly an invasion of one’s basic rights. It is one thing to ask people to be on the lookout for a suspected criminal. It is one thing to ask people if they will post wanted posters, or to ask a business to donate some space to alert people to a suspected criminal. The voluntary cooperation of common people in finding and apprehending criminals is one thing, but compelling them to police one another is entirely a different matter. This is the difference between a free country and police state. The U.S. has crossed the line, and so have many other countries.

Another answer to all of these questions is panarchy. You choose your society, and I will choose mine. And they can co-exist side by side on the same territory. Societies that are without territorial control, living side by side, intermingling, are what panarchy is about. You practice your religion or none, and I practice mine or none. We live in the same town and there is no problem.

If you want to live in a society in which no one has privacy and everyone spies on everyone else, then do so. Your members can report on each other all they like. But you have no right to impose your restraints and dictates on those who think otherwise and choose a society in which their banks do not have to report large cash transactions to the police. You may want to reduce drug-taking and attempt to do so by imposing all sorts of police-state methods. You may launch billion-dollar wars on drugs and build a prison in each locality to house, feed, and clothe drug users, or you may execute them. But you have no right to impose your methods (or taxes or regulations) on anyone else who chooses a different society, although they may live on the east side and you on the west side of town, or even if they live on the west side too.

Tolerance is what panarchy is about, that is, tolerance by people of those who live across the social divides that they wish to make for themselves. Social divides need not be territorial divides. There is plenty of room for everyone and plenty of ways to accommodate the different ways of others without compelling everyone to live under one set of laws in this vast region we call the United States of America. You may be as intolerant of drug-users as you like to all those within your society who have agreed to that intolerance, but you may not extend your intolerance to my drug use within my society and my ability to buy drugs without a doctor’s prescription or to my having them administered by an alternative healer of illness.

Is Dr. Jackson guilty of a crime?

The fact that Dr. Jackson pleaded guilty does not answer the question of whether he is guilty of a crime. He was forced into a corner. He is seeking to continue the company he began 12 years ago. He is revamping it to comply with the State’s edicts. A guilty plea was his least-cost choice, in his estimation. Dr. Jackson’s statement can be found here. It is a complete cave-in to all the demands of the State.

E-Gold was not a fly-by-night business. Its customers did not bring about the criminal indictment. It was not customer complaints about missing gold, embezzlement, theft, or poor service that brought on the indictments. E-Gold did not steal anything from anyone. If it has, why hasn’t the DOJ trumpeted that? However, the criminal complaint did have a large negative effect on E-Gold customers who encountered illiquidity in their accounts.

The Department of Justice [sic] news release goes on at great length about the supposed crimes that Dr. Jackson committed. In fact, the document suggests to me that the company committed no crimes at all! If it did commit crimes, did the victims appear in court? Did they document their damages?

If Dr. Jackson actually committed a crime, what was it? The fact is that he pleaded guilty to the nebulous crime of conspiracy to engage in money laundering. This only means that other people used E-Gold to transmit funds possibly obtained via illegal activities and that E-Gold was not equipped to detect who they were and report them. What kind of cockamamie crime is it when one fails to kowtow to the State’s edicts compelling one to work with the authorities to detect money laundering? For that is what is involved in the other conspiracy charge. I quote the DOJ: "E-Gold...will move to fully comply with all applicable federal and state laws relating to operating as a licensed money transmitting business and the prevention of money laundering which includes registering as money service businesses. Also as part of the plea agreement, the businesses will create a comprehensive money laundering detection program that will require verified customer identification, suspicious activity reporting and regular supervision by the Internal Revenue Services’ (IRS) Bank Secrecy Act Division..."

Dr. Jackson has pleaded guilty to the crime of not verifying who his customers were, not making sure that they were not criminals, not creating a comprehensive program to detect money laundering, not detecting and reporting suspicious activity, and not operating under the supervision of the Bank Secrecy Act Division of the IRS. In other words, he didn’t become part of the State’s spying apparatus, and that makes him and his operation a criminal conspiracy. The crime here is not the commission of a crime. Instead the State is demanding that you do what it tells you, and if you don’t, then that is a crime. If you stand up for your rights and do not obey the State’s demands, you are a criminal!

Conclusion

In Wikipedia, we read: "The Bank Secrecy Act of 1970 (or BSA, or otherwise known as the Currency and Foreign Transactions Reporting Act) requires U.S.A. financial institutions to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $5,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. It was passed by the Congress of the United States in 1970. The BSA is sometimes referred to as an "anti-money laundering" law ("AML") or jointly as "BSA/AML". Several anti-money laundering acts, including provisions in title III of the USA PATRIOT Act, have been enacted up to the present to amend the BSA. (See 31 USC 5311-5330 and 31 CFR 103.)"

The rest of the article introduces the reader to the reporting requirements under these laws.

These laws infringe the monetary rights of all persons who either are made to obey them or who are forced to transact under the watchful eyes of financial institutions that are applying these laws to their persons and property.

These laws are one of the very many instances of the abysmal and wretched failure of Americans to have monetary freedom. Many other countries are in no better shape.

We have major laws that openly violate the rights of people. I protest! If I disobey one of these laws, then I am a criminal under these laws. If I am caught, then I will pay a price for my disobedience, that is, for exercising my rights. That is what happened to E-Gold. It’s a topsy-turvy world.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York.

For further reading:
"Money laundering and digital precious metals", BCS Australia, July 2008