Of Taxes, Taps, and 'Total Encryption'

ational encryption policy is being stymied by government fears that proliferation of impossible-to-crack ciphers will give tax cheats an easy way out, limit intellectual property rights and even undermine the authority of the state, say White House officials.

"We can't predict the consequences of 'total encryption,' " said Mike Nelson, special assistant for information technology at the White House Office of Science and Technology Policy. "According to some scenarios, encryption would make it very difficult to collect tax revenues or even cause the dissolution of the state," said Nelson. "So you can understand why some people on the Hill and in the Administration are concerned."

The threat of total encryption - meaning open market access to a number of coding products - "is extremely serious," said James Bidzos, president of the encryption-development company doing the most to create a world of total encryption, RSA Data Security Inc., Redwood City., Calif. "I don't disagree with [Nelson's concerns] at all. They should be worried about it," and should decide on a national policy towards encryption after a nationwide debate, he said.

Total encryption provided by ubiquitous, uncrackable voice and data-scrambling devices, such as RSA's technology, on every type of telephone, fax or computer, does not exist. RSA's code is more or less impossible to break.

But total encryption is coming, say advocates. "The crypto-genie is out of the bottle. The government cannot stop it," said Phil Karn, an encryption advocate.

Already, the rapid development of low-cost encryption devices by commercial vendors has prompted the National Security Agency, Fort Meade, Md., and the Federal Bureau of Investigations to promote the controversial Clipper chip and to successfully lobby Congress for approval of the Digital Telephony Act..

The act requires commercial telephone companies to modify their sophisticated communications networks to make judicially approved wiretaps easier. Congress provided $500 million to pay for network modifications.

The NSA secretly developed the voice-scrambling Clipper chip - based on its key-escrow technology - to hide private conversations while allowing monitoring of suspected criminal conversations.

If - or when - "total encryption" arrives, the government obviously would get little use out of the NSA's electronic eavesdropping systems, the wiretap evidence needed by the FBI to track criminal activity such as drug-smuggling and money laundering - and most importantly, financial information needed by the Internal Revenue Service, said government officials.

Encryption also could conceal the theft of intellectual property, such as software programs, records and videos, Nelson said. "I could encrypt someone else's document and sell it to millions of people over the Internet," he said.

With total encryption, "organized crime investigations go away...the world goes dark for law-enforcement as well as intelligence," said one administration official.

The total encryption scare and the White House's search for a as-yet-unknown policy have stymied administration efforts to develop an encryption policy, said Nelson.

Currently, the government faces two unpalatable policy options: Accept a world of total encryption, or try to clamp down on U.S. export of high-grade encryption while promoting key-escrow technology in the United States.

To help resolve the issue, the White House appointed a National Research Council group to study fundamental issues of encryption, and Nelson asked Stuart Schwartzstein, an analyst at the Washington-based Center for Strategic and International Studies, to set up a panel of government, industry and academic experts to investigate.

Assessments of the administration's position are split in two camps. One says total encryption is inevitable and will hurt law-enforcement and tax-collection.

"The government's monopoly over the control of information has been broken. They will never put it back," said one industry official. But without encryption, the government's ability to monitor the public could be abused. "I'd sooner trust the people [with encryption] than government," the official said.

Nelson's concerns are plausible, but "there is nothing the government can do about it. It just has to deal with it," said Doug Miller, an encryption expert with the Washington-based Software Publishers Association. The association is lobbying to reverse NSA-inspired export controls on commercial software equipped with high-grade encryption, arguing the controls cost U.S. suppliers billions of dollars. The controls are intended to slow proliferation of encryption technology.

Another group of encryption-advocates agreed large-scale use was inevitable, but dismissed Nelson's concerns, saying the state would find alternative ways to enforce tax and property laws.

The administration's concern "strikes me as unmitigated balderdash," said Whitfield Diffie, who conceived the technology in modern, easy-to-use encryption. Tax-collectors and police enforce the law with minimal electronic monitoring, so its loss would make little difference, he said. Also, economic growth powered by encryption-aided information technology will boost tax revenues, he said.

The argument that tax-collection would be compromised "is especially specious," said David Banisar, a lawyer at the Washington-based Electronic Privacy Information Center, a privacy advocacy group, because current tax-revenue is generated by company-managed deductions from paychecks.

Despite the debate, the administration has no plans to enforce use of Clipper or key-escrow. "As long as the administration is in the White House, we are not going to do it," Nelson said.