

From the Radio Free Michigan archives



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THE END OF ORDINARY MONEY



by  J. Orlin Grabbe



Late one night while sharing a

pharmacological product with a spook I met in the

northeastern part of the United States, I mentioned I

was studying cryptology. 



"Cryptology is the *future*," he responded

emphatically.  "It's what's going to protect us from

Big Brother." 



Since he worked for the National Security

Agency (NSA), the thought did occur to me that

many would have taken the position that he and his

colleagues *were* Big Brother.  But I had learned

years ago not to demonize people on the basis of an

accidental profession.  After all, if an ex-CIA

employee like Kerry Thornley could become a

staunch libertarian, the creator of Zenarchy and

implied co-author of  the Erisian holy book

Principia Discordia [1], then there was hope for all

of us.  I additionally believed that one of our best

defenses against the national security state was the

perennial proclivity of clandestine organizations to

piss off their own employees [2].



At any rate, the spook spoke the truth:

cryptology represents the future of privacy, and

more.  By implication cryptology also represents the

future of money, and the future of banking and

finance. (By "money" I mean the medium of

exchange, the institutional mechanisms for making

transactions, whether by cash, check, debit card or

other electronic transfer.)  Given the choice between

intersecting with a monetary system that leaves a

detailed electronic trail of all one's financial

activities, and a parallel system that ensures

anonymity and privacy, people will opt for the

latter.  Moreover, they will *demand* the latter,

because the current monetary system is being turned

into the principal instrument of surveillance and

control by tyrannical elements in Western

governments.  



These elements all want to know where your

money comes from, and when and how you spend

it.  After all, you might be a terrorist, drug dealer,

or spy.  And if you try to hide your transactions, you

are by definition a money launderer and perhaps a

child pornographer. 



Say what? To understand this quaint

accusatorial juxtaposition, one only has to grasp a

few simple facts:  Money is digital information. 

The way to hide digital information is through

cryptography. The government doesn't want you

using cryptography, because they want to know

where your money is so they can get some of it. 

And they don't like you using drugs, unless the

government is the dealer [3], or viewing child

pornography, unless the government supplies it

because it is setting you up for blackmail or a smear

campaign [4].



Okay, I'll admit it.  I like privacy (I often

send mail inside sealed envelopes, and sometimes

close the door when I go to the bathroom), take

drugs (nothing like a cup of expresso in the

morning), and don't like to pay taxes (but doesn't

H&R Block make a living off this same popular

sentiment?). I don't know much about child

pornography, but a friend of a friend is said to have

a distant cousin who swears he keeps several

hundred gigabytes of encrypted pictures of naked

children stored in NSA computers at Ft. Meade. ("No

one breaks in there," the cousin supposedly brags.)

[5]



This is serious stuff.  Consider the following

items as pieces of an overall mosaic, whose ultimate

meaning will become even more obscure as we

proceed.



* Cryptography software is classified as

munitions, and its export is restricted by the State

Department. The International Traffic in Arms

Regulations (ITAR) defines "encryption software"

to include not only computer programs designed to

protect the privacy of information, but all of the

technical data about those programs.  ITAR

restrictions continue to be enforced, even though the

Justice Department originally found them

unconstitutional [6].  Mail a copy of your new

encryption program to a friend in Italy, and--

presto!--you are subject to prosecution as an

international arms dealer. (It is not, however, illegal

to export your program to outer space, or to deliver

it to your friend by rocket, since a "launch vehicle

or payload shall not, by the launching of such

vehicle, be considered export for the purposes of

this subchapter" (120.10).)



* Steward Baker, Chief Counsel for NSA,

points out how the spread of cryptology plays into

the hands of pedophiles:  "Take for example the

campaign to distribute PGP ('Pretty Good Privacy')

encryption on the Internet. Some argue that

widespread availability of this encryption will help

Latvian freedom fighters today and American

freedom fighters tomorrow. Well, not quite. Rather,

one of the earliest users of PGP was a high-tech

pedophile in Santa Clara, California. He used PGP

to encrypt files that, police suspect, include a diary

of his contacts with susceptible young boys using

computer bulletin boards all over the country. 'What

really bothers me,' says Detective Brian Kennedy of

the Sacramento, California, Sheriff's Department, 'is

that there could be kids out there who need help

badly, but thanks to this encryption, we'll never

reach them' " [7] .



Which does lead to a few questions.  Since

the NSA is the largest user of encryption software in

the world, does that mean NSA is rife with

pedophiles?  Are police *suspicions* to be taken as

convincing evidence?  And what if this alleged

pedophile had never kept notes in the first place? 

But never mind. What really bothers me is that there

could be kids out there who need help badly, but

thanks to sloppy records, extended ignorance, and

appeals to national security, we'll never reach them.



The NSA Chief Counsel also noted, as he

had in previous speeches, ". . . it's the proponents of

widespread unbreakable encryption who want to

create a brave new world, one in which all of us--

crooks included--have a guarantee that the

government can't tap our phones." Which caused

one observer, Bruce Sterling, to remark, "As a

professional science fiction writer I remember being

immediately struck by the deep conviction that there

was plenty of Brave New World to go around" [8].



* Georgetown University cryptologist

Dorthy Denning reminds us that "Because 

encryption can make communications immune from

lawful interception, it threatens a key law

enforcement tool. The proliferation of high quality,

portable, easy-to-use, and affordable encryption

could be harmful to society if law enforcement does

not have the means to decrypt lawfully intercepted

communications. Although encryption of stored

files is also of concern, 99% of the issue is

telephone communications (voice, fax, and data)"

[9]. 



The reason for this is all those people on the

phone dealing drugs.  "Almost two thirds of all

court orders for electronic surveillance are used to

fight the war on drugs, and electronic surveillance

has been critical in identifying and then dismantling

major drug trafficking organizations.  In an

operation code named 'PIZZA CONNECTION,' an

FBI international investigation into the importation

and distribution of $1.6 billion worth of heroin by

the Sicilian Mafia and La Cosa Nostra resulted in

the indictment of 57 high-level drug traffickers in

the U.S. and 5 in Italy . . ..  The FBI estimates that

the war on drugs and its continuing legacy of

violent street crime would be substantially, if not

totally, lost if law enforcement were to lose its

capability for electronic surveillance" [10].



In fact, that's supposed to settle the issue

right there:  "We need such-and-such to fight the

war on drugs.  Case closed."  This argument is used

ad nauseam in document after document.  Nowhere

is the issue raised:  Oh yeah?  So why are we

fighting a war on drugs?  Such questions are ruled

out, because we're dealing with *needs* here, and

needs spew forth their own logic and evolve their

own morals.



* One of governments' biggest needs is to

get all that drug money for themselves, the part they

don't already have.  The U.S. State Department

proposes a sort of international spree of 

government theft: "We must effect greater asset

seizures, not just of bank accounts, but also

corporate assets and even corporate entities . . . We

must be ready to impose appropriate sanctions

against banking institutions, as well as bankers . . .

The FATF [Financial Task Force] countries, the 12

EU [European Union] nations, the EFTA countries,

and the majority of the 95 states party to the 1988

UN Convention are adopting (if not yet fully

implementing) legislation that will ultimately

improve individual and collective capabilities." [11]  



Everyone is suspect.  You say you want to

buy some Portuguese escudos?  We better keep our

eye on you--you're a potential money launderer. 

According to the State Department, "Entry in the

European monetary system has made the escudo,

which became fully convertible in 1993, more

attractive to potential money launderers" [12].

Hmm. Hey, fellows. With that mentality, you

should send some investigators from Foggy Bottom

up to 19th Street. You'll find an entire building, an

outfit called the International Monetary Fund, which

was originally set up to work for currency

convertibility.  No telling what wicked *potential*

money laundering havens they're working on next.   



* The Financial Crimes Enforcement

Network (FinCEN) located in Vienna, Virginia, was

set up in April 1990 to track money laundering, and

given computerized access to data from pretty much

everyone--FBI, DEA, Secret Service, Customs

Service, Postal Service, CIA, NSA, Defense

Intelligence Agency, National Security Council, the

State Department's Bureau of Intelligence and

Research, and, yes, the IRS (despite denials).

FinCEN has a $2.4 million contract with Los

Alamos National Laboratory to develop artificial

intelligence programs to look for unexplained

money flows [13].  FinCEN also proposed a

"Deposit Tracking System" (DTS) that would also

track deposits to, or withdrawals from, U.S. banks

accounts in real time.



* Now, if you were a drug dealer (or maybe

just an average Joe), how would you react to all this

unwanted attention?  Try to keep a low profile,

maybe?  Perhaps opt out of the usual banking

channels? "During the past two years, analysts saw

an increasing use of non-bank financial institutions,

especially exchange houses, check cashing services,

credit unions, and instruments like postal money

orders, cashiers checks, and certificates of deposit

(particularly in 'bearer' form), with transactions

occurring in an ever longer list of countries and

territories" [12].



This process whereby money flows through

non-traditional banking channels is termed

*disintermediation*.  Disintermediation happens

whenever a government manipulates banking

services in such a way to make them less attractive. 

For example, if bank deposits have an interest rate

ceiling of  3 percent, you may elect to pull your

money out of bank deposits, and purchase Treasury

bills which  have no ceiling.  In the same way, if the

government is looking around in your bank account,

perhaps with the idea of seizing it, or seizing you,

you may elect not to have a bank account, or at least

not one the government knows about.  Or you may

elect to use non-traditional financial channels which

are less likely to be observed.   The ultimate end of

the process is completely anonymous banking

through encrypted digital cash.      



The State Department also notes will alarm

that "[drug] traffickers were employing professional

money managers." Which does lead one to reflect,

whatever is the world coming to?  The next thing

you know,  drug dealers will be shopping at the

local grocery store and sending their children to

better schools.  They'll be mowing their lawns and

sprucing up the neighborhood. How could we live

in such a society?



* All this talk of computers has gotten the

IRS hot and bothered also. Not in a negative way,

mind you.  The IRS has become obsessed with the

noble goal to save us time by just sending us a bill: 

"In an effort to catch more tax cheats, the Internal

Revenue Service plans to vastly expand the secret

computer database of information it keeps on

virtually all Americans. . . .'Ultimately, the IRS may

obtain enough information to prepare most tax

returns,' said Coleta Brueck, the agency's top

document processing official.  'If I know what

you've made during the year', she said, 'if I know

what your withholding is, if I know what your

spending pattern is, I should be able to generate for

you a tax return...' " [14]. 



We have nothing to fear, apparently, but

*fiends who hide their spending patterns*.  Well,

Coleta, you had better prepare for a flood of data

that is spending-pattern impaired, because

according to the Crypto Anarchist Manifesto, "Just

as the technology of printing altered and reduced

the power of medieval guilds and the social power

structure, so too will cryptologic methods

fundamentally alter the nature of corporations and

of government interference in economic

transactions" [15].



How did we come to this state of catch as

catch can, and where are we going from here? 

Perhaps history will give some perspective.  Let's

start with that big bugaboo--drugs. In article logic,

drug prohibition leads to money laundering, which

leads to increased surveillance of banking

transactions, and heightens interest in anonymity

through cryptology.



Oh, What a Lovely War!



In the mid-1990s the United States and other

countries were spending a good deal of money on a

"war on drugs."  What the phrase meant was unclear

in a nation where 50 million people used tobacco,

over 100 million used alcohol, and virtually

everyone used aspirin or an equivalent pain-reliever. 

But certainly there was a prohibition in using, or

dealing in, certain drugs.  Naturally these drugs

were still available on the black market despite the

prohibition.  The market supplied the consumption

needs not only of the general public, but also of 

federal prisoners.  Thus even if the country were

turned into a police state, such drugs would still be

available.  Given this, what was the purpose or

function of the prohibition?  The simple economic

rationale was this: the war on drugs was a source of

profit both to those who dealt in prohibited drugs,

and those who conducted the war against them.



The prohibition of anything is a restriction

in supply.  Supply restriction drives up the price.  In

1973-4 the OPEC cartel caused a quick four-fold

increase in the price of oil by restricting its supply. 

It also greatly increased the profit margin on each

barrel pumped out of the ground.  In a similar way,

prohibition of drugs increases their black market

price and the potential profit margin from supplying

them to the public. But legitimate businessmen are

deterred from entering the market.  Hence drug

prohibition creates a bonanza--high profit margins

--only for those willing to deal in prohibited

products.   Just as alcohol prohibition financed the

growth of powerful mobsters like Al Capone earlier

in the century, so did prohibition of cocaine  finance

the growth of powerful production and supply

cartels, such as the Cali cartel in Colombia.   The

U.S. government's prohibition made it possible for

them to become rich, and then powerful.



Because trade in drugs is illegal, contracts

cannot be enforced in court.  One cannot resort to

common or commercial law.  Hence contracts are

often enforced via the barrel of a gun.  And as there

is no countervailing authority, those who enforce

their contracts with guns may use the same method

to simply eliminate competition.  Territory is

acquired or defended by force. Steven B. Duke, the

Law of Science and Technology Professor at Yale

University states simply:  "The use of drugs--

except, of course, alcohol--causes almost no

crime."  But drug *prohibition* does cause crime. The

firearm assault and murder rates rose in the U.S.

with the start of Prohibition in 1920, and remained

high during it, but then declined for eleven

consequence years after Prohibition was repealed.

In the U.S. today, perhaps one-third of murders are

related to contract enforcement and competition

over dealing territory [16]. 



Prohibition turns others into crime victims. 

Because certain drugs cannot be obtained at the

local neighborhood drugstore, drug consumers visit

unsafe parts of a city, and are simply assaulted. 

Such victims, naturally, are not in a position to

complain to the police. Others become victims

because of the lack of quality control.  Because

drugs are illegal, rip-off artists who deal in

substitute or impure products know they will not be

sued.  Other suppliers simply make mistakes in

production, but these mistakes are not caught right

away because information flow is not efficient in a

non-public market.  This results in injuries, often

caused not the use of the prohibited drugs

themselves, but by the constraint on the flow of

information brought about by prohibition. 



During the earlier era of alcohol Prohibition

in the U.S., many of a city's leading citizens became

criminals by the fact of visiting the bar of a local

speakeasy.  There, naturally, they associated with

the proprietors, mobsters, who began to acquire

increasing political influence. Today billions of

dollars in cocaine profits leads to wide-spread

corruption [17].



About 1.2 million suspected drug offenders

are arrested each year in the U.S., most of them for

simple possession or petty sale [18]. Currently in

the U.S., police spend one-half their time on drug-

related crimes. The court system is on the verge of

collapse because of the proliferation of drug cases,

which-because they are criminal cases-have

priority over civil cases. Six out of ten federal

inmates are in prison on drug charges. Probably

another two of the ten are there on prohibition-

related offenses.  There is a crisis in prison

crowding (forty states are under court order to

reduce overcrowding), with the result that violent

criminals--including child molesters, multiple

rapists, and kidnappers--are often released early. 

This is reinforced by mandatory sentencing laws. 

Consensual drug offenses are not only treated as the

moral equivalent of murder, rape, or kidnapping: 

they are given harsher punishment.  Youths are sent

to prison for life for selling drugs, while murderers

were eligible for early parole for good behavior

[19].  As one example,  Florida punishes "simple

rape" by a maximum prison term of 15 years,

second-degree murder with no mandatory minimum

and a maximum of life in prison , first degree

murder (where the death penalty is not imposed)

with a mandatory minimum penalty of 25 years,

after which one is eligible for parole, but trafficking

in cocaine is punished with life imprisonment

"without the possibility of parole."



The war on drugs has turned into a war on

civil liberties  The reason is simple.  The war is a

war on people suspected of using, or dealing in, or

otherwise being involved in drugs.  But the drug

industry survives because tens of millions of people

engage in voluntary transactions, which they try to

keep secret.  Hence law enforcement must attempt

to penetrate the private lives of millions of 

suspects, which could be almost anyone.  A Nobel

prize-winning economist wrote:  "Every friend of

freedom . . . must be as revolted as I am by the

prospect of turning the U.S. into an armed camp, by

the vision of jails filled with casual drug users and

of an army of enforcers empowered to invade the

liberty of citizens on slight evidence" [20].

Unfortunately, not everyone is a friend of freedom. 

A mayor of New York advocated strip searching

travelers from Asia and South America.  A U.S.

congressman introduced a bill to create an

"American Gulag" of Arctic prison camps for drug

offenders.  And so on.



The drug trade is sustained by prohibition

itself.  Agencies like the Drug Enforcement

Administration (DEA) grew up to "fight" the drug

war.  Their budgets, prestige, and paychecks depend

on the war's continuation.  These agencies have vast

sums to spend on public relations and propaganda

("education"), and a vested interest against

legalization.  Since these agencies profit from

crime, they have an incentive to cultivate

criminality as a natural resource.  The sheriff of

Broward County, Florida, manufactured his own

crack cocaine to sell to buyers in order to arrest

them [21].  Others employ cocaine gigolos, who

then pressure unsuspecting boyfriends/girlfriends

into purchasing drugs from undercover agents (e.g.,

United States v. Eugenio Llamera, No. 84-167-Cr

(S.D. Fla. 1984)).  Periodically a new "biggest ever"

drug bust (such as 22 tons of cocaine in a Los

Angeles warehouse) is proudly announced, with no

apparent perception that such busts prove the

agencies are failing in their alleged goal of drug

elimination. Meanwhile, some government

employees-drug warriors-themselves engage in

criminal acts for enjoyment or to supplement their

income.  Drug dealers, in particular, can be killed

and robbed with impunity.  Forfeiture laws, which

allow the seizure of money, houses, boats, cars,

planes, and other property on the basis of a

circumstantial connection with prohibited drugs,

have also been profitable.  The associate deputy

attorney general in charge of the U.S. Justice

Department's forfeiture program said "we're not at

all apologetic about the fact that we do benefit

(financially) from it" [22].



Others are paid to extend the war

internationally.  Examples include Latin American

coca crop eradication and substitution programs. 

These have had almost no success, and have created

massive social problems [23]. Poor farmers can

make four to ten times as much growing coca as in

growing legal crops [24]; they can grow coca and

marijuana in regions with poor soil; and they can

avoid oppressive agricultural regulations

encountered with the production and sale of crops

lacking an efficient alternative to government

marketing organizations.  The 200,000 peasant

families (1 million people) engaged in coca

production in Peru are oblivious to campaigns

urging them to "just say no" to the source of their

livelihood.



In the last few years, the use of, and hence

the demand for,  cocaine has fallen.  But there are

always new ways to justify increased drug war

budgets.  The U.S. Department of State notes, with

no awareness of the irony of the statement: "The

economics of the heroin trade are also important. 

While at U.S. street prices, cocaine and heroin are

competitive, at the wholesale level heroin has a

strong advantage.  A kilo of cocaine wholesales for

between $10,500 and $40,000; a kilo of heroin will

fetch on average between $50,000 and $250,000. 

With the likelihood that heroin will be to the 1990's

what cocaine was to the 1980's, Latin American

trafficking organizations are poised to cash in on a

heroin epidemic" [12].   And, naturally, so also are

those who fight them. 



For at some point it occurred to these drug

warriors, mighty and bold, that there were easier

ways to make a living.  Why not just go after the

cash?  After all, if you go out to the poppy fields

you may get your boots muddy, and (more

importantly) bankers don't carry guns.



99 and 44/100 Percent Pure



The House of Representatives report on the

banking legislation leading up to the U.S. Banking

Secrecy Act of 1970 noted that "secret foreign bank

accounts and secret foreign financial institutions"

had been used, among other things, to "purchase

gold," and to serve "as the ultimate depository of

black market proceeds from Vietnam" [25]. The

report does not explain why the purchase of gold

was a menace to society, nor elaborate on the role of

the House in creating a black market in Vietnam. 

Within a few years gold was legalized, and the

absence of U.S. military forces in Vietnam

eliminated the black market.  The report also noted: 

"Unwarranted and unwanted credit is being pumped

into our markets."  This was also attributed to

foreign banks with secrecy laws, although the

Federal Reserve*the real source of excess credit in

the years leading up to the breakdown of Bretton

Woods*is not foreign.  In short, the House report

was a broad-based attack with little rhyme or

reason, setting the tone for similar future studies.  



As is usual in political double-speak, the

Banking Secrecy Act was an act of legislation

intended to prevent, not preserve, banking secrecy. 

It created four requirements that were supposed to

address the issue of money laundering:  1) A paper

trail of bank records had to be maintained for five

years.  2) A Currency Transaction Report (CTR)

had to be filed by banks and other financial

institutions for currency transactions greater than

$10,000.  CTRs were filed with the IRS.  3) A

Currency or Monetary Instrument Report (CMIR)

had to be filed when currency or monetary

instruments greater than $5,000 were taken out of

the U.S.  CMIRs were filed with the Customs

Service. 4) A Foreign Bank Account Report

(FBAR) had to filed whenever a person had an

account in a foreign bank greater than $5,000 in

value. (The latter two requirements have been

increased to $10,000.)



These reports mostly collected unread

during the 1970s.  But that was to change with the

growth in computerized recordkeeping and artificial

intelligence processing, and with the escalation of

the "war on drugs."  In the early 1980s, a Senate

staff study noted in alarm "what appears to be

otherwise ordinary Americans engaged in using

offshore facilities to facilitate tax fraud.  These

cases signify that the illegal use of offshore

facilities has enveloped 'the man next door'--a trend

which forecasts severe consequences for the

country"  [26]. 



The same report made a concerted effort to

draw connections between the eurodollar market

and criminal activity, noting "few banking

authorities address the issue of primary concern to

us here: criminal uses of Eurobanking."  The focus

was not banking fraud or theft:  "The most visible

and notorious aspect of offshore criminality

involves drug traffic."  One of the report's many

recommendations was that the Treasury Department

should  work with the "Federal Reserve Board to

develop a better understanding of the financial

significance and use of currency repatriation data as

well as information about foreign depositors'

currency deposits."  Subsequently, Panama was

identified as the major banking center for the

cocaine trade, and Hong Kong as the major center

for the heroin trade, based largely on the amount of

U.S. dollars, including cash, being return to the

Federal Reserve by, respectively, the Banco

National de Panama and by Hong Kong-based

banks [27].



Thus, with that simple act, the Federal

Reserve Board was transformed from an institution

that watched over the currency to a co-conspirator

that watched over currency users.



Efforts were extended internationally to

trace cash movements.  The Bank for International

Settlements (BIS) Code of Conduct (1984)

recommended a global version of the CRT. 

Information from the global CRT was to be

processed by the OECD and shared with tax

authorities in all industrialized countries. The G-7

countries in 1989 agreed to form the Financial

Action Task Force (FATF), with staffing and

support to be provided by the OECD. FATF now

includes 26 governments. In May 1990, FATF

adopted forty recommendations on money

laundering countermeasures.  These included

provisions that a global currency tracking system

(the global CRT proposed earlier by the BIS) be

created, that financial institutions be required to

report "suspicious transactions" to law enforcement

authorities, that global sting operations be used

against launderers, and that electronic money

movements, especially international wire transfers,

be monitored.



So better beware your banker:  by law, he's a

snitch.  Maybe even a government employee.  In

one recent example of a global sting,  government

officials set up a bank in the Caribbean (Anguilla),

and advertised their services in confidential

banking.  They then turned all the information over

to tax authorities.  Did you ever wonder why

uneducated people believe in international banking

conspiracies?



The Digital World of Money



Money is a mechanism for making payment. 

What we want from a payments mechanism is fast,

reliable (secure) service at a low cost.  In current

technology that means that the payment mechanism

will be determined by transactions costs.  Hence

money in a modern economy exists chiefly in the

form of electronic entries in computerized

recordkeeping systems or data bases. Money exists

as a number (e.g. 20) beside which is attached a

currency or country label (e.g. DM or BP or U.S.$)

and also an ownership label (e.g. "Deutsche Bank"

or "Microsoft" or "Jack Parsons").  Physical goods

are transported to different geographical locations,

but currencies by and large are not.  This is true

both domestically and internationally. A bank in

London will sell British pounds to a bank in

Frankfurt for deutschemarks by having the

Frankfurt bank's name recorded as the new owner of

a pound deposit in London, while the London

bank's name is recorded as the new owner of a

deutschemark deposit in Frankfurt.  



Payment between banks is made by an

exchange of electronic messages.  The scope and

size of transactions mandates this type of payment

mechanism.  The most important communications

network for international financial market

transactions is the Society for Worldwide Interbank

Financial Telecommunication (SWIFT), a Belgian

not-for-profit cooperative. This system for

transferring foreign exchange deposits and loans

began actual operation in May 1977 and by 1990

had 1,812 members, and connected 3,049 banks and

securities industry participants in eighty-four

countries.  It carried an average of 1.1 million

messages per day. SWIFT messages are transmitted

=66rom country to country via central, interconnected

operating centers located in Brussels, Amsterdam,

and Culpeper, Virginia. These three operating

centers are in turn connected by international data-

transmission lines to regional processors in most

member countries. Banks in an individual country

use the available national communication facilities

to send messages to the regional processor. A bank

in London, for example, will access SWIFT by

sending messages to a regional processing center in

the north of London [28]. The message will be

received by a bank in New York via the SWIFT

operating center in Culpeper, Virginia.



Within the U.S. the most important

communications-money-channels are Fedwire

and CHIPS.  Eleven thousand depository

institutions have access to Fedwire, the electronic

network system of the Federal Reserve System. 

(About a thousand of these access the system

through the New York Fed.)  In 1991 an average of

$766 billion daily went through the net, of which

$435 billion involved the New York Fed.  The

average size of a funds transfer was $3 million. 

There were 258,000 average daily  transfers.



The New York Clearing House Association

(twelve private commercial banks) operate the

Clearing House Interbank Payments System

(CHIPS) to settle foreign exchange and eurodollar

transactions.  CHIPS connected 122 participants in

1991.  On an average day $866 billion went through

the CHIPS network, with 150,000 average daily

transfers (or an average transfer size of about $5.7

million).  Sometimes there are large fluctuations in

the level of payments.  On January 21, 1992,

$1.5977 trillion went through the CHIPS system.

That is, the U.S. M1 money stock turned over

several times in a single day. The CHIPS system

maintains an account at the New York Fed.  Much

of the nation's money flows through what is literally

an underground economy:  the computer banks

located beneath 55 Water Street in Manhattan.



These systems, even the Fedwire system, did

not arise by centralized government planning.  ". . .

it is historically accurate that the Fedwire system

evolved in almost a 'natural' manner; no one at the

Board or at a Reserve bank ever sat down and said

'let there be a wire transfer system.'  Thus, Fedwire

can be regarded as an example of a market tendency

to evolve, over time, in an efficient manner" [29].



In Europe, banks have available

CEBAMAIL, a shared voice and data network

established by European central banks and later

expanded to other users.  European banks also use

IBM's International Network and DIAL service to

communicate with the Bank for International

Settlements in Basle, Switzerland, and with each

other.



Money, then, is part of the worldwide

information superhighway (or infobahn).  The

Clinton administration's proposal for a "National

Information Infrastructure" (NII) was announced in

1994:  "All Americans have a stake in the

construction of an advanced National Information

Infrastructure (NII), a seamless web of

communications networks, computers, databases,

and consumer electronics that will put vast amounts

of information at users' fingertips.  Development of

the NII can help unleash an information revolution

that will change forever the way people live, work,

and interact with each other" [30].



To be sure, the ensuing hype has made the

whole thing sound like more circuses to keep the

masses pacified and thirsty:  500 channels of MTV

with beer and Pepsi ads, and insurance salesmen

popping out of your home computer. But the

information revolution was already well underway,

and had been so for years. The real agenda for

government involvement was stated in the White

House Press release, April 16, 1993: "Sophisticated

encryption technology has been used for years to

protect electronic funds transfer.  . . While

encryption technology can help Americans protect

business secrets and the unauthorized release of

personal information, it also can be used by

terrorists, drug dealers, and other criminals."



Now, in fact, almost all modern technology,

=66rom can openers to automobiles, can be used by

terrorists, drugs dealers, and criminals (even the

thieves in the Justice Department who preside over

asset forfeitures). But what is special about

cryptography is that it threatens to slow or nullify

the effectiveness of government-sponsored

computer surveillance of individuals and private

business.  To get a handle on this, let's brush up our

high school cryptography, which has probably

grown rusty from lack of use.  Eager students can

read an exhaustive history of the subject written by

David Kahn [31], but we will only focus on the tail-

end, post-Kahnian part of the story, on something

called "public key cryptography" [32].



Public Key Cryptography in One Easy Lesson



Public key cryptography relies on two

scrambling devices, called "keys", that have the

following relationship.  There is a public key P and

a private key R.  Suppose I write a sweet, sensitive

love letter, filled with spiritual values, genetic

imperatives, and sexual innuendo, to my current

flame Veronica.  Let's refer to this letter as the

message M.  I sign it with Veronica's public key P,

producing the encrypted message P(M).  Anyone

looking at P(M) will only see a string of

meaningless symbols, gibberish. When Veronica

receives it, she will apply her private key R to the

encrypted message, producing R(P(M)) =3D M,

turning the apparent randomness into tears, joy, and

erotic fantasy. 



The key pairs P and R must have the

relationship that for any message M, R(P(M)) =3D M.

In addition, it should be practically impossible for

anyone to determine M from P(M), without the

associated private key R.  For any other private key

R',  R'(P(M)) is not equal to M--it's still gibberish.  

The key pairs P and R also have the commutative

relationship P(R(M)) =3D M:  if you encrypt a

message with your private key R, then anyone can

decrypt it using your public key P. 



Being able to send secure messages is one

function of public key cryptography.  Another

function is authentication. Suppose you sent a

message M to Bill.  He receives the

message M*.  Bill doesn't know whether M* is

really from you; or, even if it is from you, whether it

has been altered in some way (that is, if the M* he

receives is the same as the M you sent).  The

solution to this problem, using public key

cryptography, is that you also send Bill a digital

signature S along with the message M.  Here is how

this authentication process works.



For simplicity, assume you don't even

encrypt the message to Bill.  You just send him the

plain message M, saying "Dear Bill:  You are wrong

and I am right. Here is why, blah blah blah [for a

few thousand words]."  Then you just sign it by the

following procedure.



First you chop your message down to size,

to produce a (meaningless) condensed version,

where one size fits all.  To do this, you need a

message chopper called a "hash function."  You

apply the hash function H to the message M to

produce a "message digest" or "hash value" H(M)

which is 160 bits long.  You then sign the hash

value H(M) with your own private key R, producing

the signature S =3D R(H(M)).



The receiver of the message, Bill, applies the

same hash function to the received message M* to

obtain its hash value H(M*).  Bill then decrypts

your signature S, using your public key P, to obtain

P(S) =3D P(R(H(M))).  He compares the two.  If 

H(M*) =3D P(R(H(M))), then he knows the message

has not been altered (that is, M* =3D M), and that you

sent the message. That's because the equality will

fail if either (1) the message was signed with some

other private key R', not yours, or if (2) the received

message M* was not the same as the message M

that was sent [33].   



By some accident, of course, it could be that

Bill finds H(M*) =3D P(R(H(M))) even if  the message

has been altered, or it is not from you.  But the odds

of this happening are roughly 1 in 2^160, which is

vanishingly small; and even if this happens for one

message, it is not likely to happen with the next.



The Growth of the Information Superspyway



NSA is the U.S. intelligence agency located

in Ft. Meade, Maryland, which is responsible for

collecting electronic and signals intelligence.

Activities include monitoring the conversations of

foreign leaders, listening in on most international

communications (including financial transactions),

breaking codes, and setting the cryptological

standards for U.S. military and security agencies

[34]. In 1975 at the University of California at

Berkeley, I made a special trip over to the

employment office to see the NSA recruitment

posters.  They were, after all, a novelty.  Hardly

anyone knew the NSA ("No Such Agency") existed,

and the word was just getting around that

mathematicians could compete with physicists for

Defense Department largess.



A couple of years later, Bobby Inman

departed his post as head of Naval Intelligence,

=66rom which vantage point he had leaked Watergate

revelations to Bob Woodward, to become head of

NSA.  Soon thereafter, the NSA began harassing

certain mathematicians in the private sector,

claiming "sole authority to fund research in

cryptography" [35].



In those days such a monopoly was possible.

The computer culture was hierarchically structured

and mind-bogglingly pedantic. Peon programmers

produced a token 20 lines of code per day, which

allowed them plenty of time to attend "efficiency"

meetings. Systems analysts involved themselves in

busy work--creating elaborate flow charts to explain

self-evident routines. Only those who learned to toe

the line were allowed gradual access to better

equipment and more CPU time. NSA, meanwhile,

was one of the top markets for expensive,

sophisticated computer equipment. If you wanted to

be a cryptologist [36], you bit the bullet and bowed

to  NSA and IBM.



The federal encryption standard for

unclassified government computer data and

communications, an encryption algorithm called

Lucifer, had been developed by IBM in the early

70s.  It was later certified by a civilian agency, the

National Bureau of Standards (now NIST), as the

Data Encryption Standard (DES)  in 1976.  Unlike

public key cryptography which uses two keys

(either one of which may be used to encrypt, and the

other to decrypt), DES was a symmetric key system,

using a single key to both encrypt and decrypt. 

Because of the single key, DES could be used for

encryption or authentication, but not both

simultaneously.



Through the American Bankers Association

and ANSI's Financial Institution Wholesale Security

Working Group, DES entered the banking world as

a method of encryption and message authentication

in electronic funds transfer.  But for digital

signatures it made more sense to rely on public key

cryptography. And although the NIST began to

solicit public-key cryptographic algorithms in 1982,

nothing would be approved for another decade, so

both federal agencies and private organizations,

including banks, began to look to commercial

sources of digital signature technology. (They

basically settled on one called the Rivest-Shamir-

Adleman (RSA) system.)



Meanwhile, the anarchy of the personal

computer had been unleashed.  The PC allowed one

person to be in charge of the entire software

development process.  She could be hardware

technician, systems analyst, mathematician,

programmer, artist-in-residence, and general hell-

raiser rolled into one.  Just as Gutenberg inspired

later generations to learn to read precisely because

they had, Pogo-like, acquired the ability to write, so

did the appearance of the microprocessor inspire a

generation of  talented and creative people to absorb

themselves in computer-accentuated tasks which no

longer mandated interaction with a phalanx of

mandarins whose notion of Eros was a COBOL

routine to insert Tab A into Slot B.  To be sure, the

PC was not powerful enough to break codes

(cryptanalysis), but it was a good enough tool for

creating cryptography software.



In 1984 Reagan's National Security Decision

Directive 145 (NSDD-145) shifted the

responsibility for certifying DES-based products to

NSA.  Executive Order 12333 in 1980 had made the

Secretary of Defense the government's executive

agent for communications security, and NSDD-145

expanded this role to telecommunications and

information systems.  The Director of NSA was

made responsible for the implementation of the

Secretary's responsibilites.  In 1986 NSA created an

uproar by saying it would no longer endorse DES

products after 1988, and would substitute a new set

of incompatible, classified, hardware standards. 

Banks and software vendors weren't happy with the

news because they had only recently invested

heavily in DES-based systems. But Congress

effectively  rejected NSDD-145's federal computer

security plan by passing the Computer Security Act

of 1987, and DES was reaffirmed anyway (with the

NIST reinstated as the certifier of applications that

met the standard), and then affirmed again in 1993.  

(The next DES review is scheduled for 1998.)



Changes in technology were creating both

new security concerns and spying opportunities.  On

the one hand, a rank amateur with a scanner could

sit in his apartment and monitor his neighbors'

cordless and cellular telephone conversations. (After

all, if a signal makes it into your bedroom, you may

feel you have a right to tune it in.)  On the other

hand, the NSA could in the same way make use of

the electromagnetic signals sent out by computer

hardware components. Unshielded cables act as

radio broadcast antennas. Related signals, especially

=66rom the computer monitor and the computer's

CPU, are sent back down the AC power cord and

out into the building's electrical wiring. Signals may

also be transmitted directly into the phone line

through a computer modem (which isn't in use).

These frequencies  can be tuned, so that what

appeared on one person's computer screen can be

displayed on an observer's screen a block away. 

(There were no laws against monitoring computer

radiation then, and there are none now, so the NSA

can take the position that it is doing nothing illegal

by parking its monitoring vans in domestic spots in

New York, Chicago, San Francisco, and

Washington, D.C.  [37].)



 The erosion of the spying monopoly lead to

the 1986 Electronic Communications Privacy Act

(ECPA) which prohibited phone and data-line

tapping--except, naturally, by law enforcement

agencies and employers. ECPA made cellular (but

not cordless) phone monitoring illegal. President

Bush would later sign a second law which

prohibited even the *manufacture or import* of

scanners that are capable of cellular monitoring. 

But the latter law was nonsensical, since *every

cellular phone is itself a scanner*. In a

demonstration for a Congressional subcommittee, it

took a technician only three minutes to reprogram a

cellular phone's codes so that it could be used for

eavesdropping [38].



 With the worldwide collapse of

Communism, federal agents quickly discovered a

new fount of terrorist activity: American teenagers,

hackers. The Secret Service crusade to conquer

children started when Congress passed the

Computer Fraud and Abuse Act in 1986, and

culminated in May 1990 with Operation Sundevil,

in which 42 computer systems were seized around

the country, along with 23,000 floppy disks.



One college-age hacker, Chris Goggans

(a.k.a. Eric Bloodaxe) upon receiving information

which lead him to suspect the coming raid, went

home and (like any good host) cleaned and

vacuumed his apartment, placed little notes in

drawers ("Nope, nothing in here";  "Wrong, try

again"), and adorned his desk with brochures from

the local Federal Building--titles like How to

Become an FBI Agent, . . . Secret Service Agent, etc. 

The raid came one morning while Goggans was in

bed. "Leading the pack is Special Agent Tim

Foley,"  Goggans recounts, "and he's got his service

revolver out, and he's got it pointed at me. He's a

pretty big guy and I'm me. . . . Hackers are a

notoriously violent group of people who are known

for their physical prowess, so  guns are definitely

always necessary" [39 ].



Paranoia verged on the imbecilic. AT&T

Security found a description of 911 system

administration, called "E911," on one bulletin board

service. They claimed in court the theft of this

information was worth exactly $79,449, but the case

fell apart when the defense showed the same

information, with more technical details, about the

911 system was publicly available from AT&T for

the mere price of $13.



The FBI, meanwhile, was undergoing

culture shock. Telephone carrier signals were now

digital and multiplexed, so that any specific channel

might be interleaved among many others in a

continuous stream of bits which the FBI could no

longer access with only a pair of alligator clips. In

March 1992 the FBI proposed Digital Telephony

legislation (code-named in FBI documents

"Operation Root Canal") that would require private

industry to provide access ports in digital equipment

for the purpose of tapping specific conversations.



The FBI proposal didn't sit well with the

General Services Administration (GSA), the largest

purchaser of telecommunications equipment for the

U.S. government.  GSA noted that the "proposed

bill would have to have the FCC or another agency

approve or reject new telephone equipment mainly

on the basis of whether the FBI has the capability to

wiretap it." So GSA opposed the legislation for

security reasons, noting it would "make it easier for

criminals, terrorists, foreign intelligence (spies) and

computer hackers to electronically penetrate the

public network and pry into areas previously not

open to snooping.  This situation of easier access

due to new technology changes could therefore

affect national security"  [40].



Ironically, the World Trade Center was

subsequently bombed by a group that was already

under FBI surveillance, so one could make a case

that *voyeurism*, not public security, was the real

intent of the proposed legislation [41]. The 1992

Digital Telephony proposal would have also given

the Justice Department the unilateral and exclusive

authority to enforce, grant exceptions, or waive

provisions of the law, or enforce it in Federal Court. 

You know, the *Justice Department*: that splendid

collection of righteous lawyers, whose recent

triumphs include overseeing the slaughter of a

religious group in Waco, Texas [42], running a

software company into bankruptcy and

appropriating its software [43], and allegedly

manipulating the machinery of justice to cover

tracks left by financial thieves [44].



Now the Computer Security Act of 1987 had

authorized a U.S. government project to develop

standards for publicly-available cryptography. On

April 16, 1993 the Clinton Administration

announced two new controversial Federal

Information Processing Standards (FIPS) which

embodied Capstone's principal elements.  These

were the Escrowed Encryption Standard (EES)--

a.k.a. "Clipper"--and the Digital Signature Standard

(DSS).  All private companies doing business with

the government might be affected.



The Escrowed Encryption Standard



The EES was promulgated by the Clinton

Administration as a voluntary (for now, anyway)

alternative to the Data Encryption Standard (DES).

It involved a bulk data encryption algorithm called

Skipjack, which would be contained on a tamper-

resistant chip, called the Clipper Chip (or MYK-78).

The chip would be manufactured by VLSI Logic,

and programmed with the algorithms and keys by

Mykotronx at a facility in Torrance, California. 

Each chip would contain a trapdoor that would

allow the government, using a two-part key (U =3D

U1+U2), each half deposited with a different escrow

agency, to decode any communications sent through

the chip [45]. 



Here is how the process works. (You can

skip this paragraph and the next one if you like.) In

addition to the Skipjack encryption algorithm, each

chip will contain a 80-bit family key F that is

common to all chips; a 30-bit serial number N; and

an 80-bit secret "unique" key U which can be used

to unlock all messages sent through the chip. 

Suppose I have my secure device get in touch with

Veronica's secure device.  The first thing that

happens is our two chips agree on a randomly

generated 80-bit symmetric session key K, which

will be used only for this one conversation.  The

Clipper Chip takes our whispered message stream

M and encrypts it with K, using the Skipjack

algorithm, producing the encrypted message K(M).

Simple enough.  But my chip also has other ideas. 

As an entirely separate process, it also takes the

session key K and encrypts it with the secret key U,

producing U(K).  Then it tacks the serial number N

on to the end of the encrypted session key, giving

the sandwich U(K)+N.  Then it takes the family key

F and encrypts the sandwich, giving F[U(K)+N]. 

The encrypted sandwich, F[U(K)+N], is called the

LEAF, or "Law Enforcement Access Field."  Both

my encrypted message K(M) and the LEAF,

F[U(K)+N], are sent out over the telephone line. 

Veronica's chip receives both these, but mostly

ignores the LEAF.  Her chip simply takes the

previously agreed session key K and uses it to

decrypt the encrypted message, yielding K[K(M)] =3D

M.  



Now suppose Fred is a horny FBI agent who

wants to listen in on all this.  He gets a warrant

(maybe), and has the phone company plug him into

the conversation.  With his listening device, he

siphons off both my encrypted message K(M) and

the LEAF, F[U(K)+N].  As a member of the FBI he

is allowed to know the family key F, which he uses

to decrypt the LEAF, yielding the sandwich: 

F{F[U(K)+N]} =3D U(K)+N.  So now he knows the

serial number N.   He then takes N along with his

warrant over to the first escrow agency, which gives

him half of the secret key, U1.  He takes N with his

warrant over to the second escrow agency, which

gives him the other half, U2.  He now knows the

secret key U =3D U1+U2.  He uses U to decrypt the

encrypted session key:  U[U(K)] =3D K.  Now he

knows the session key K, which he uses to decrypt

my encrypted message:  K[K(M)] =3D M.  To his great

disappointment, he discovers I was only calling to

thank Veronica for the pepperoni and cheese pizza

she sent over.



Industry was urged to build the EES into

every type of communication device: computer

modem, telephone, fax, and set-top TV converter. 

Of course to do so (surprise, surprise) will make a

product subject to State Department ITAR export

controls. But AT&T, at least, promptly popped the

Clipper Chip into the AT&T Security Telephone

Device 3600, which has a retail price of about

$1,100, because they had been "suitably

incentivised" (see below).



Another implementation of the ESS is the

Capstone Chip (Mykotronx MYK-80), which

includes Clipper's Skipjack algorithm, and adds to it

digital signature, hash, and key-change functions. 

While Clipper is mostly intended for telephone

communication, Capstone is designed for data

communication.  Finally there is Tessera, which is a

PCMCIA card that contains a Capstone Chip. 

Despite generating universally negative comments,

EES was  approved by the Department of

Commerce as a federal standard in February 1994.



The details of the NSA-developed Skipjack

algorithm are classified.  However, it uses 80-bit

keys and scrambles the data for 32 steps or rounds. 

The earlier standard, DES, uses 56-bit keys and

scrambles the data for only 16 rounds. But the

secrecy of Skipjack removed some of its credibility.

People are confident in the security of DES, because

its details are public.  Hence people have probed

DES over the years and failed to find any

weaknesses.  The primary reason for Skipjack's

classification appears to be an attempt to prevent its

use without transmission of the associated LEAF

field.



An outside panel of expects concluded there

was no significant risk that messages encrypted with

the Skipjack algorithm would be breakable by

exhaustive search in the next 30 to 40 years.  The

same cannot be said for the EES protocol as a

whole.  Matthew Blaze, a researcher at AT&T 

showed there are ways to corrupt the LEAF, so that

the session key K cannot be recovered, and hence

messages cannot be decrypted [46].  Of course if

you are sending data files, and not voice, you can

ignore the presence or absence of the Clipper Chip

altogether.  Just encrypt your file with, say, Pretty

Good Privacy, before you send it through the

Clipper Chip.  Thus your original message is an

already-encrypted file, and it won't matter if  FBI 

Fred reads it or not.  But things are not so simple

with voice messages.  So the first target for a

government ban is alternative encryption devices

for voice communication, particularly if the Clipper

Chip doesn't catch on.  Which would be nothing

new:  for years ham radio operators have been

prohibited from using encryption on the air.



The future of the EES may depend on the

coercive purchasing power of the U.S. government. 

A memorandum prepared for the Acting Assistant

Secretary of Defense had noted a number of U.S.

computer industries objections to a trapdoor chip,

such as the Clipper Chip:  "The industry argues

persuasively that overseas markets (much less drug

lords or spies) will not look with favor on U.S.

products which have known trapdoors  when

offshore products which do not have them are

available.  In support of their argument, they note

that powerful public-key cryptography developed

and patented by RSA using U.S. tax dollars is free

to developers in Europe, subject to royalties in the

United States, and cannot be exported without

expensive and time-late export licenses.  These

charges are true.  . . .Despite these concerns, the

President has directed that the Attorney General

request that manufacturers of communications

hardware use the trapdoor chip, and at least AT&T

has been reported willing to do so (having been

suitably incentivised by promises of government

purchases)" [47].





The Digital Signature Standard



The second announced standard, DSS, uses

a digital signature algorithm (DSA) to authenticate

the source and validity of messages [48].  Digital

signatures are the equivalent of handwritten

signatures on legal documents.  While there is yet

no body of case law dealing with the subject,

documents signed with proper digital signatures will

almost certainly be legally binding, both for

commercial use as defined in the Uniform

Commercial Code (UCC), and will probably also

have the same legal standard as handwritten

signatures. 



The computer industry had generally wanted

the U.S. government to choose instead the RSA

algorithm, which was currently the most widely

used authentication algorithm. The banking and

financial services industry were using both the RSA

algorithm and a modified form of the DSA

algorithm [49].



As we saw previously, it is typically not the

entire message that is signed, but rather a condensed

form of it, a hash value.  The hash function for the

DSS is the Secure Hash Standard (SHS), which

accepts a variable-size input (the message) and

returns a 160-bit string.  SHS was adopted as a

government standard in 1993 [50]. 



That both EES and DSS were rushed forth in

an attempt to break the spread of good cryptography

in the private sector is acknowledged even by a

government agency, the Office of Technology

Assessment (OTA):  "In OTA's view, both the EES

and the DSS are federal standards that are part of a

long-term control strategy intended to retard the

general availability of 'unbreakable' or 'hard to

break' cryptography within the United States, for

reasons of national security and law enforcement. It

appears that the EES is intended to complement the

DSS in this overall encryption-control strategy, by

discouraging future development and use of

encryption without built-in law enforcement access,

in favor of key-escrow encryption and related

technologies" [51].



Which brings us back to privacy and the

monetary system.



The Buck Stops Here



In 1993 SWIFT began asking users of  its

messaging system to include a purpose of payment

in all messages, as well as payers, payees, and

intermediaries.  This type of arrangement would

allow NSA computers to scan for any names in

which they were interested.  To be sure,

$10,000,000 for the "Purchase of Plutonium" would

have been scanned for anyway.  But now they can

search for "Hakim 'Bobby' Bey," because someone

has decided he's a terrorist.  Or someone decided

they just don't like him, and so they claim he's a

terrorist.



In addition, proposals resurfaced for a two-

tier U.S. currency.  When such a proposal was

rumored around 1970 during the slow breakdown of

the Bretton Woods agreement, the rumor was

dismissed as a paranoid fantasy. Recently the

proposal itself has been discussed on the Federal

Page of the Washington Post, which gives support

to the plan of "an expert on terrorism" (*another

one?*) to have two separate U.S. currencies, "new

greenbacks for domestic use and new 'redbacks' for

overseas use."  The International Counterfeit

Deterrence Strike Force (an inter-agency working

group informally called the "Super-Bill

Committee") supports a revived 1989 DEA plan for

the forced conversion of "domestic" dollars into

"international" dollars by U.S. travelers at the

border, which would be re-exchanged on their

return [52].



While Customs deals with physical cash,

NSA is set to deal with the electronic variety. That

NSA has in some circumstances already monitored

international banking transactions since at least the

early 1980s seems evident from the inclusion of

detailed banking transactions between the

Panamanian branch of the Discount Bank and Trust

of Switzerland and a Cayman Islands bank in a

classified report to the Secretary of State during the

Reagan administration. The information in the

report seemingly could only have come from

electronic access to the bank's computerized

records.  Some observers have speculated that a

bugged computer program, Inslaw's PROMIS, was

involved. This program, allegedly stolen from

Inslaw by the U.S. Department of Justice, was sold

to dozens of banks. (A federal bankruptcy judge

found that the Justice Department had purposefully

propelled Inslaw into bankruptcy in an effort to

steal the PROMIS software through "trickery, deceit

and fraud" [53].)  The program was said to have

been altered in such a way to allow government

agencies trapdoor access into a bank's transaction

records [54].



The Federal Deposit Insurance Corporation

(FDIC) is the government corporation that insures

deposits at U.S. member banks.  The FDIC

Improvement Act of 1991 required the FDIC to

study the costs and feasibility of tracking every

bank deposit in the U.S.  The notion was it was

necessary to compute bank deposit insurance

requirements in real time.  Not everyone thought

this was a good idea.  The American Banker's

Association noted it was inconceivable that such

data would "be used only by the FDIC in deposit

insurance coverage functions." And even though the

FDIC itself argued against the proposal in its draft

report to Congress in June 1993, FinCEN used the

occasion to propose a "Deposit Tracking System"

(DTS) that would also track deposits to, or

withdrawals from, U.S. banks accounts in real time. 



So advances in cryptography come face to

face with round-the-clock, round-the-border

surveillance.



F.A. Hayek argued for the denationalization

of money, an abolition of the government monopoly

over the money supply, and the institution of a

regime of competitive private issuers of currency

[55]. One reason was to stop the recurring bouts of

acute inflation and deflation that have become

accentuated over this century.  Another reason was

to make it increasingly impossible for governments

to restrict the international movement of

individuals, money and capital, and thereby to

safeguard the ability of dissidents to escape

oppression.  He said that "attempts by governments

to control the international movements of currency

and capital" is at present "the most serious threat not

only to a working international economy but also to

personal freedom; and it will remain a threat so long

as governments have the physical power to enforce

such controls." 



Two decades ago, Hayek's proposal seemed

to have scant probability of ever coming about.   No

longer. 



Hayek's dream is about to be realized.



PART  II:  DIGITAL CASH



[To Be Continued]



Footnotes



[1]   The Principia Discordia, or How I Found

Goddess and What I Did to Her When I Found Her

was authored by Malaclypse the Younger (a

computer programmer named Greg Hill) and 

recounts the visionary encounter he and Omar

Ravenhurst (Kerry Thornley) had with Eris, the

Goddess of Chaos, in an all-night bowling alley. 

Kerry Thornley is also the author of Zenarchy as

well as a novel about Lee Harvey Oswald, whom

Kerry knew in the Marines.  Some of the early

Erisian (Discordian) writings were mimeographed

at the office of Jim Garrison, the New Orleans

District Attorney, where a friend of Kerry's worked. 

Principia Discordia may be found on the Internet at

the wiretap.spies.com gopher, in the directory

Electronic Books, filed under Malaclypse the

Younger.  It and the other works mentioned in this

footnote are also available from Loompanics

Unlimited, P.O. Box 1197, Port Townsend, WA

98368. Phone: 206-385-2230, Fax: 206-385-7785.



[2]  The NSA employee handbook notes:

"It is the policy of the National

Security Agency to prevent and

eliminate the improper use of drugs

by Agency employees and other

personnel associated with the

Agency.  The term "drugs" includes

all controlled drugs or substances

identified and listed in the Controlled

Substances Act of 1970, as amended,

which includes but is not limited to:

narcotics, depressants, stimulants,

cocaine, hallucinogens and cannabis

(marijuana, hashish, and hashish oil).

The use of illegal drugs or the abuse

of prescription drugs by persons

employed by, assigned or detailed to

the Agency may adversely affect the

national security; may have a serious

damaging effect on the safety [of

yourself] and the safety of others;

and may lead to criminal

prosecution.  Such use of drugs

either within or outside Agency

controlled facilities is prohibited."

A copy of this handbook may be found in the

hacker publication Phrack Magazine, No. 45, March

30, 1994, which is available on the Internet at 

ftp.fc.net/pub/phrack. 



[3]  Governments have always been in the drug

business, and perhaps always will be.  In earlier

times, governments attempted a monopoly on drugs,

sex, and religion.  But in recent years the ungodly

have stopped paying tithes, so many governments

have gotten out of the religion business, and private

competition has forced them out of the sex business. 

Of the big three, most governments are left with

only drugs, which explains why drugs are politically

more important than either sex or religion.  Two

references on historical drug politics are Jack

Beeching, The Chinese Opium Wars, Harcourt

Bruce Jovanovich, New York, 1975, and Alfred W.

McCoy, The Politics of Heroin:  CIA Complicity in

the Global Drug Trade, Lawrence Hill Books, New

York, 1991. Two references on more recent U.S.

government involvement include the well-

documented book by Peter Dale Scott and Jonathan

Marshall, Cocaine Politics: Drugs, Armies, and the

CIA in Central America, The University of

California Press, Berkeley, 1991, and the less well

substantiated, but provocative, Compromised: 

Clinton, Bush, and the CIA, by Terry Reed & John

Cummings, Shapolsky Publishers, New York, 1994.



[4] The following may be related, although no

charges have been filed.  In 1987 Tallahassee police

traced an alleged child porn operation back to a

warehouse in Washington, D.C.  The warehouse

was operated by a group called The Finders, whose

leader has an extensive background in intelligence. 

Customs agents had information that was, according

to Customs and FBI documents posted on the

Internet by Wendell Minnick (author of Spies and

Provocateurs: A Worldwide Encyclopedia of

Persons Conducting Espionage and Covert Action,

1946-1991), "specific in describing 'blood rituals'

and sexual orgies involving children, and an as yet

unsolved murder in which the Finders may be

involved."  The evidence included a telex which

"specifically ordered the purchase of two children in

Hong Kong to be arranged through a contact in the

Chinese Embassy there" and a photographic album. 

"The album contained a series of photos of adults

and children dressed in white sheets participating in

a blood ritual.  The ritual centered around the

execution of at least two goats. . . ."  As the

investigation proceeded, the "CIA made one contact

and admitted to owning the Finders organization as

a front for a domestic computer training operation,

but that it had 'gone bad.'  CIA defers all further

contacts to FCIA (Foreign Counter Intelligence

Agency).  FCIA is distinct and autonomous

organization within FBI. . . . FCIA contacts

[Washington] MPD Intelligence and advised that all

reports regarding Finders are to be classified at the

Secret level.  FCIA also advised that no information

was to be turned over to the FBI WFO [Washington

Field Office] for investigation, and that the WFO

would not be advised of the CIA or FCIA

involvement/contact." 



I've since checked with all my programming

friends, but no one remembers seeing a computer

training film involving the sacrifice of goats.



[5]  It is argued that the creation and distribution of

images of  nude children should be prohibited, since

they might be used "for the purpose of sexual

stimulation or gratification of any individual who

may view such depiction" (Edward De Grazia, The

Big Chill: Censorship and the Law, Aperture, Fall

1990, page 50). Where I grew up, children

sometimes played naked.  However, I guess in that

case rays of natural light seen by the human eye

underwent a mysterious *transubstantiation* that

turned the data into *pastoral innocence* before

digitized messages were sent to the brain.  By

contrast, .gif files stored in a computer have not

undergone transubstantiation, and remain slimy

with evil inherited from the Original Snub. 



[6]  The Justice Department's Office of General

Counsel issued a legal opinion on the First

Amendment constitutionality of ITAR restrictions

on public cryptography on May 11, 1978. The

opinion--addressed to Dr. Frank Press,  the Science

Adviser to the President--concluded: "It is our view

that the existing provisions of the ITAR are

Unconstitutional insofar as they establish a prior

restraint on disclosure of cryptographic ideas and

information developed by scientists and

mathematicians in the private sector."  The ITAR

regulations are also referred to as Defense Trade

Regulations.  See Department of State, Defense

Trade Regulations, 22 CFR 120-130, Office of

Defense Trade Controls, May 1992.  The State

Department turns all cryptology decisions over to

NSA.



[7] Stewart A. Baker, "Don't Worry, Be Happy,"

Wired Magazine, June 1994.



[8] Remarks at Computers, Freedom and Privacy

Conference IV, Chicago, March 26, 1994.



[9]  Denning, Dorothy E., "Encryption and Law

Enforcement," Georgetown University,  February

21, 1994.



[10] Which explains, I guess, why I am no longer

able to get any smack with my pepperoni and

cheese.



[11] U.S. Department of State, Bureau of

International Narcotics Matters, International

Narcotics Control Strategy Report, U.S.

Government Printing Office, April 1994.



[12]  Ibid.



[13]  Kimery,  Anthony L.,  "Big Brother Wants to

Look into Your Bank Account (Any Time It

Pleases),"  Wired Magazine,  December 1993.



[14]  Chicago Tribune, January 20, 1995.



[15] Timothy C. May,  "The Crypto Anarchist

Manifesto," September 1992.



[16] Steven B. Duke and Albert C. Gross, America's

Longest War:  Rethinking Our Tragic Crusade

Against Drugs, Putnam, New York, 1993.



[17] Examples may be found in Steven Wisotsky,

Beyond the War on Drugs, Prometheus Books,

Buffalo, New York, 1990.



[18] John Powell and Ellen Hershenov, "Hostage to

the Drug War: The National Purse, The

Constitution, and the Black Community,"

University of California at Davis Law Review, 24,

1991.



[19] David B. Kopel, "Prison Blues:  How

America's Foolish Sentencing Policies Endanger

Public Safety," Policy Analysis No. 208, Cato

Institute, Washington, D.C., May 17, 1994.



[20] Milton Friedman, "Open Letter to Bill Bennet,"

Wall Street Journal, September 7, 1989.



[21] Larry Keller,  "Sheriff's Office Makes Own

Crack for Drug Stings," Fort Lauderdale News &

Sun Sentinel, April 18, 1989.



[22] The quote may be found on page 5 in Andrew

Schneider and Mary Pat Flaherty, Presumed Guilty: 

The Law's Victims in the War on Drugs, reprinted

=66rom The Pittsburgh Press, August 11-16, 1991.



[23]  Melanie S. Tammen, "The Drug War vs. Land

Reform in Peru,"  Policy Analysis No. 156, Cato

Institute, Washington, D.C., July 10, 1991.



[24] Rensselaer W. Lee, The White Labyrinth: 

Cocaine and Political Power, Transaction, New

Brunswick, NJ, 1989.



[25] House of Representatives, Banks Records and

Foreign Transactions concerning P.L. 95-508,

House Report 91-975, October 12, 1970.



[26] U.S. Senate Permanent Subcommittee on

Investigations, Crime and Secrecy: The Use of

Offshore Banks and Companies, U.S. Government

Printing Office, February 1983.



[27]  President's Commission on Organized Crime,

The Cash Connection:  Organized Crime, Financial

Institutions, and Money Laundering, U.S.

Government Printing Office, October 1984.



[28] Bank for International Settlements, Large

Value Funds Transfer Systems in the Group of Ten

Countries, May 1990.



[29]  Ernest T. Patrikis, Thomas C. Baxter Jr., and 

Raj K. Bhala,  Wire Transfers:  A Guide to U.S. and

International Laws Governing Funds Transfer,

Probus Publishing Company, Chicago, IL, 1993.



[30]  The National Information Infrastructure:

Agenda for Action.

[31] David Kahn, The Codebreakers:  The Story of

Secret Writing, Macmillan, New York, 1967.



[32] The best accessible book on the subject is

Bruce Schneier, Applied Cryptography, John Wiley

& Sons, New York, 1994.



[33] It could also fail for other reasons, such as a

signature garbled in transmission (solution: resend

it), or disagreement on the hash function (solution:

adopt a common standard, such as the Secure Hash

Standard, discussed later).



[34]  The activities of the NSA were first

comprehensively surveyed in James Bamford, The

Puzzle Palace: a Report on NSA, America's Most

Secret Agency, Houghton Mifflin   Company,

Boston, 1982.



[35]  David Burnham, The Rise of the Computer

State, Random House, New York, 1983.



[36]  Cryptology is divided into cryptography, the

art of secret writing (encryption), and cryptanalysis,

the art of code breaking.  By analogy, thinking of

the world of banking divided into vault-keepers and

thieves.



[37]  Computer Monitor Radiation (CMR) is

involved in the plot of Winn Schwartau's *Terminal

Compromise*, the best hacker novel available.  A

freeware version, replete with misspellings and

other typos, under the filename termcomp.zip, is

available by ftp or gopher from many sites.  One

location is ucselx.sdsu.edu/pub/doc/etext.



[38]  Cindy Skrzycki, "Dark Side of the Data Age,"

Washington Post, May 3, 1993.



[39] Interviewed by Netta Gilboa in Gray Areas

Magazine.  Interview reprinted in The Journal of

American Underground Computing,  1(7),  January

17, 1995.



[40] Attachment to memo from Wm. R. Loy 5/5/92,

(O/F)-9C1h(2)(a)-File (#4A).



[41] I was a block away in a building with a view of 

one of the World Trade Center towers when the

explosion occurred, but, along with all the Barclays

Precious Metals dealers, only found out about the

bomb when the news came across the Telerate

monitor a few minutes later.



[42]  Not that there weren't good motives for the

operation.  For example, the four BATF agents slain

in the attack on the Branch Davidians were all ex-

bodyguards for the Clinton presidential campaign,

and heaven knows we've already heard *enough*

revelations from Clinton's ex-bodyguards.



[43] INSLAW, discussed further below.



[44]  The latter statement is speculation on my part,

and I have no evidence to back it up.  I am certainly

*not* referring to the following alleged sequence of

events, cited by Nicholas A. Guarino ("Money,

Fraud, Drugs, and Sex," January 26, 1995): When

Madison Guaranty Savings and Loan folds, it is

somewhere between $47 and $68 million in the

hole. The tab is settled at $65  million.  One of the

biggest debtors to Madison is a Madison director, 

Seth Ward, who is the father-in-law of Webb

Hubbell. Webb is Hillary Clinton's former law

partner and afterward (until April 1994) Associate

Attorney General (the Number 3 position) at the

Justice Department, who gets assigned to

investigate Whitewater. But when the Resolution

Trust Corporation (RTC) takes over Madison

Guaranty Savings & Loans, Hillary  has been on

retainer to Madison for many   months.  The  RTC

brings suit to obtain $60 million from Madison

Guaranty's debtors. But Hillary negotiates the RTC

down from $60 million to $1 million.  Hillary then

gets the RTC to forgive the $600,000 debt Seth

Ward owes the RTC, leaving the RTC with

$400,000 out of the original $60 million owed.  But

(surprise) Hillary does this as the counsel for the

RTC, not Madison.  Her fee for representing the

RTC?  $400,000, which leaves the RTC with

nothing.



[45] Dorothy E. Denning, "The Clipper Encryption

System,"  American Scientist, 81(4), July/August

1993, 319-323.  The NIST and the Treasury

Department's Automated Systems Division were

designated as the initial escrow agents.



[46] Matt Blaze, "Protocol Failure in the Escrowed

Encryption Standard," AT&T Bell Laboratories,

June 3, 1994.



[47] Ray Pollari, Memorandum for the Acting

Assistant Secretary of Defense (C31), April 30,

1993.



[48] National Institute of Standards and Technology

(NIST), The Digital Signature Standard, Proposal

and Discussion, Communications of the ACM,

35(7), July 1992, 36-54.



[49] American National Standards Institute,

American National Standard X9.30-199X: Public

Key Cryptography Using Irreversible  Algorithms

for the Financial Services Industry: Part 1: The

Digital  Signature Algorithm (DSA), American

Bankers Association, Washington, D.C., March 4,

1993.



[50] National Institute of Standards and Technology

(NIST),  Secure Hash Standard (SHS),  FIPS

Publication 180, May 11, 1993.



[51] Office of Technology Assessment (OTA),

Information Security and Privacy in Network

Environments, September 9, 1994.



[52]  "TerrorDollars:  Counterfeiters, Cartels and

Other Emerging Threats to America's Currency," 

Washington Post,  March 6, 1994.



[53] Maggie Mahar, "Beneath Contempt Did the

Justice Dept. Deliberately Bankrupt INSLAW?,"

Barron's National Business and Financial Weekly,

March 21, 1988; and "Rogue Justice:  Who and

What Were Behind the Vendetta Against

INSLAW?,"  Barron's National Business and

Financial Weekly, April 4, 1988;  U.S. Congress,

Committee on the Judiciary,  The Inslaw Affair,

House Report 102-857, September 10, 1992.



[54] Thompson's, Congress backs claims that spy

agencies bugged bank software, Thompson's

International Banking  Regulator, Jan. 17, 1994.



[55] Hayek, Friedrich A. von, Denationalisation of

Money:  An Analysis of  the Theory and Practice of

Concurrent Currencies, The Institute of Economic

Affairs, Lancing, 1976.





=A9 1995 J. Orlin Grabbe, 1280 Terminal Way #3, Reno, NV

89502.  Internet address: kalliste@delphi.com  





 

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