diff --git a/outofcontrol-kevinkelly b/outofcontrol-kevinkelly new file mode 100644 index 0000000..6a6a13e --- /dev/null +++ b/outofcontrol-kevinkelly @@ -0,0 +1,962 @@ +https://kk.org/mt-files/books-mt/ooc-mf.pdf +Chapter 12 (pg 176-197) +E-Money + Crypto-anarchy: encryption always wins +In Tim May’s eyes a digital tape is a weapon as potent and subversive as a shouldermounted +Stinger missile. May (fortyish, trim beard, ex-physicist) holds up a $9.95 digital +audio tape, or DAT. The cassette—just slightly fatter than an ordinary cassette—contains +a copy of Mozart equivalent in fidelity to a conventional digital compact disc. DAT +can hold text as easily as music. If the data is smartly compressed, one DAT purchased +at K-Mart can hold about 10,000 books in digital form. +One DAT can also completely cloak a smaller library of information interleaved +within the music. Not only can the data be securely encrypted within a digital tape, but +the library’s existence on the tape would be invisible even to powerful computers. In the +scheme May promotes, a computer hard disk’s-worth of coded information could be +made to disappear inside an ordinary digital tape of Michael Jackson’s Thriller. +The vanishing act works as follows. DAT records music in 16 binary digits, but that +precision is beyond perception. The difference contained in the 16th bit of the signal is +too small to be detected by the human ear. An engineer can substitute a long message—a +book of diagrams, a pile of data spreadsheets (in encrypted form)—into the positions +of the 16th bits of music. Anyone playing the tape would hear Michael Jackson crooning +in the exact digital quality they would hear on a purchased Thriller tape. Anyone +examining the tape with a computer would see only digital music. Only by matching an +Tim May, cypherpunk. +177 +untampered-with tape with the encrypted one bit by bit on a computer could someone +detect the difference. Even then, the random-looking differences would appear to be +noise acquired while duping a digital tape through an analog CD player (as is normally +done). Finally, this “noise” would have to be decrypted (not likely) to prove that it was +something other than noise. +“What this means,” says May, “is that already it is totally hopeless to stop the flow +of bits across borders. Because anyone carrying a single music cassette bought in a +store could carry the entire computerized files of the stealth bomber, and it would be +completely and totally imperceptible.” One tape contains disco music. The other tape +contains disco and the essential blueprints of a key technology. +Music isn’t the only way to hide things, either. “I’ve done this with photos, “ says +May. “I take a digitized photo posted on the Net, download it into Adobe Photoshop, +and then strip an encrypted message into the least significant bit in each pixel. When I +repost the image, it is essentially indistinguishable from the original.” +The other thing May is into is wholly anonymous transactions. If one takes the +encryption methods developed by military agencies and transplants them into the vast +terrain of electronic networks, very powerful—and very unbreakable—technologies of +anonymous dealing become possible. Two complete strangers could solicit or supply +information to each other, and consummate the exchange with money, without the least +chance of being traced. That’s something that cannot be securely done with phones and +the post office now. +It’s not just spies and organized crime who are paying attention. Efficient means +of authentication and verification, such as smart cards, tamper-proof networks, and +micro-size encryption chips, are driving the cost of ciphers down to the consumer level. +Encryption is now affordable for the everyman. +The upshot of all this, Tim believes, is the end of corporations in their current form +and the beginning of more sophisticated, untaxed black markets. Tim calls this movement +Crypto Anarchy. “I have to tell you I think there is a coming war between two +forces,” Tim May confides to me. “One force wants full disclosure, an end to secret dealings. +That’s the government going after pot smokers and controversial bulletin boards. +The other force wants privacy and civil liberties. In this war, encryption wins. Unless the +government is successful in banning encryption, which it won’t be, encryption always +wins.” +A couple of years ago May wrote a manifesto to alert the world to the advent of +widespread encryption. In this electronic broadside published on the Net, he warned of +the coming “specter of crypto anarchy”: +...The State will of course try to slow or halt the spread of this technology, citing +national security concerns, use of the technology by drug dealers and tax evaders, and +fears of societal disintegration. Many of these concerns will be valid; crypto anarchy will +allow national secrets to be traded freely and will allow illicit and stolen materials to be +traded. An anonymous computerized market will even make possible abhorrent markets +for assassinations and extortion. Various criminal and foreign elements will be active users +of CryptoNet. But this will not halt the spread of crypto anarchy. +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. Combined +with emerging information markets, crypto anarchy will create a liquid market for +any and all material which can be put into words and pictures. And just as a seemingly +minor invention like barbed wire made possible the fencing-off of vast ranches and +farms, thus altering forever the concepts of land and property rights in the frontier West, +so too will the seemingly minor discovery out of an arcane branch of mathematics come +178 +to be the wire clippers which dismantle the barbed wire around intellectual property. +The manifesto was signed: +Timothy C. May, Crypto Anarchy: encryption, digital money, anonymous networks, +digital pseudonyms, zero knowledge, reputations, information markets, black markets, +collapse of government. +I asked Tim May, a retired Intel physicist, to explain the connection between +encryption and the collapse of society as we know it. May explained, “Medieval guilds +would monopolize information. When someone tried to make leather or silver outside +the guilds, the King’s men came in and pounded on them because the guild paid a levy +to the King. What broke the medieval guilds was printing; someone could publish a +treatise on how to tan leather. In the age of printing, corporations arose to monopolize +certain expertise like gunsmithing, or making steel. Now encryption will cause the +erosion of the current corporate monopoly on expertise and proprietary knowledge. +Corporations won’t be able to keep secrets because of how easy it will be to sell information +on the nets.” +The reason crypto anarchy hasn’t broken out yet, according to May, is that the +military has a monopoly on the key knowledge of encryption—just as the Church once +tried to control printing. With few exceptions, encryption technology has been invented +by and for the world’s military organizations. To say that the military is secretive about +this technology would be an understatement. Very little developed by the U.S. National +Security Agency (NSA)—whose mandate it is to develop crypto systems—has ever +trickled down for civilian use, unlike technologies spun off from the rest of the military/ +industrial alliance. +But who needs encryption, anyway? Only people with something to hide, perhaps. +Spies, criminals, and malcontents. People whose appetite for encryption may be thwarted +righteously, effectively, and harshly. +The ground shifted two decades ago when the information age arrived, and intelligence +became the chief asset of corporations. Intelligence was no longer the monopoly +of the Central Intelligence Agency, but the subject of seminars for CEOs. Spying meant +corporate spying. Illicit transfer of corporate know-how, rather than military plans, +became the treasonous information the state had to worry about. +In addition, within the last decade, computers became fast and cheap; enciphering +no longer demanded supercomputers and the superbudgets need to run them. A generic +brand PC picked up at a garage sale could handle the massive computations that decent +encryption schemes consumed. For small companies running their entire business on +PCs, encryption was a tool they wanted on their hard disks. +And now, within the last few years, a thousand electronic networks have blossomed +into one highly decentralized network of networks. A network is a distributed thing without +a center of control, and with few clear boundaries. How do you secure something +without boundaries? Certain types of encryption, it turns out, are an ideal way to bring +security to a decentralized system while keeping the system flexible. Rather than trying +to seal out trouble with a rigid wall of security, networks can tolerate all kinds of crap if +a large portion of its members use peer-to-peer encryption. +Suddenly, encryption has become incredibly useful to ordinary people who have +“nothing to hide” but their privacy. Peer-to-peer encryption, sown into the Net, linked +with electronic payments, tied into everyday business deals, becomes just another business +tool like fax machines or credit cards. +Just as suddenly, tax-paying citizens—whose dollars funded the military ownership +of this technology—want the technology back. +But the government (at least the U.S. government) may not give encryption back +179 +to the people for a number of antiquated reasons. So, in the summer of 1992, a loose +federation of creative math hackers, civil libertarians, free-market advocates, genius +programmers, renegade cryptologists, and sundry other frontier folk, began creating, +assembling, or appropriating encryption technology to plug into the Net. They called +themselves “cypherpunks.” +On a couple of Saturdays in the fall of 1992, I joined Tim May and about 15 other +crypto-rebels for their monthly cypherpunk meeting held near Palo Alto, California. The +group meets in a typically nondescript office complex full of small hi-tech start-up companies. +It could be anywhere in Silicon Valley. The room has corporate gray carpeting +and a conference table. The moderator for this meeting, Eric Hughes, tries to quiet the +cacophony of loud, opinionated voices. Hughes, with sandy hair halfway down his back, +grabs a marker and scribbles the agenda on a whiteboard. The items he writes down +echo Tim May’s digital card: reputations, PGP encryption, anonymous re-mailer update, +and the Diffie-Hellmann key exchange paper. +After a bit of gossip the group gets down to business. It’s class time. One member, +Dean Tribble, stands up front to report on his research on digital reputations. If you are +trying to do business with someone you know only as a name introducing some e-mail, +how can you be sure they are legit? Tribble suggests that you can buy a reputation from +a “trust escrow”—a company similar to a title or bond company that would guarantee +someone for a fee. He explains the lesson from game theory concerning iterated negotiation +games, like the Prisoner’s Dilemma; how payoffs shift when playing the game over +and over instead of just once, and how important reputations become in iterated relationships. +The potential problems of buying and selling reputations online are chewed +on, and suggestions of new directions for research are made, before Tribble sits down +and another member stands to give a brief talk. Round the table it goes. +Arthur Abraham, dressed in heavy studded black leather, reviews a recent technical +paper on encryption. Abraham flicks on an overhead projector, whips out some transparencies +painted with equations, and walks the group through the mathematical proof. +It is clear that the math is not easy for most. Sitting around the table are programmers +(many self-taught), engineers, consultants—all very smart—but only a single member +is equipped with a background in mathematics. “What do you mean by that?” questions +one quiet fellow as Abraham talks. “Oh, I see, you forgot the modulus,” chimes in +another guy. “Is that ‘a to the x’ or ‘a to the y’? The amateur crypto-hackers challenge +each statement, asking for clarification, mulling it over until each understands. The +hacker mind, the programmer’s drive to whittle things down to an elegant minimum, +to seek short cuts, confronts the academic stance of the paper. Pointing to a large hunk +of one equation, Dean asks, “Why not just scrap all this?” A voice from back: “That’s a +great question, and I think I know why not.” So the voice explains. Dean nods. Arthur +looks around to be sure everyone got it. Then he goes on to the next line in the paper; +those who understand help out those who don’t. Soon the room is full of people saying, +“Oh, that means you can serve this up on a network configuration! Hey, cool!” And +another tool for distributed computing is born; another component is transferred from +the shroud of military secrecy to the open web of the Net; and another brick is set into +the foundation of network culture. +The main thrust of the group’s efforts takes place in the virtual online space of the +Cypherpunk electronic mailing list. A growing crowd of crypto-hip folks from around +the world interact daily via an Internet “mailing list.” Here they pass around code-inprogress +as they attempt to implement ideas on the cheap (such as digital signatures), or +discuss the ethical and political implications of what they are doing. Some anonymous +subset of them has launched the Information Liberation Front. The ILF locates schol- +180 +arly papers on cryptology appearing in very expensive (and very hard-to-find) journals, +scans them in by computer, and “liberates” them from their copyright restrictions by +posting the articles anonymously to the Net. +Posting anything anonymously to the Net is quite hard: the nature of the Net is to +track everything infallibly, and to duplicate items promiscuously. It is theoretically trivial +to monitor transmission nodes in order to backtrack a message to its source. In such a +climate of potential omniscience, the crypto-rebels yearn for true anonymity. +I confess my misgivings about the potential market for anonymity to Tim: “Seems +like the perfect thing for ransom notes, extortion threats, bribes, blackmail, insider +trading, and terrorism.” “Well,” Tim answers, “what about selling information that +isn’t viewed as legal, say about pot growing, do-it-yourself abortion, cryonics, or even +peddling alternative medical information without a license? What about the anonymity +wanted for whistleblowers, confessionals, and dating personals?” +Digital anonymity is needed, the crypto-rebels feel, because anonymity is as important +a civil tool as authentic identification is. Pretty good anonymity is offered by +the post office; you don’t need to give a return address and the post office doesn’t verify +it if you do. Telephones (without caller ID) and telegrams are likewise anonymous to +a rough degree. And everyone has a right (upheld by the Supreme Court) to distribute +anonymous handbills and pamphlets. Anonymity stirs the most fervor among those who +spend hours each day in networked communications. Ted Kaehler, a programmer at +Apple Computer, believes that “our society is in the midst of a privacy crisis.” He sees +encryption as an extension of such all-American institutions as the Post Office: “We have +always valued the privacy of the mails. Now for the first time, we don’t have to trust in it; +we can enforce it.” John Gilmore, a crypto-freak who sits on the board of the Electronic +Frontier Foundation, says, “We clearly have a societal need for anonymity in our basic +communications media.” +A pretty good society needs more than just anonymity. An online civilization requires +online anonymity, online identification, online authentication, online reputations, +online trust holders, online signatures, online privacy, and online access. All are essential +ingredients of any open society. The cypherpunk’s agenda is to build the tools that provide +digital equivalents to the interpersonal conventions we have in face-to-face society, +and hand them out for free. By the time they are done, the cypherpunks hope to have +given away free digital signatures, as well as the opportunity for online anonymity. +To create digital anonymity, the cypherpunks have developed about 15 prototype +versions of an anonymous re-mailer that would, when fully implemented, make it impossible +to determine the source of an e-mail message, even under intensive monitoring of +communication lines. One stage of the re-mailer works today. When you use it to mail +to Alice, she gets a message from you that says it is from “nobody.” Unraveling where it +came from is trivial for any computer capable of monitoring the entire network—a feat +few can afford. But to be mathematically untraceable, the re-mailers have to work in a +relay of at least two (more is better)—one re-mailer handing off a message to the next +re-mailer, diluting information about its source to nothing as it is passed along. +Eric Hughes sees a role for digital pseudonymity—your identity is known by some +but not by others. When cloaked pseudonymously “you could join a collective to purchase +some information and decrease your actual cost by orders of magnitude—that is, +until it is almost free.” A digital co-op could form a private online library and collectively +purchase digital movies, albums, software, and expensive newsletters, which they would +“lend” to each other over the net. The vendor selling the information would have absolutely +no way of determining whether he was selling to one person or 500. Hughes sees +these kinds of arrangements peppering an information-rich society as “increasing the +181 +margins where the poor can survive.” +“One thing for sure,” Tim says, “long-term, this stuff nukes tax collection.” I +venture the rather lame observation that this may be one reason the government isn’t +handing the technology back. I also offer the speculation that an escalating arms race +with a digital IRS might evolve. For every new avenue the digital underground invents to +disguise transactions, the digital IRS will counter with a surveillance method. Tim poohpoohs +the notion. “Without a doubt, this stuff is unbreakable. Encryption always wins.” +John Gilmore shows of document secured under a Freedom of Information Act request. +182 +And this is scary because pervasive encryption removes economic activity—one +driving force of our society—from any hope of central control. Encryption breeds outof-controllness. + The fax effect and the law of increasing returns +Encryption always wins because it follows the logic of the Net. A given public-key +encryption key can eventually be cracked by a supercomputer working on the problem +long enough. Those who have codes they don’t want cracked try to stay ahead of the +supercomputers by increasing the length of their keys (the longer a key, the harder it is to +crack)—but at the cost of making the safeguard more unwieldy and slow to use. However, +any code can be deciphered given enough time or money. As Eric Hughes often +reminds fellow cypherpunks, “Encryption is economics. Encryption is always possible, +just expensive.” It took Adi Shamir a year to break a 120-digit key using a network of +distributed Sun workstations working part-time. A person could use a key so long that +no supercomputer could crack it for the foreseeable future, but it would be awkward to +use in daily life. A building-full of NSA’s specially hot-rodded supercomputers might take +a day to crack a 140-digit code today. But that is a full day of big iron to open just one +lousy key! +Cypherpunks intend to level the playing field against centralized computer resources +with the Fax Effect. If you have the only fax machine in the world it is worth nothing. +But for every other fax installed in the world, your fax machine increases in value. In +fact, the more faxes in the world, the more valuable everybody’s fax becomes. This is the +logic of the Net, also known as the law of increasing returns. It goes contrary to classical +economic theories of wealth based on equilibratory tradeoff. These state that you +can’t get something from nothing. The truth is, you can. (Only now are a few radical +economics professors formalizing this notion.) Hackers, cypherpunks, and many hi-tech +entrepreneurs already know that. In network economics, more brings more. This is why +giving things away so often works, and why the cypherpunks want to pass out their tools +gratis. It has less to do with charity than with the clear intuition that network economics +reward the more and not the less—and you can seed the “more” at the start by giving +the tools away. (The cypherpunks also talk about using the economics of the Net for the +reverse side of encryption: to crack codes. They could assemble a people’s supercomputer +by networking together a million Macintoshes, each one computing a coordinated +little part of a huge, distributed decryption program. In theory, such a decentralized parallel +computer would in sum be the most powerful computer we can now imagine—far +greater than the centralized NSA’s.) +The idea of choking Big Brother with a deluge of petty, heavily encrypted messages +so tickles the imagination of crypto-rebels that one of them came up with a freeware +version of a highly regarded public-key encryption scheme. The software is called PGP, +for Pretty Good Privacy. The code has been passed out on the nets for free and made +available on disks. In certain parts of the Net it is quite common to see messages encrypted +with PGP, with a note that the sender’s public-key is “available upon request.” +PGP is not the only encryption freeware. On the Net, cypherpunks can grab +RIPEM, an application for privacy-enhanced mail. Both PGP and RIPEM are based +on RSA, a patented implementation of encryption algorithms. But while RIPEM is +distributed as public domain software by the RSA company itself, Pretty Good Privacy +183 +software is home-brew code concocted by a crypto-rebel named Philip Zimmermann. +Because Pretty Good Privacy uses RSA’s patented math, it’s outlaw-ware. +RSA was developed at MIT—partly with federal funds—but was later licensed to +the academic researchers who invented it. The researchers published their crypto-methods +before they filed for patents out of fear that the NSA would hold up the patents +or even prevent the civilian use of their system. In the US, inventors have a year after +publication to file patents. But the rest of the world requires patents before publication, +so RSA could secure only U.S. patents on its system. PGP’s use of RSA’s patented +mathematics is legitimate overseas. But PGP is commonly exchanged in the no-place +of the Net (what country’s jurisdiction prevails in cyberspace?) where the law on intellectual +property is still a bit murky and close to the beginnings of crypto anarchy. Pretty +Good Privacy deals with this legal tar baby by notifying its American users that it is their +responsibility to secure from RSA a license for use of PGP’s underlying algorithm. (Sure. +Right.) +Zimmermann claims he released the quasi-legal PGP into the world because he +was concerned that the government would reclaim all public-key encryption technology, +including RSA’s. RSA can’t stop distribution of existing versions of PGP because +once something goes onto the Net, it never comes back. But it’s hard for RSA to argue +damages. Both the outlawed PGP and the officially sanctioned RIPEM infect the Net to +produce the Fax Effect. PGP encourages consumer use of encryption—the more use, the +better for everyone in the business. Pretty Good Privacy is freeware; like most freeware, +its users will sooner or later graduate to commercially supported stuff. Only RSA offers +the license for that at the moment. Economically, what could be better for a patent +holder than to have a million people use the buddy system to teach themselves about the +intricacies and virtues of your product (as pirated and distributed by others), and then +wait in line to buy your stuff when they want the best? +The Fax Effect, the rule of freeware upgrade, and the power of distributed intelligence +are all part of an emerging network economics. Politics in a network economy will +also definitely require the kind of tools the cypherpunks are playing with. Glenn Tenney, +chairman of the annual Hackers’ Conference, ran for public office in California last +year using the computer networks for campaigning, and came away with a realistic grasp +of how they will shape politics. He notes that digital techniques for establishing trust +are needed for electronic democracy. He writes online, “Imagine if a Senator responds +to some e-mail, but someone alters the response and then sends it on to the NY Times? +Authentication, digital signatures, etc., are essential for protection of all sides.” Encryption +and digital signatures are techniques to expand the dynamics of trust into a new +territory. Encryption cultivates a “web of trust,” says Phil Zimmermann, the very web +that is the heart of any society or human network. The short form of the cypherpunk’s +obsession with encryption can be summarized as: Pretty good privacy means pretty good +society. +One of the consequences of network economics, as facilitated by ciphers and digital +technology, is the transformation of what we mean by pretty good privacy. Networks +shift privacy from the realm of morals to the marketplace; privacy becomes a commodity. +A telephone directory has value because of the energy it saves a caller in finding a +particular phone number. When telephones were new, having an individual number to +list in a directory was valuable to the lister and to all other telephone users. But today, +in a world full of easily obtained telephone numbers, an unlisted phone number is more +valuable to the unlisted (who pay more) and to the phone company (who charge more). +Privacy is a commodity to be priced and sold. +184 +Most privacy transactions will soon take place in the marketplace rather than in +government offices because a centralized government is handicapped in a distributed, +open-weave network, and can no longer guarantee how things are connected or not connected. +Hundreds of privacy vendors will sell bits of privacy at market rates. You hire +Little Brother, Inc., to demand maximum payment from junk mail and direct marketers +when you sell your name, and to monitor uses of that information as it tends to escape +into the Net. On your behalf, Little Brother, Inc., negotiates with other privacy vendors +for hired services such as personal encrypters, absolutely unlisted numbers, bozo filters +(to hide the messages from known “bozos”), stranger ID screeners (such as caller ID on +phones that only accept calls from certain numbers), and hired mechanical agents (called +network “knowbots”) to trace addresses, and counter-knowbots that unravel traces of +your own activities. +Privacy is a type of information that has its polarity reversed; I imagine it as anti-information. +The removal of a bit of information from a system can be seen as the reproduction +of a corresponding bit of anti-information. In a world flooded with information +ceaselessly replicating itself to the edges of the Net, the absence or vaporization of a bit +of information becomes very valuable, especially if that absence can be maintained. In a +world where everything is connected to everything—where connection and information +and knowledge are dirt cheap—then disconnection and anti-information and no-knowledge +become expensive. When bandwidth becomes free and entire gigabytes of information +are swapped around the clock, what you don’t want to communicate becomes the +most difficult chore. Encryption systems and their ilk are technologies of disconnection. +They somewhat tame the network’s innate tendency to connect and inform without +discrimination. + Superdistribution +We manage the disconnection of domestic utilities, such as water or electricity, +through metering. But metering is neither obvious nor easy. Thomas Edison’s dazzling +electrical gizmos were of little use to anyone until people had easy access to electricity in +their factories and homes. So at the peak of his career Edison diverted his attention away +from designing electrical devices to focus on the electrical delivery network itself. At first, +very little was settled about how electricity should be created (DC or AC?), carried, or +billed. For billing, Edison favored the approach that most information providers today +favor: charge a flat fee. Readers pay the same for a newspaper no matter how much of it +they read. Ditto for cable TV, books and computer software. All are priced flat for all you +can use. +Edison pushed a flat fee for electricity—a fixed amount if you are connected, +nothing if you aren’t—because he felt that the costs of accounting for differential usage +would exceed the cost of variances in electricity usage. But mostly Edison was stymied +about how to meter electricity. For the first six months of his General Electric Lighting +Company in New York City, customers paid a flat fee. To Edison’s chagrin, that didn’t +work out economically. Edison was forced to come up with a stop-gap solution. His +remedy, an electrolytic meter, was erratic and impractical. It froze in winter, it sometimes +ran backwards, and customers couldn’t read it (nor did they trust the company’s meter +readers). It wasn’t until a decade after municipal electrical networks were up and running +that another inventor came up with a reliable watt-hour meter. Now we can hardly +185 +imagine buying electricity any other way. +A hundred years later the information industry still lacks an information meter. +George Gilder, hi-tech gadfly, puts the problem this way: “Rather than having to pay for +the whole reservoir every time you are thirsty, what you want is to only pay for a glass of +water.” +Indeed, why buy an ocean of information when all you want is a drink? No reason +at all, if you have an information meter. Entrepreneur Peter Sprague believes he has just +invented one. “We use encryption to force the metering of information,” says Sprague. +His spigot is a microchip that doles out small bits of information from a huge pile of +encrypted data. Instead of selling a CD-ROM crammed with a hundred thousand pages +of legal documents for $2,000, Sprague invented a ciphering device that would dispense +the documents off the CD-ROM at $1 per page. A user only pays for what she uses and +can use only what she pays for. +Sprague’s way of selling information per page is to make each page unreadable until +decrypted. Working from a catalog of contents, a user selects a range of information +to browse. She reads the abstracts or summaries and is charged a minuscule amount. +Then she selects a full text, which is decrypted by her dispenser. Each act of decryption +rings up a small charge (maybe 50 cents). The charge is tallied by a metering chip in her +dispenser that deducts the amount from a prepaid account (also stored on the metering +chip), much as a postage meter deducts credit while dispensing postage tapes. When the +CD-ROM credit runs out, she calls a central office, which replenishes her account via +an encrypted message sent on a modem line running into her computer’s metering chip. +Her dispenser now has $300 credit to spend on information by the page, by the paragraph, +or by the stock price, depending on how fine the vendor is cutting it. +What Sprague’s encryption metering device does is decouple information’s fabulous +ease in being copied from its owner’s need to have it selectively disconnected. It lets +information flow freely and ubiquitously—like water through a town’s plumbing—by +metering it out in usable chunks. Metering converts information into a utility. +The cypherpunks note, quite correctly, that this will not stop hackers from siphoning +off free information. The Videocipher encryption system, used to meter satellite-delivered +TV programs such as HBO and Showtime, was compromised within weeks of its +introduction. Despite claims by the meter’s manufacturer that the encrypto-metering +chip was unhackable, big moneymaking scams capitalized on hacks around the codes. +(The scams were set up on Indian reservations—but that’s a whole ’nother story). Pirates +would find a descrambler box with a valid subscription—in a hotel room, for instance— +and then clone the identity into other chips. A consumer would send their box to the +reservation for “repairs” and it would come back with a new chip cloned with the identity +of the hotel box. The broadcasting system couldn’t perceive clones in the audience. +In short, the system was hacked not by cracking the code but by subverting places where +the code tied into the other parts of the system. +No system is hack-proof. But disruptions of an encrypted system require deliberate +creative energy. Information meters can’t stop thievery or hacking, but meters can counteract +the effects of lazy mooching and the natural human desire to share. The Videocipher +satellite TV system eliminates user piracy on a mass scale—the type of piracy that +plagued the satellite TV outback before scrambling and that still plagues the lands of +software and photocopying. Encryption makes pirating a chore and not something that +any slouch with a blank disk can do. Satellite encryption works overall because encryption +always wins. +Peter Sprague’s crypto-meter permits Alice to make as many copies of the encrypted +CD-ROMs as she likes, since she pays for only what she uses. Crypto-metering, in +186 +essence, disengages the process of payment from the process of duplication. +Using encryption to force the metering of information works because it does not +constrain information’s desire to reproduce. All things being equal, a bit of information +will replicate through an available network until it fills that network. With an animate +drive, every fact naturally proliferates as many times as possible. The more fit—the more +interesting or useful—a fact is, the wider it spreads. A pretty metaphor compares the +spread of genes through a population with the similar spread of ideas, or memes, in a +population. Both genes and memes depend on a network of replicating machines—cells +or brains or computer terminals. A network in this general sense is a swarm of flexibly +interconnected nodes each of which can copy (either exactly or with variation) a message +taken from another node. A population of butterflies and a flurry of e-mail messages +have the same mandate: replicate or die. Information wants to be copied. +Our digital society has built a supernetwork of copiers out of hundreds of millions +of personal faxes, library photocopiers, and desktop hard disks. It is as if our information +society is one huge aggregate copying machine. But we won’t let this supermachine copy. +Much to everyone’s surprise, information created in one corner finds its way into all the +other corners rather quickly. Because our previous economy was built upon scarcity of +goods, we have so far fought the natural fecundity of information by trying to control +every act of replication as it occurs. We take a massively parallel copy machine and try +to stifle most acts of reproduction. As in other puritanical regimes, this doesn’t work. +Information wants to be copied. +“Free the bits!” shouts Tim May. This sense of the word “free” shifts Stewart +Brand’s oft-quoted maxim, “Information wants to be free”—as in “without cost”—to the +more subtle “without chains or imprisonment.” Information wants to be free to wander +and reproduce. Success, in a networked world of decentralized nodes, belongs to those +plans that do not resist either the replication or roaming urges of information. +Sprague’s encrypted meter capitalizes on the distinction between pay and copy. “It +is easy to make software count how many times it has been invoked, but hard to make +it count how many times it has been copied,” says software architect Brad Cox. In a message +broadcast on the Internet, Cox writes: +Software objects differ from tangible objects in being fundamentally unable to monitor +their copying but trivially able to monitor their use....So why not build an information +age market economy around this difference between manufacturing-age and information-age +goods? If revenue collection were based on monitoring the use of software +inside a computer, vendors could dispense with copy protection altogether. +Cox is a software developer specializing in object-oriented programming. In addition +to the previously mentioned virtue of reduced bugs which OOP delivers, it offers +two other magnificent improvements over conventional software. First, OOP provides +the user with applications that are more fluid, more interoperable with various tasks— +sort of like a house with movable “object” furniture instead of house saddled with +built-in furniture. Second, OOP provides software developers the ability to “reuse” modules +of software, whether they wrote the modules themselves or purchased them from +someone else. To build a database, an OOP designer like Cox takes a sort routine, a field +manager, a form generator, an icon handler, etc., and assembles the program instead of +rewriting a working whole from scratch. Cox developed a set of cool OOP objects that +he sold to Steve Jobs to use in his Next machine, but selling small bits of modular code as +a regular business has been slow. It is similar to trying to peddle limericks one by one. To +recoup the great cost of writing an individual object by selling it outright would garner +too few sales, but selling it by copy is too hard to monitor or control. But if objects could +generate revenue each time a user activated one, then an author could make a living +187 +creating them. +While contemplating the possible market for OOP objects that were sold on a “per +use” plan, Cox uncovered the natural grain in networked intelligence: Let the copies +flow, and pay per use. He says, “The premise is that copy protection is exactly the wrong +idea for intangible, easily copied goods such as software. You want information-age +goods to be freely distributed and freely acquired via whatever distribution means you +want. You are positively encouraged to download software from networks, give copies to +your friends, or send it as junk mail to people you’ve never met. Broadcast my software +from satellites. Please!” +Cox adds (in echo of Peter Sprague, although surprisingly the two are unfamiliar +with each other’s work), “This generosity is possible because the software is actually +‘meterware.’ It has strings attached that make revenue collection independent of how +the software was distributed.” +“The approach is called superdistribution,” Cox says, using a term given by Japanese +researchers to a similar method they devised to track the flow of software through a +network. Cox: “Like superconductivity, it lets information flow freely, without resistance +from copy protection or piracy.” +The model is the successful balance of copyright and use rights worked out by the +music and radio industries. Musicians earn money not only by selling customers a copy +of their work but by selling broadcast stations a “use” of their music. The copies are supplied +free, sent to radio stations in a great unmonitored flood by the musicians’ agents. +The stations sort through this tide of free music, paying royalties only for the music they +broadcast, as metered (statistically) by two agencies representing musicians, ASCAP and +BMI. +JEIDA, a Japanese consortium of computer manufacturers, developed a chip and +a protocol that allows each Macintosh on a network to freely replicate software while +metering use rights. According to Ryoichi Mori, the head of JEIDA, “Each computer is +thought of as a station that broadcasts, not the software itself, but the use of the software, +to an audience of a single ‘listener.’” Each time your Mac “plays” a piece of software +or a software component from among thousands freely available, it triggers a royalty. +Commercial radio and TV provide an “existence proof ” of a working superdistribution +system in which the copies are disseminated free and the stations only pay for what they +use. Musicians would be quite happy if one radio station made copies of their tapes and +distributed them to other stations (“Free the bits!”) because it increases the likelihood of +some station using their music. +JEIDA envisions software percolating through large computer networks unencumbered +by restrictions on copying or mobility. Like Cox, Sprague, and the cypherpunks, +JEIDA counts on public-key encryption to keep these counts private and untampered as +they are transmitted to the credit center. Peter Sprague says plainly, “Encrypted metering +is an ASCAP for intellectual property.” +Cox’s electronically disseminated pamphlet on superdistribution sums up the virtues +very nicely: +Whereas software’s ease of replication is a liability today, superdistribution makes it an +asset. Whereas software vendors must spend heavily to overcome software’s invisibility, +superdistribution thrusts software out into the world to serve as its own advertisement. +A hoary ogre known as the Pay-Per-View Problem haunts the information economy. +In the past this monster ate billions of dollars in failed corporate attempts to sell movies, +databases, or music recordings on a per view or per use basis. The ogre still lives. The +problem is, people are reluctant to pay in advance for information they haven’t seen +because of their hunch that they might not find it useful. They are equally unwilling to +188 +pay after they have seen it because their hunch usually proves correct: they could have +lived without it. Can you imagine being asked to pay after you’ve seen a movie? Medical +knowledge is the only type of information that can be easily sold sight unseen because +the buyers believe they can’t live without it. +The ogre is usually slain with sampling. Moviegoers are persuaded to pay beforehand +by lapel-grabbing trailers. Software is loaned among friends for trial; books and +magazines are browsed in the bookstore. +The other way to slay the problem is by lowering the price of admission. Newspapers +are cheap; we pay before looking. The ingenious thing about information metering +is that it delivers two solutions: it provides a spigot to record how much data is used, and +it provides a spigot that can be turned down to a cheap trickle. Encryption-metering +chops big expensive data hunks into small inexpensive doses of data. People will readily +pay for bits of cheap information before viewing, particularly if the payment invisibly +deducts itself from an account. +The fine granularity of information-metering gets Peter Sprague excited. When +asked for an example of how fine it could get, he volunteers one so fast it’s obvious that +he has been giving it some thought: “Say you want to write obscene limericks from your +house in Telluride, Colorado. If you could write one obscene limerick a day, we can +probably find 10,000 people in the world who want to pay 10 cents a day to get it. We’ll +collect $365,000 per year and pay you $120,000, and then you can ski for the rest of +your life.” In no other kind of marketplace would one measly limerick, no matter how +bawdy and clever, be worth selling on its own. Maybe a book of them—an ocean of limericks—but +not one. Yet in an electronic marketplace, a single limerick—the information +equivalent of a stick of gum—is worth producing and offering for sale. +Sprague ticks off a list of other fine-grained items that might be traded in such a +marketplace. He catalogs what he’d pay for right now: “I want the weather in Prague for +25 cents per month, I want my stocks updated for 50 cents a stock, I want the Dines Letter +for $12 a week, I want the congestion report from O’Hare Airport updated continuously +because I’m always getting stuck in Chicago, so I’ll pay a buck per month for that, and I +want ‘Hagar the Horrible’ cartoon for a nickel a day.” Each of these products is currently +either given away scattershot or peddled in the aggregate very expensively. Sprague’s +electronically mediated marketplace would “unbundle” the data and deliver a narrowly +selected piece of information to your desktop or mobile palmtop for a reasonable price. +Encryption would meter it out, preventing you from filching other tiny bits of data that +would hardly be worth protecting (or selling) in other ways. In essence, the ocean of +information flows through you, but you only pay for what you drink. +At the moment, this particular technology of disconnection exists as a $95 circuit +board that can slide into a personal computer and plug into a phone line. To encourage +established computer manufacturers such as Hewlett-Packard to hardwire a similar +board into units coming off their assembly line, Sprague’s company, Waves, Inc., offers +manufacturers a percentage of the revenue the encryption system generates. Their first +market is lawyers, “because,” he says, “lawyers spend $400 a month on information +searches.” Sprague’s next step is to compress the encrypto-metering circuits and the +modem down into a single $20 microchip that can be tucked into beepers, video recorders, +phones, radios, and anything else that dispenses information. Ordinarily, this vision +might be dismissed as the pipe dream of a starry-eyed junior inventor, but Peter Sprague +is chairman and founder of National Semiconductor, one of the major semiconducter +manufacturers in the world. He is sort of a Henry Ford of silicon chips. A cypherpunk, +not. If anyone knows how to squeeze a revolutionary economy onto the head of a pin, it +might be him. +Anything holding an electric charge w ill hold a fiscal charge +This anticipated information economy and network culture still lacks one vital +component—an ingredient that, once again, is enabled by encryption, and a key element +that, once again, only long-haired crypto-rebels are experimenting with: electronic cash. +We already have electronic money. It flows daily in great invisible rivers from bank +vault to bank vault, from broker to broker, from country to country, from your employer +to your bank account. One institution alone, the Clearing House Interbank Payment +System, currently moves an average of a trillion dollars (a million millions) each day via +wire and satellite. +But that river of numbers is institutional electronic money, as remote from electronic +cash as mainframes are from PCs. When pocket cash goes digital—demassified into data +in the same transformation that institutional money underwent—we’ll experience the +deepest consequences of an information economy. Just as computing machines did not +reorganize society until individuals plugged into them outside of institutions, the full +effects of an electronic economy will have to wait until everyday petty cash (and check) +transactions of individuals go digital. +We have a hint of digital cash in credit cards and ATMs. Like most of my generation, +I get the little cash I use at an ATM, not having been inside a bank in years. On +average, I use less cash every month. High-octane executives fly around the country +purchasing everything on the go—meals, rooms, cabs, supplies, presents—carrying no +more than $50 in their wallets. Already, the cashless society is real for some. +Today in the U.S., credit card purchases are used for one-tenth of all consumer +payments. Credit card companies salivate while envisioning a near future where people +routinely use their cards for “virtually every kind of transaction.” Visa U.S.A. is experimenting +with card-based electronic money terminals (no slip to sign) at fast-food shops +and grocery stores. Since 1975, Visa has issued over 20 million debit cards that deduct +money from one’s bank account. In essence, Visa moved ATMs off of bank walls and +onto the front counters of stores. +The conventional view of cashless money thus touted by banks and most futurists is +not much more than a pervasive extension of the generic credit card system now operating. +Alice has an account at National Trust Me Bank. The bank issues her one of their +handy-dandy smart cards. She goes to an ATM and loads the wallet-size debit card with +$300 cash deducted from her checking account. She can spend her $300 from the card +at any store, gas station, ticket counter, or phone booth that has a Trust Me smart-card +slot. +What’s wrong with this picture? Most folks would prefer this system over passing +around portraits of dead presidents. Or over indebtedness to Visa or MasterCard. But +this version of the cashless concept slights both user and merchant; therefore it has slept +on the drawing boards for years, and will probably die there. +Foremost among the debit (or credit) card’s weaknesses is its nasty habit of leaving +every merchant Alice buys from—newsstand to nursery—with a personalized history +of her purchases. The record of a single store is not worrisome. But each store’s file of +Alice’s spending is indexed with her bank account number or Social Security number. +That makes it all too easy, and inevitable, for her spending histories to be combined, +store to store, into an exact, extremely desirable marketing profile of her. Such a mon- +190 +etary dossier holds valuable information (not to mention private data) about her. She has +no control over this information and derives no compensation for it. +Second, the bank is obliged to hand out whiz-bang smart cards. Banks being the legendary +cheapskates they are, you know who is going to pay for them, at bank rates. Alice +will also have to pay the bank for the transaction costs of using the money card. +Third, merchants pay the system a small percentage whenever a debit card is used. +This eats into their already small profits and discourages vendors from soliciting the +card’s use for small purchases. +Fourth, Alice can only use her money at establishments equipped with slots that +accept Trust Me’s proprietary technology. This hardware quarantine has been a prime +factor in the nonhappening of this future. It also eliminates person-to-person payments +(unless you want to carry a slot around for others to poke into). Furthermore, Alice can +only refill her card (essentially purchase money) at an official Trust Me ATM branch. +This obstacle could be surmounted by a cooperative network of banks using a universal +slot linked into an internet of all banks; a hint of such a network already exists. +The alternative to debit card cash is true digital cash. Digital cash has none of the +debit or credit card’s drawbacks. True digital cash is real money with the nimbleness of +electricity and the privacy of cash. Payments are accountable but unlinkable. The cash +does not demand proprietary hardware or software. Therefore, money can be received +or transferred from and to anywhere, including to and from other individuals. You don’t +need to be a store or institution to get paid in nonpaper money. Anyone connected can +collect. And any company with the right reputation can “sell” electronic money refills, so +the costs are at market rates. Banks are only peripherally involved. You use digital cash to +order a pizza, pay for a bridge toll, or reimburse a friend, as well as to pay the mortgage, +if you want. It is different from plain old electronic money in that it can be anonymous +and untraceable except by the payer. It is fueled by encryption. +The method, technically known as blinded digital signatures, is based on a variant +of a proven technology called public-key encryption. Here’s how it works at the consumer +level. You use a digicash card to pay Joe’s Meat Market for a prime roast. The +merchant can verify (by examining the digital signature of the bank issuing the money) +that he was paid with money that had not been “spent” before. Yet, he’ll have no record +of who paid him. After the transaction, the bank has a verifiable account that you spent +$7, and spent it only once, and that Joe’s Meat Market did indeed receive $7. But those +two sides of the transaction are not linked and cannot be reconstructed unless you the +payer enable them to be. It seems illogical at first that such blind but verifiable transactions +can occur, but the integrity of their “disconnection” is pretty watertight. +Digital cash can replace every use of pocket cash except flipping a coin. You have +a complete record of all your payments and to whom they were made. “They” have a +record of being paid but not by whom they were made. The reliability of both impeccably +accurate accounting and 100 percent anonymity is ranked mathematically “unconditional”—without +exceptions. +The privacy and agility of digital cash stems from a simple and clever technology. +When I ask a digicash card entrepreneur if I could see one of his smart cards, he says +that he is sorry. He thought he had put one in his wallet but can’t find it. It looks like a +regular credit card, he says, showing me his very small collection of them. It looks like... +why, here it is! He slips out a blank, very thin, flexible card. The plastic rectangle holds +math money. In one corner is a small gold square the size of a thumbnail. This is a computer. +The CPU, no larger than a soggy cornflake, contains a limited amount of cash, +say, $500 or 100 transactions, whichever comes first. This one, made by Cylink, contains +a coprocessor specifically designed to handle public-key encryption mathematics. On +191 +the tiny computer’s gold square are six very minute surface contacts which connect to an +online computer when the card is inserted into a slot. +Less smart cards (they don’t do encryption) are big in Europe and Japan, where 61 +million of them are already in use. Japan is afloat in a primitive type of electronic currency—prepaid +magnetic phone cards. The Japanese national phone company, NTT, +has so far sold 330 million (some 10 million per month) of them. Forty percent of the +French carry smart cards in their wallets today to make phone calls. New York City +recently introduced a cashless phone card for a few of its 58,000 public phone booths. +New York is motivated not by futurism but by thieves. According to The New York Times, +“Every three minutes, a thief, a vandal, or some other telephone thug breaks into a coin +box or yanks a handset from a socket. That’s more than 175,000 times a year,” and costs +the city $10 million annually for repairs. The disposable phone card New York uses is +not very smart, but it’s adequate. It employs an infrared optical memory, common in +European phone cards, which is hard to counterfeit in small quantities but cheap to +manufacture in large numbers. +In Denmark, smart cards substitute for the credit cards the Danes never got. So +everyone who would tote a credit card in America, packs a smart debit card in Denmark. +Danish law demanded two significant restrictions: (1) that there be no minimum purchase +amount; (2) that there be no surcharge for the card’s use. The immediate effect was +that the cards began to replace cash in everyday use even more than checks and credit +cards have replaced cash in the States. The popularity of these cards is their undoing +because unlike cheap, decentralized phone cards, these cards rely on real-time interactions +with banks. They are overloading the Danish banking system, hogging phone lines +as the sale of each piece of candy is transmitted to the central bank, flooding the system +with transactions that cost more than they are worth. +David Chaum, a Berkeley cryptographer now living in Holland, has a solution. +Chaum, head of the cryptography group at the center for Mathematics and Computer +Science in Amsterdam, has proposed a mathematical code for a distributed, true digital +cash system. In his solution, everyone carries around a refillable smart card that packs +anonymous cash. This digicash seamlessly intermingles with electronic cash from home, +company, or government. And it works offline, freeing the phone system. +Chaum looks like a Berkeley stereotype: gray beard, full mane of hair tied back in +a professional ponytail, tweed jacket, sandals. As a grad student, Chaum got interested +in the prospects and problems of electronic voting. For his thesis he worked on the idea +of a digital signature that could not be faked, an essential tool for fraud-proof electronic +elections. From there his interest drifted to the similar problem in computer network +communications: how can you be sure a document is really from whom it claims to be +from? At the same time he wondered: how can you keep certain information private and +untraceable? Both directions—security and privacy—led to cryptography and a Ph.D. in +that subject. +Sometime in 1978, Chaum says, “I had this flash of inspiration that it was possible +to make a database of people so that someone could not link them all together, yet you +could prove everything about them was correct. At the time, I was trying to convince +myself that it was not possible, but I saw a loophole, how you might do it and I thought, +gee....But it wasn’t until 1984 or ’85 that I figured out how to actually do that. ” +“Unconditional untraceability” is what Chaum calls his innovation. When this +code is integrated with the “practically unbreakable security” of a standard public-key +encryption code, the combined encryption scheme can provide anonymous electronic +money, among other things. Chaum’s encrypted cash (to date none of the other systems +anywhere are encrypted) offers several important practical improvements in a card-based +192 +electronic currency. +First, it offers the bonafide privacy of material cash. In the past, if you bought a +subversive pamphlet from a merchant for a dollar, he had a dollar that was definitely +a dollar and could be paid to anyone else; but he had no record of who gave him that +dollar or any way to provably reconstruct who gave it to him. In Chaum’s digital cash, +the merchant likewise gets a digital dollar transferred from your card (or from an online +account), and the bank can prove that indeed he definitely has one dollar there and no +more and no less, but no one (except you if you want) can prove where that dollar came +from. +One minor caveat: the smart-card versions of cash implemented so far are, alas, as +vulnerable and valuable as cash if lost or stolen. However, encrypting them with a PIN +password would make them substantially more secure, though also slightly more hassle +to use. Chaum predicts that users of digicash will use short (4-digit) PINs (or none at all) +for minor transactions and longer passwords for major ones. Speculating a bit, Chaum +David Chaum in his Berkeley home. +193 +says, “To protect herself from a robber who might force her to give up her passwords at +gunpoint, Alice could use a ‘duress code’ that would cause the card to appear to operate +normally, while hiding its more valuable assets.” +Second, Chaum’s card-based system works offline. It does not require instant verification +via phone lines as credit cards do, so the costs are minimal and perfect for the +numerous small-time cash transactions people want them for—parking meters, restaurant +meals, bus rides, phone calls, groceries. Transaction records are ganged together +and zapped once a day, say, to the central accountant computer. +During this day’s delay, it would theoretically be possible to cheat. Electronic money +systems dealing in larger amounts, running online in almost real time, have a smaller +window for cheating—the instant between sending and receiving—but the minute opportunity +is still there. While it is not theoretically possible to break the privacy aspect +of digital cash (who paid whom) if you were desperate enough for small cash, you could +break the security aspect—has this money been spent?—with supercomputers. By breaking +the RSA public-key code, you could use the compromised key to spend money more +than once. That is, until the data was submitted to the bank and they caught you. For +in a delicious quirk, Chaum’s digital cash is untraceable except if you try to cheat by +spending money more than once. When that happens, the extra bit of information the +twice-spent money now carries is enough to trace the payer. So electronic money is as +anonymous as cash, except for cheaters! +Because of its cheaper costs, the Danish government is making plans to switch from +the Dencard to the Dencoin, an offline system suited to small change. The computational +overhead needed to run a system like this is nano-small. Each encrypted transaction +on a smart card consumes only 64 bytes. (The previous sentence contains 67 bytes.) A +household’s yearly financial record of all income and all expenditure would easily fit on +one hi-density floppy disk. Chaum calculates that the existing mainframe computers in +banks would have more-than-adequate computational horsepower to handle digital cash. +The encryption safeguards of an offline system would reduce much of the transactional +computation that occurs online over phone lines (for ATMs and credit card checks), +enabling the same banking computers to cover the increase in electronic cash. Even if +we assume that Chaum guessed wrong about the computational demands of a scaled-up +system, and he is off by a factor of ten, computer speed is accelerating so fast that this +defers the feasibility of using existing bank power by only a few years. +In variations on Chaum’s basic design, people may also have computer appliances +at home, loaded with digital cash software, which allow them to pay other individuals, +and get paid, over phone lines. This would be e-money on the networks. Attached to +your e-mail message to your daughter is an electronic $100 bill. She may use that cash +to purchase via e-mail an airplane ticket home. The airline sends the cash to one of +their vendors, the flight’s meal caterer. In Chaum’s system nobody has any trace of the +money’s path. E-mail and digital cash are a match made in heaven. Digital cash could +fail in real life, but it is almost certain to flourish in the nascent network culture. +I asked Chaum what banks think of digital cash. His company has visited or been +visited by most of the big players. Do they say, gee, this threatens our business? Or do +they say, hmm, this strengthens us, makes us more efficient? Chaum: “Well, it ranges. I +find the corporate planners in $1,000 suits and private dining halls are more interested +in it than the lower-level systems guys because the planners’ job is to look to the future. +Banks don’t go about building stuff themselves. They have their systems guys buy stuff +from vendors. My company is the first vendor of electronic money. I have a very extensive +portfolio of patents on electronic money, in the U.S., Europe, and elsewhere.” Some +of Chaum’s crypto-anarcho friends still give him a hard time about taking out patents on +194 +this work. Chaum tells me in defense, “It turns out that I was in the field very early so I +wiped out all the basic problems. So most of the new work now [in encrypted electronic +money] are extensions and applications of the basic work I did. The thing is, banks don’t +want to invest into something that is unprotected. Patents are very helpful in making +electronic money happen.” +Chaum is an idealist. He sees security and privacy as a tradeoff. His larger agenda +is providing tools for privacy in a networked world so that privacy can be balanced with +security. In the economics of networks, costs are disproportionately dependent on the +number of other users. To get the Fax Effect going, you need a critical mass of early +adopters. Once beyond the threshold, the event is unstoppable because it is self-reinforcing. +Electronic cash shows all the signs of having a lower critical mass threshold than +other implementations of data privacy. Chaum is betting that an electronic cash system +inside an e-mail network, or a card-based electronic cash for a local public transportation +network, has the lowest critical mass of all. +The most eager current customers for digital cash are European city officials. They +see card-based digital cash as the next step beyond magnetic fast-passes now issued regularly +by most cities’ bus and subway departments. One card is filled with as much bus +money as you want. But there are added advantages: the same card could fit into parking +meters when you did drive or be used on trains for longer-distance travel. +Urban planners love the idea of automatic tolls charging vehicles for downtown +entry or crossing a bridge without having the car stop or slow down. Bar-code lasers can +identify moving cars on the road, and drivers will accept purchasing vouchers. What’s +holding up a finer-grain toll system is the Orwellian fear that “they will have a record of +my car’s travels.” Despite that fear, automatic tolls that record car identities are already +operating in Oklahoma, Louisiana, and Texas. Three states in the busy Northeast +have agreed to install one compatible system starting with experimental setups on two +Manhattan/New Jersey bridges. In this system, a tiny card-size radio taped to the car +windshield transmits signals to the toll gate which deducts the toll from your account at +the gate (not from the card). Similar equipment running on the Texas turnpike system +is 99.99 percent reliable. These proven toll mechanisms could easily be modified to +Chaum’s untraceable encrypted payments, and true electronic cash, if people wanted. +In this way the same cash card that pays for public transportation can also be used +to cover fees for private transportation. Chaum relates that in his experience with European +cities, the Fax Effect—the more people online, the more incentive to join—takes +hold, quickly drawing other uses. Officials from the phone company get wind of what’s +up and make it known that they would like to use the card to rid themselves of a nasty +plague called “coins” that bog public phones down. Newspaper vendors call to inquire if +they can use the card.... Soon the economics of networks begin to take over. +Ubiquitous digital cash dovetails well with massive electronic networks. It’s a pretty +sound bet that the Internet will be the first place that e-money will infiltrate deeply. Money +is another type of information, a compact type of control. As the Net expands, money +expands. Wherever information goes, money is sure to follow. By its decentralized, +distributed nature, encrypted e-money has the same potential for transforming economic +structure as personal computers did for overhauling management and communication +structure. Most importantly, the privacy/security innovations needed for e-money are +instrumental in developing the next level of adaptive complexity in an information-based +society. I’d go so far as to say that truly digital money—or, more accurately, the economic +mechanics needed for truly digital cash—will rewire the nature of our economy, communications, +and knowledge. +195 + Peer-to-peer finance with nanobucks +The consequential effects of digital money upon the hive mind of our network +economy are already underway. Five we can expect are: +• Increased velocity. When money is disembodied—removed from any material basis at +all—it speeds up. It travels farther, faster. Circulating money faster has an effect similar +to circulating more money. When satellites went up, enabling near-the-speed-of-light, +round-the-clock world stock trade, they expanded the amount of global money by 5 percent. +Digital cash used on a large scale will further accelerate money’s velocity. +• Continuity. Money that is composed of gold, precious materials, or paper comes in +fixed units that are paid at fixed times. The ATM spits out $20 bills; that’s it. You pay the +phone company once a month even though you use the phone everyday. This is batchmode +money. Electronic money is continuous-flow. It allows recurring expenses to be +paid, in Alvin Toffler’s phrase, by “bleeding electronically from one’s bank account in +tiny droplets, on a minute-by-minute basis.” Your e-money account pays for each phone +call as soon as you hang up, or—how about this?—as you are talking. Payment coincides +with use. Together with its higher velocity, continuous electronic money can approach +near instantaneity. This puts a crimp on banks which derive a lot of their current profit +on the “float”—which instantaneity erases. +• Unlimited fungibility. Finally, really plastic money. Once completely disembodied, digitized +money escapes from a single transmission form and merrily migrates to whatever +medium is handiest. Separate billing fades away. Accounts can be interleaved with the +object or service itself. The bill for a video comes incorporated into the video. Invoices +reside alongside of bar codes and can be paid with the zap of a laser. Anything that can +hold an electronic charge can hold a fiscal charge. Foreign currencies become a matter +of changing a symbol. Money is as malleable as digitized information. This makes it all +the easier to monetize exchanges and interactions that were never part of an economy +before. It opens the floodgates of commerce onto the Net. +• Accessibility. Until now, sophisticated manipulations of money have been the private +domain of professional financial institutions—a financial priesthood. But just as a million +Macs broke the monopoly of the high priests guarding access to mainframe computers, +so e-money will break the monopoly of financial Brahmins. Imagine if you could charge +(and get) interest on any money due you by dragging an icon over that electronic invoice. +Imagine if you could factor in the “interest due” icon and give it variable interest, ballooning +as it aged. Or maybe you would charge interest by the minute if you sent a +payment in early. Or program your personal computer to differentially pay bills depending +on the prime rate—programmed bill-trading for amateurs. Or perhaps you would +engineer your computer to play with exchange rates, paying bills in whatever currency +is least valuable at the time. All manner of clever financial instruments will surface once +the masses can drink from the same river of electronic money as the pros. To the list of +things to hack, we may now add finance. We are headed toward programmed capitalism. +• Privatization. The ease with which e-money is caught, flung, and shaped makes it +ideal for private currencies. The 214 billion yen tied up by Japan’s NTT’s phone cards +is one limited type of private currency. The law of the Net is: he who owns a computer +not only owns a printing press, but also a mint, when that computer is linked to e-money. +Para-currencies can pop up anywhere there is trust (and fail there, too). +196 +Historically, most modern barter networks rapidly slide into exchanges of real currency; +one could expect the same in electronic barter clubs, but the blinding efficiency +of an e-money system may not tend that way. The $350 billion tax question is whether +para-currency networks would ever rise above unofficial status. +The minting and issuing of currency has been one of the few remaining functions +of government that the private sector has not encroached upon. E-money will lower +this formidable barrier. By doing so it will provide a powerful tool to private governance +systems, such as might be established by renegade ethnic groups, or the “edge cities” +proliferating near the world’s megacities. The use of institutional electronic money transfers +to launder money on a global scale is already out of anyone’s control. + Fear of underwire economies +The nature of e-money —invisible, lightning quick, cheap, globally penetrating—is +likely to produce indelible underground economies, a worry way beyond mere laundering +of drug money. In the net-world, where a global economy is rooted in distributed +knowledge and decentralized control, e-money is not an option but a necessity. Paracurrencies +will flourish as the network culture flourishes. An electronic matrix is destined +to be an outback of hardy underwire economies. The Net is so amicable to electronic cash +that once established interstitially in the Net’s links, e-money is probably ineradicable. +In fact, the legality of anonymous digital cash is in limbo from the start. There are +now strict limits to the size of transactions U.S. citizens can make with physical cash; +try depositing $10,000 in greenbacks in a bank. At what amount will the government +limit anonymous digital cash? The drift of all governments is to demand fuller and fuller +disclosures of financial transactions (to make sure they get their cut of tax) and to halt +unlawful transactions (as in the War on Drugs). The prospect of allowing untraceable +commerce to bloom on a federally subsidized network would probably have the U.S. +government seriously worried if they were thinking about it. But they aren’t. A cashless +society smells like stale science-fiction, and the notion reminds every bureaucrat drowning +in paper of the unfulfilled predictions of a paperless society. Eric Hughes, maintainer +of the cypherpunks’ mailing list, says, “The Really Big Question is, how large can the +flow of money on the nets get before the government requires reporting of every small +transaction? Because if the flows can get large enough, past some threshold, then there +might be enough aggregate money to provide an economic incentive for a transnational +service to issue money, and it wouldn’t matter what one government does.” +Hughes envisions multiple outlets for electronic money springing up all over the +global net. The vendors would act like traveler’s check companies. They would issue +e-money for, say, a 1 percent surcharge. You could then spend Internet Express Checks +wherever anyone accepts them. But somewhere on the global Net, underwire economies +would dawn, perhaps sponsored by the governments of struggling developing countries. +Like the Swiss banks of old, these digital banks would offer unreported transactions. +Paying in online Nigerian nairas from a house in Connecticut would be no more difficult +than using U.S. dollars. “The interesting market experiment,” Hughes says, “is to see +what the difference in the charge for anonymous money is, once the market equalizes. I +bet it’ll be on the order of 1–3 percent higher, with an upper limit of about 10 percent. +That amount will be the first real measure of what financial privacy is worth. It might +also be the case that anonymous money will be the only kind of money. ” +197 +Usable electronic money may be the most important outcome of a sudden grassroots +takeover of the formerly esoteric and forbidden field of codes and ciphers. Everyday +e-money is one novel use for encryption that never would have occurred to the military. +There are certainly many potential uses of encryption that the cypherpunks’ own +ideological leanings blind them to, and that will have to wait until encryption technology +enters the mainstream—as it certainly will. +To date encryption has birthed the following: digital signatures, blind credentials +(you have a diploma that says, yes, you have a Ph.D., yet no one can link that diploma +with the other diploma in your name from traffic school), anonymous e-mail, and electronic +money. These species of disconnection thrive as networks thrive. +Encryption wins because it is the necessary counterforce to the Net’s runaway +tendency to link. Left to itself, the Net will connect everyone to everyone, everything to +everything. The Net says, “Just connect.” The cipher, in contrast, says, “Disconnect.” +Without some force of disconnection, the world would freeze up in an overloaded tangle +of unprivate connections and unfiltered information. +I’m listening to the cypherpunks not because I think that anarchy is a solution to +anything but because it seems to me that encryption technology civilizes the grid-locking +avalanche of knowledge and data that networked systems generate. Without this taming +spirit, the Net becomes a web that snares its own life. It strangles itself by its own prolific +connections. A cipher is the yin for the network’s yang, a tiny hidden force that is able to +tame the explosive interconnections born of decentralized, distributed systems. +Encryption permits the requisite out-of-controllness that a hive culture demands in +order to keep nimble and quick as it evolves into a deepening tangle.