Bhattarai 1

Madan Bhattarai

Professor Lynn Kilpatrick

English 2010

3/18/2016

Relationship between Cryptography and Modern Economy

Cryptography is a technique of writing and deciphering codes. It has come a long way
from using strictly in military like Caesar cipher, enigma to modern cryptography used for
banking, e-mail, cloud storage and online shopping. So, what is the relationships between
cryptography and modern economy? We already use cryptography in most of the finance related
activity over the internet. Increasing consumer confidence and accessibility of e-commerce has
allowed easier transaction than ever, which is enabled by strong encryption.
In the article Cryptography and New Economy, Author Tom Lee explains about
growing e-commerce with the help of modern cryptography. Advances in mathematics of
cryptographical theory in early 1970s allowed the robust framework for modern cryptography.
The recent surge in wireless devices like smartphone and tablets has allowed to do crucial
transaction like banking, buying and selling stocks on the go. Need for stronger encryption is
greater than ever because these kinds of wireless devices are less secure than traditional wired
devices. Confidence in modern cryptography is high and cryptography will be the backbone for
future e-commerce. Future advancement in encryption can create easier implementation,
allowing more companies to implement this technology.

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Tom Lee is a computer programmer who graduated from the University of Virginia. He
has wrote several articles for the Washington Post, and an independently published non-profit
publication, American Prospect. He also has worked as director for Sunlight Lab, a nonprofit,
community driven, investigative organization that encourages policies for transparent
government. His article appeared in Industrial Physicist, Journal, by the American Physical
Society that is targeted to Physicist in Academia, laboratories, and industries throughout the
world. Article by Tom Lee goes in depth about everyday application enabled by encryption. His
knowledge about cryptography, education, and his experiences makes his statement convincing.
Writing for Niskanen Center, Ryan Hagemann and Josh Hampson in their article
evaluate the economic benefit associated with encryption. Citing the study done by NIST
(National Institute for Standard and Technology) which concluded the net value of encryption
ranged from $345 billion to 1.2 trillion in 2001 (3). The same research also illustrates the
decreasing cost and increasing benefits of encryption over decades. Economic impact by
adoption of encryptions is under research area and more data is needed to reach concrete
conclusion, but available data shows a 50% increase in mobile online banking from 2011 to 2013
(11). Furthermore, Hampson and Hagemann also find the total e-commerce transactions in 2013
alone to be a $3.3 trillion, substantial increase from 2001 estimated value of e-commerce of
$200-300 million.
Niskanen is the libertarian non-profit think tank which works to change public policy.
Hagemann is the technology and civil liberties policy analyst at the Niskanen center and has a
Masters Degree in Science and Technology Policy from George Mason University and
Hampson graduated with Master Degree in International Relations and Economics. Citing

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research done by NIST, the economist, U.S. Department of Commerce, Hagemann and Hampson
conclude growth in value of encryption, providing an excellent logical argument.
In Journal of Electronic Commerce Research," Michelle Baddeley suggests the e-cash
system over a conventional monetary system. In the article Using E-Cash in the New Economy:
An Economic Analysis of Micropayment Systems, Baddeley acknowledges that growth of ecommerce is dependent on effective electronic system. Most buyers over the internet use
credit/debit cards, but there is a hefty price under this type of transaction making them costly
transaction for small purchases. Most of the transactions done by credit/debit cards uses account
based medium, and banks as an intermediary. This usually creates a lot of problems including
and not limited to: hackers paradise (bulk data in single place or server), regulatory pressure,
money transferring, and money laundering. Innovative e-cash system has the potential to address
many of this limitations and issues with the old monetary system. She urges cryptographers,
computer scientists, economists, governments and central banks to create this e-cash system,
moderating between security and privacy of this e-cash system.
Baddeley got her PhD in Economics from the University of Cambridge and is a professor
in Economics and Finance at the University College of London. Presenting excellent credibility
and logical argument, Baddeley makes a strong makes strong argument to develop an effective ecash system. Old monetary system of cash, there is a simply bilateral interaction between buyers
and sellers. Our modern day transaction consists of bank or credit cards as the middle person
instead of the conventional cash system. Since, banks or credit cards is a middle person doing the
bookkeeping, they charge certain fees (usually from the seller). These types of fees hurt small
business and micro transactions are more expensive. Baddleys argunment here is very logical,
and cant argue with here statement. She then urges us to create an e-cash system which

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incorporates better privacy/security, is backed by central government, and should be accepted

everywhere.
Tom Lee, Ryan Hagemann and Josh Hampson raise an important question about
cryptography and modern economy. Lee who is strong advocate for cryptography believes
cryptography to be the foundation for future economy. Citing research done by NIST, the
economist, U.S. Department of Commerce, Hagemann and Hampson provide excellent data thus
logically supporting their argument. Since, think tank Niskanen is a libertarian think tank article,
it could be biased, only pointing out ideas to support their view. Both articles from Journal of
Electronic Commerce Research" and Niskanen lack to mention the economic impact caused by
hacking or exploitation of encryption algorithm. Even with encryption in place, it is hard to keep
hackers off bay. But usually cybercrimes are the result of hackers paradise, companies not
implementing proper network security, no regulation on proper encryption if companies hold
private information and many more. According to US bureau of Justice, Financial losses due to
personal identity theft totaled $24.7 billion, over $10 billion more than the losses attributed to all
other property crimes measured in the National Crime Victimization Survey (2). This amount of
$24.7 billion is just from identity theft, financial losses from other cybercrimes is undetermined
because of lack of data.
Numbers presented by Hagemann and Hampson are very staggering putting value of
encryption to $345 billion to $1.2 trillion in 2001. E-commerce alone in 2013 accounted for $3.3
trillion in transaction. This is possible because of encryption used in e-commerce transaction.
Again, like mentioned above encryptions we use today are not perfect and neither is our financial
system. According to the United States Department of Justice, it cost US economy $24.7 billion
only from identity theft. Same research also shows that identity theft are also rising at an

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alarming rate (2). Baddeleys suggestions for an e-cash system where bank or credit cards wont
charge fees making even small transactions easier. Her suggestion for e-cash where central bank
and government will play a key role, adopting modern technology, midway between security and
privacy, and to reinvent the old economic system is like an utopian dream. Even cryptocurrencies (modern crypto-currencies are not backed by central bank or government), which are
made for security and privacy are not immune to hacks or breaches. If we adopt an e-cash system
with better security, it will eliminate some of the problems
Encryption should be the backbone for our modern economy. As the article by Baddeley
suggests, what we have is flawed. We have a middle person usually bank or credit card issuers
for our transaction, we can completely eliminate this old monetary system with a new innovative,
technological modern e-cash system. Like, Baddeleys paper mentions how todays bank and
credit card is the paradise for hackers. We also can completely eliminate this by using p2p (peer
to peer like bit coin) currencies using public key encryption. We have the technology, and
expertise to create a better economy for the future. We can create an economy that can mediate
between security and privacy for a better financial future. We are using a middle age economy
(with couple of changes), in our modern world. It is time for to reinvent the whole economy from
bottom up using modern technology to meet modern standard.

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Work Cited
Baddeley, Michelle. "Using E-cash in the New Economy: An economic analysis of micropayment systems." Journal of Electronic Commerce Research 5.4 (2004): 239-253. Web.
17 Apr. 2016.
Hagemann, Ryan, and Josh Hampson. "Encryption, Trust, and the Online Economy." Niskanen
Center, 9 Nov. 2015. Web. 17 Apr. 2016. <https://niskanencenter.org/wpcontent/uploads/2015/11/RESEARCH-PAPER_EncryptionEconomicBenefits.pdf>.
Lee, Tom. "Cryptography and the New Economy." Industrial Physicist 6.4 (2000): 29. Publisher
Provided Full Text Searching File. Web. 22 Mar. 2016.
Erika Harrell. United States. Dept. of Justice. Office of Justice Programs. Bureau of Justice
Statistics. Victims of Identity Theft, 2014. Washington: U.S. Dept. of Justice, Office of
Justice Programs, Bureau of Justice Statistics, Sep. 2015. Web. 22 Mar. 2016.
<http://www.bjs.gov/content/pub/pdf/vit14.pdf >.