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The End of Ordinary Money, Part I

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
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 nontraditional 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
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, whichbecause 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 G7 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 from
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,
Within the U.S. the most important communications-moneychannels 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
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, from 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

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 encrypt 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))
= M, turning the apparent randomness into tears, joy, and erotic
The key pairs P and R must have the relationship that for any
message M, R(P(M)) = 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)) = 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
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 = 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) = P(R(H(M))). He compares the two. If
H(M*) = P(R(H(M))), then he knows the message has not been
altered (that is, M* = 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*) =
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

NSA is the U.S. intelligence agency located in Ft. Mead,
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, from 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 selfevident 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
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
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 publickey 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, artistin-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 computeraccentuated 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 DESbased 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 from 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 led 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 led 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
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"
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

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 tamperresistant 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 = 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 80bit 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)] = 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]} = 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 = U1+U2. He uses U to decrypt the
encrypted session key: U[U(K)] = K. Now he knows the session
key K, which he uses to decrypt my encrypted message:
K[K(M)] = 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 Fortezza, 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-theclock, 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.

[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 allnight 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,
[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 from 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
[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
[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 vaultkeepers 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
[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,
[51] Office of Technology Assessment (OTA), Information
Security and Privacy in Network Environments, September 9,
[52] "TerrorDollars: Counterfeiters, Cartels and Other Emerging
Threats to America's Currency," Washington Post, March 6,
[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.
First posted to the Internet February 1995.
1995 J. Orlin Grabbe, 1475 Terminal Way, Suite E, Reno, NV
Web Page: http://www.aci.net/kalliste/

The End of Ordinary Money, Part II:

Money Laundering, Electronic Cash, and Cryptological
by J. Orlin Grabbe
It was bright lights and balmy action. Thomas Constantine, the
head of the U.S. Drug Enforcement Administration (DEA),
claimed we've entered a "new world order of law enforcement"
[1]. He meant the cooperation of British, Italian, and Spanish

authorities in setting up a fake bank in Anguilla, in the

Caribbean. It was a sting to trap money launderers.
Like all pirate organizations, the group calculated success by the
amount of booty seized. And this cleverly code-named
"Operation Dinero" added $52 million, nine tons of cocaine, and
a number of paintings (including works by Reynolds, Reuben,
and Picasso) to official coffers. There were also 88 arrests. In
many ways it was a great scam in classic DEA style:
government officials got to keep the goods, while taxpayers got
to pay for the incarceration of up to 88 people.
The British Foreign Office--those wacky guys who, you will
recall, conveniently released a barrage of information about
Nazis in Argentina at the outbreak of the Falklands (Malvinas)
war, and who also helped coordinate Operation Dinero--have
since made a propaganda video about this official foray into
fraudulent banking. Among others it stars Tony Baldry, junior
Be prepared for more of the same. The nine tons of coke should
enable the British Foreign Office and the nosy DEA to burn the
midnight oil for months to come, planning other bootygathering raids and video thrillers. After all, the FATF report of
1990 encouraged international banking stings like this one. But
it isn't just the pseudo-bankers you should worry about.

The Banker as Snitch: the Brave New

World of Law Enforcement
One of the precepts of the Church of the Subgenius is: You will
pay to know what you really think [2]. But in the world of
money-laundering, you will pay your thankless banker to turn
you in to the government. In 1993 a Federal judge in
Providence, Rhode Island, issued the longest sentence ever
given for a non-violent legal offense: he sentenced a man to 600
years in prison for money laundering. The individual was
fingered by his Rhode Island bankers, who then cooperated with
federal agents in building a case against him, even while the
same bankers received fees for banking services.
American Express was recently fined $7 million for failing to
detect money laundering, and agreed to forfeit to the U.S.
Justice Department another $7 million. As part of the settlement,
the bank will spend a further $3 million in employee education,
teaching them recommended procedures for spying on customer
In a book about banker Edmond Safra [3], author Bryan
Burrough notes: "To truly defeat money launderers, banks must
know not only their own customers--by no means an easy task--

but their customers' customers, and in many cases their

customers' customers' customers." (p. x). And then, as part of an
argument clearing Safra's Republic National Bank of money
laundering charges, Burrough recounts how he visited the office
of the Financial Crimes Enforcement Network (FinCEN) and
talked with one of its top officials. The official said that, on the
contrary, Republic had made "some solid suggestions about new
ways the government could track dirty money" (p. xii).
Most have still not gotten the message that their banker is a spy.
They are still stuck in yesterday's world, where legislation like
the Right to Financial Privacy Act of 1978 allowed banks, on
the one hand, to monitor their own records and inform the
government when there were suspicious transactions in an
account. On the other hand, the bank was prohibited from
identifying either the account number or the account's owner.
But the Privacy Act was effectively gutted by the AnnunzioWylie Anti-Money Laundering Act of 1992, which gives
protection from civil liability to any financial institution,
director, officer or employee who makes a suspicious
transaction report under any federal, state or local law. The latter
Act essentially implies banks can reveal to the government any
information they want to about their customers, without fear of
prosecution. [4]

Money Laundering--What Is It,

There's a specter haunting the international financial markets:
the specter of crime by nomenclature, by theological semantics.
To be sure, the faceless piece of transaction information that
makes money "money"--a useful medium of exchange, whereby
we exchange everything for it, and avoid the direct bartering of
wheelbarrows for oranges--has been under attack before. The
60s brought us "euro"-dollars, and the 70s "petro"-dollars. Now
we have "narco"-dollars, "terror"-dollars, and (who knows?)
maybe "kiddie-porn"-dollars. For some of the data bits stored in
banks' computers comprise "clean" money and others "dirty"
money, the latter legalistically smitten with original sin.
As Yoga Berra might say, it's digital voodoo, all over again.
Since the governmental powers that be can't do much about
drug-dealing or terrorism--if only because they themselves are
the chief drug dealers and the chief terrorists- -they have
transferred these and other (often alleged) sins to the money
supply. And since every dollar is a potential "narco" dollar or
"terror" dollar, they must track each one as best they can [5].
The fact that monetary monitoring has done nothing to diminish
either drug-dealing or terrorism is treated of no importance,
because it's all part of a larger game. All the players can easily

see that this same financial tracking yields political side benefits
in the form of social control and government revenue
Anyone who has studied the evolution of money- laundering
statutes in the U.S. and elsewhere will realize that the "crime" of
money laundering boils down to a single, basic prohibited act:
Doing something and not telling the government about it. But
since the real Big-Brotherly motive is a Thing That Cannot Be
Named, the laws are bogged down in prolix circumlocution,
forming a hodge- podge of lawyerly fingers inserted here and
there into the financial channels of the monetary system.
U.S. legislation includes the Bank Secrecy Act of 1970, the
Comprehensive Crime Control Act of 1984, the Money
Laundering Control Act of 1986, the Anti-Drug Abuse Act of
1988, the Annunzio-Wylie Anti-Money Laundering Act of 1992,
and the Money Laundering Suppression Act of 1994.
International efforts include the UN Convention Against Illicit
Traffic in Narcotic Drugs and Psychotropic Substances of 1988;
the Basle Committee on Banking Regulations and Supervisory
Practices Statement of Principles of December 1988; the
Financial Action Task Force (FATF) Report of April, 1990 (with
its forty recommendations for action); the Council of Europe
Convention on Laundering, Search, Seizure and Confiscation of
Proceeds of Crime of September 8, 1990; the sixty-one
recommendations of the Caribbean Drug Money Laundering
Conference of June, 1990; the agreement on EC legislation by
the European Community's Ministers for Economy and Finance
of December 17, 1990; the Organization of American States
Model Regulations on Crimes Related to Laundering of
Property and Proceeds Related to Drug Trafficking of March
1992; and a tangled bouillabaisse of Mutual Legal Assistance
Treaties (MLATs).
"Most economically motivated criminals always have wanted to
appear legitimate," says attorney Kirk Munroe. "What is new is
the criminalization of money laundering. The process itself now
is a crime separate from the crime that produced the money" [6].
Money laundering is said to be the "process by which one
conceals the existence, illegal source, or illegal application of
income, and then disguises that income to make it appear
legitimate" (emphasis added) [7]. Notice the word "existence."
The sentence could be construed to mean that simply disguising
the existence of income is money laundering. But whatever
money laundering is, in practice U.S. law purports to detect it
through the mandatory reporting of cash transactions greater
than or equal to a threshold amount of US$10,000. For countries
in Europe the figure ranges from ECU 7,200 to 16,000.
In the U.S., Section 5313 of the Banking Secrecy Act (BSA)

requires a Currency Transaction Report (CTR) of cash deposits

or transactions of $10,000 and above, which is IRS Form 4789,
and a Currency Transaction Report by Casinos (CTRC), which
is IRS Form 8362. Section 5316 of BSA also requires a
Currency or Monetary Instrument Report (CMIR) for transport
of $10,000 or more of currency in or out of the U.S. This is
Customs Form 4790. Section 5314(a) of BSA requires reporting
of foreign bank or financial accounts whose value exceeds
$10,000 at any time during the preceding year. This is called a
Foreign Bank Account Report (FBAR) and is Treasury form
TDR 90-22-1. Section 60501 of the IRS Code requires the
reporting of business transactions involving more than $10,000
cash. These are reported on IRS Form 8300.
Suppose you're an arms dealer in trouble and need a criminal
lawyer. You've violated those pesky ITAR restrictions because
you carried a copy of PGP on your portable computer when you
drove over to Matamoros from Brownsville for the day, and you
forgot to fill out those customs forms, and that girl you met said
she just had to set up a secure channel to her cousin who works
in Washington, D.C., as an undocumented maid for a potential
Cabinet nominee . . . The lawyer charges a modest $200 an
hour, so the first month you pay him $7,000 in cash. The next
month you pay him $4,000 in cash. Under current U.S. law, the
lawyer is required to report complete information about you,
including the $11,000 total cash payment, on IRS Form 8300,
and ship it off to the IRS Computing Center in Detroit,
Michigan, within fifteen days of receiving the second payment
(which put the total above the reporting threshold). Never mind
if either you or your lawyer thinks filing such a form violates
attorney-client privilege, the Sixth Amendment right to counsel,
or the Fifth Amendment right to be free from self-incrimination.
For if the report is not made, and the IRS finds out about it and
penalizes and/or prosecutes your lawyer, the courts will most
probably back up the IRS. [8]
The scope and arrogance of the money-laundering statutes
knows no bounds. The Kerry Amendment to the Anti-Drug
Abuse Act of 1988 demands that foreign nations must also
require financial institutions to report deposits of US$10,000 or
greater, and to make this information available to US law
enforcement. Otherwise the President is directed to impose
sanctions against non-cooperative countries. [9]
Having extended the concept of evil to a vaguely defined
practice called "money laundering," and having put in a
detection system to help trace it, the laws have proceeded to
make evasion of the monitoring system evil also. This tertiary
evil may be found in the practice of "smurfing" or "structuring,"
which is basically any method of spreading cash among
accounts or across time to avoid the $10,000 reporting
threshold. Structuring is defined in a 1991 amendment to the

Bank Secrecy Act thusly: "Structure (structuring). . . . a person

structures a transaction if that person, acting alone, or in
conjunction with, or on behalf of other persons, conducts or
attempts to conduct one or more transactions in currency in any
amount, at one or more financial institutions, on one or more
days in any manner, for the purpose of evading the reporting
requirements . . . 'In any manner' includes, but is not limited to,
the breaking down of a single sum of currency exceeding
$10,000 into smaller sums, including sums at or below $10,000,
or the conduct of a transaction or series of transactions,
including transactions at or below $10,000. The transaction or
transactions need not exceed the $10,000 reporting threshold at
any single financial institution on any single day in order to
constitute structuring within the meaning of this definition"
And what does the government do with the information it
collects? When your lawyer's Form 8300 reaches the IRS
Computing Center in Detroit, it will be entered into the Treasury
Financial Data Base (TFDB). Similarly, if you cross a U.S.
border with more than $10,000 cash, you will fill out Customs
Form 4790. This form will be sent off to customs' San Diego
Data Center, and it too will eventually show up in TFDB. These
and other forms will now be available on-line in the Treasury
Enforcement Communications System (TECS II). The TFDB
data will also be processed through the FinCEN Artificial
Intelligence (AI) System, which is trained to identify suspicious
transaction patterns.
So when you deal in cash, expect to give a note to the
government, a crumb to the friendly FinCEN AI. But AI has a
voracious appetite, so the reporting doesn't stop with cash. The
heart of any modern monetary system is the digital transfer of
electronic money through the telecommunication links among
bank computers. Internationally, banks are connected by a
computer messaging system operated by the Society for
Worldwide Interbank Financial Telecommunication (SWIFT).
Domestically, banks within a country use equivalents of the
U.S. clearing systems operated by the Federal Reserve
(Fedwire) and the Clearing House Interbank Payments System
(CHIPS). A Federal Reserve Policy Statement of December 23,
1992 asks financial institutions to include (if possible) complete
information on the sender and recipient of large payment orders
sent through Fedwire, CHIPS and SWIFT. "Historically, law
enforcement efforts to curtail money laundering activities have
focused on the identification and documentation of currencybased transactions; however, recent investigations have focused
on the use of funds transfer systems," the statement notes.
The focus on funds transfer brings in the resources of the U.S.
National Security Agency (NSA). The NSA has been
monitoring civilian communications ever since it installed IBM

computers at Menwith Hill in the U.K. in the early 60s to keep

track of international telex messages. NSA tentacles are now
ensconced not only in transatlantic communications, but also in
Pacific satellite transmissions, the regional Bell System offices,
the SWIFT messaging system, the CHIPS clearing computers in
Manhattan, and Fedwire. In addition, a satellite surveillance
system picks up high frequency transmissions of specially
constructed computer chips which are activated by certain types
of transactions-oriented financial software. U.S. agencies are
not alone in financial monitoring. As a trivial additional
example, the Council of Europe has recommended Interpol be
given access to SWIFT to assist in money-laundering detection

When they hear the term "money laundering," many
automatically think of Miami, London, Hong Kong, or Panama
City. How about Arkansas? According to what Money
Laundering Bulletin calls The Greatest Story Never Told, an
"archive of more than 2000 documents . . . allege that western
Arkansas was a centre of international drug smuggling in the
early 1980s--perhaps even the headquarters of the biggest drug
trafficking operation of all time" [12]. Perhaps that is why it was
in Arkansas that modifications were made to the stolen
PROMIS software system to enable it to spy on banking
transactions. For where there are drugs, there must be money
laundering, or so one can suppose. Curiously, however, some of
the same set of characters were apparently involved on all sides:
in drug running, money laundering, and also in the theft and
modification of the PROMIS system. (I will leave it to someone
with more money, guns, and lawyers than I have to bring that
part of the story to light, and will not pursue it further here.)
The PROMIS software was created by the Washington, D.C.based software company Inslaw for a single purpose: to track
people. It was initially designed for the use of federal
prosecutors. Want to know who the judge was on a particular
case? Ask PROMIS. Now want to know all the similar cases
that same judge has heard? Ask PROMIS again. How about all
the accused money launderers a particular attorney has
defended? And so on. But after the Justice Department acquired
the PROMIS software by "trickery, deceit, and fraud," and
installed it in most of its regional offices, the system was
modified and sold to foreign intelligence organizations, then
modified again and sold to banks.
To see the relationship among these different uses, apparently
diverse as they may appear, consider the following items of
information about Joe Blowup who lives in Sacramento:

Item 1: Monday, June 3. Master Charge record of

payment by Joe Blowup for lunch at the Cliff House in
San Francisco.
Item 2: Wednesday, June 5. Motor vehicle records show
an automobile registered to Joe Blowup is involved in a
minor accident in Barstow.
Item 3: Saturday, June 8. Check for $3,000 made out to
Pierre "C-4" Plastique is deposited in Pierre's account in
Glendale Federal Savings, and clears against Joe
Blowup's First Interstate account in Sacramento on
Tuesday, June 11.
Who might be interested in this computer-sorted chronology?
Firstly, anyone wanting to track Joe Blowup's movements. He
was in San Francisco on Monday and in Barstow on Wednesday.
The sequence also generates obvious questions for further
investigation. Did he meet Pierre in Barstow and give him the
check there, or did he drive on to Los Angeles? What is the
check payment for? And who did Joe Blowup have lunch with
in San Francisco? In order to generate relevant questions like
these, federal agents, spies, and other detectives all want a copy
of this neat software.
Secondly, banks and other financial institutions. Notice that, in
fact, most of the information is financial. That's because
financial institutions keep carefully detailed transaction records,
and over the years they've become increasingly sophisticated in
doing so. There is nothing nefarious in this per se. If I go to a
bank to get a loan, the bank has a right to make an evaluation as
to whether I will repay it. They are principally concerned with
1) ability to pay, and 2) willingness to pay--and to make this
evaluation, they rely on current and historical information. In
the example here, none of the items is of interest to banks,
unless that accident in Barstow created a financial liability
which would affect Joe Blowup's ability to repay other loans.
But if the (modified) PROMIS software organizes banking
transactions in a nice way, then banks want a copy of it also.
Thirdly, tax authorities. Do Joe Blowup's financial records
indicate a pattern of rather more income than he has been
reporting? Or, in the case of doubt (and this is the fun part), is
there a record of assets the IRS can seize in the meantime? The
IRS wants a copy of the software so they can better understand
Joe Blowup's--and your--spending patterns, even though present
IRS files already put private credit bureaus like TRW and
Equifax to shame.
In the decade of the 1980s, intelligence organizations around the
world salivated over the ability of the PROMIS software to

track terrorists, spies, political opponents, and attractive models.

Aside from distribution to almost all the U.S. three-letter
agencies, PROMIS was sold to intelligence organizations in
Canada, Israel, Singapore, Iraq, Egypt, and Jordan among
others. In addition, the DEA, through its proprietary company,
Eurame Trading Company Ltd. in Nicosia, Cyprus, is said to
have sold PROMIS to drug warrior agencies in Cyprus,
Pakistan, Syria, Kuwait, and Turkey. PROMIS was also
converted for use by the British Navy in connection with its
nuclear submarine intelligence data base. [13]
But there was more to these sales than the simple desire of the
cronies of Ed Meese and Hillary Clinton to make a fast buck,
important as the latter motive may be. The sale was itself an
intelligence operation. As former Attorney General Elliot
Richardson noted, "One important motive for the theft of
Enhanced PROMIS may have been to use it as a means of
penetrating the intelligence and law enforcement agencies of
other governments. The first step in this scheme was the sale to
the foreign government of a computer into which had been
inserted a microchip capable of transmitting to a U.S.
surveillance system the electronic signals emitted by the
computer when in use. Enhanced PROMIS has capabilities that
make it ideally suited to tracking the activities of a spy network.
Several INSLAW informants formerly affiliated with United
States and Israeli intelligence agencies claim that both the
United States and Israel have relied on 'cutout' companies to
provide ongoing support for the PROMIS software" [14]. Of
course, what can be done with foreign intelligence computers
can also be done with banking computers, and at least one of
these "cutout companies" is a major provider of banking
software. [15]

The Gathering Storm

All of these efforts--the legal reporting mechanisms, the spying
by bankers, and the supplementary activities of organizations
like FinCEN, NSA and Interpol--fly in the face of a contrary
technological and social development: anonymous digital cash
made possible by advances in cryptology.
The principal opponents of any contemplated system of
encrypted digital cash are the money-laundering laws and the
Leviathan that feeds off them. The edicts against moneylaundering represent a broader attempt to make all financial
transactions transparent, while the aim of anonymous digital
cash is to keep financial activities private. People-monitoring
systems such as those utilizing PROMIS track individuals by
the electronic trails they leave throughout the financial system.
But anonymous digital cash is specifically designed to make

such tracks virtually invisible.

Money laundering, Barry A. K. Rider frankly offers as a
definition, "amounts to a process which obscures the origin of
money and its source" [16]. On that basis, the pursuit of
anonymity in financial transactions is money laundering.
At the beginning of the 90s, money laundering was an offense in
only four states of the (then) twelve members of the European
Union. Now all twelve have a law making it a crime. In a
scramble to justify continued large budgets, intelligence
organizations have hopped on the anti-money- laundering
bandwagon. The U.K. intelligence service MI5, in an attempt
"to justify its existence after reviewing its future in the light of a
probable reduction in counter-terrorist operations in Northern
Ireland," has been "pressing for a change in the law which
would see it involved in countering drug-trafficking, money
laundering, computer hacking, nuclear proliferation and animal
rights groups--a far cry, say police, from its original remit to
'protect national security' " [17]. Even accountants are getting in
on the act. The Institute of Chartered Accountants in Australia
has issued "a set of guidelines on money laundering, including a
recommendation that client confidentiality take second place to
public interest if an accountant suspects laundering is occurring"
So the coming battle over financial footprints is inevitable, and
perhaps inevitably bloody. But in the end it is the moneylaundering regulations that will have to go. Firstly, advances in
the technology of anonymity are putting financial privacy
within the reach of everyone. Secondly, there is a growing
awareness that the existing laundering statutes have little or no
effect on terrorism or drug dealing, but instead are related to an
upswing in government- sponsored harassment of targeted
political groups.

Electronic Finance 101

Many of the basic features of electronic cash-- variously
referred to as "ecash", "digital cash", "digital money", and so
on--may sound novel to those unfamiliar with the financial
markets. But much of the financial system is already on an
electronic basis, and has been so for years.
To see why, consider the foreign exchange market [19]. This is a
largely interbank market for trading the currency of one country
for the currency of another: dollars for pounds, dollars for yen,
and so on. But if I, as an interbank trader, sell U.S. dollars for
British pounds, what are the actual logistics of the transfer?
Consider the problems that would be imposed by a cash-based
market. The standard transaction size in the foreign exchange

market is an amount of currency equivalent to US $1 million. A

US $20 bill weighs about 1 gram. So, if transacted in cash, the
$1,000,000 (50,000 bills) would weight approximately 50
kilograms or 110 pounds. Imagine the cost involved in such a
transaction if in order to sell dollars for pounds I had to fill up a
suitcase with $20 bills, lug the 110-pound suitcase to a
Manhattan taxi, take a long ride to Kennedy Airport, fill out a
CMIR form and check my baggage, arrive at Heathrow seven
hours later, retrieve my baggage, go through customs, and catch
a cab to the appropriate British bank in central London. Once
there I would pick up the equivalent in pounds sterling and
reverse the whole process.
There's a problem with this scenario: transactions costs. Anyone
trying to change dollars into pounds will go to some other bank
where he doesn't have to pay for my plane tickets and cab fares,
not to mention my courier salary and that lunch I had at the
Savoy before I headed back to New York.
(In the present markets for cocaine and heroin it is hard to
reduce transactions costs, because the weight of the drugs is less
than the weight of the cash proceeds. In the early 80s, cash bills
were actually loaded into suitcases and moved around. To save
time and money, however, the cash wasn't counted. After a spot
check of bills for denomination and authenticity, the suitcases
were simply weighed to determined the total value. This
measurement was accurate to within a few dollars--close
enough. But foreign exchange trading isn't illegal and doesn't,
and can't, happen this way.)
To see how international money transfers really work, consider
the case of a Greek immigrant, who has opened a restaurant in
Boston, has made a little money, and wants to send some cash to
the folks back home. In earlier days he probably would have
gone down to the Western Union office and handed the
attendant cash to "wire" to his mother in Athens. The Western
Union office in Boston would put the cash in its safe, or perhaps
deposit it in a Boston bank, and would meanwhile send a
message to the Athens office: "Give so-and-so X dollars" (or,
more likely, "Y drachmas"). That is, the cash received was not
the same as the cash sent. All that was sent was a message. But
no one cared, because cash itself is fungible: the dollar that is
taken out is interchangeable with, but not the same as, the dollar
that was put in. The bills are also not registered: no particular
name is associated with any particular serial number.
In this example, bills were put into the safe at one end of the
transaction, and different bills were taken out at the other.
Consider now a slight modification to this scenario: Eurobond
trading. Eurobonds are generally placed in the depository
systems operated by Euroclear in Brussels or Cedel in
Luxembourg. Once bonds are in the vault, they generally stay

there, because of transactions costs. If a trader in Frankfurt sells

a GM eurobond with a coupon of 7 1/8 percent and maturing in
2012 to a trader in London, they both send messages to
Euroclear. Euroclear compares the two set of instructions,
checks the cash balance of the London trader, then switches the
computer label of ownership of the bond to the London trader,
and the ownership of the requisite cash to the Frankfurt trader.
Again, however, the bonds are not registered, and are fungible
within the parameters of a particular issue. There may be several
thousand GM eurobonds with a coupon of 7 1/8 percent and
maturing in 2012, and the London trader owns one of them, but
his ownership is not attached to a particular bond serial number.
This is pretty much the way the foreign exchange market works.
If a New York bank deals dollars for deutschemarks with a
London bank, they send each other confirmations through
SWIFT. Then the New York bank will turn over a dollar deposit
in New York to the London bank, while the London bank will
turn over a deutschemark deposit in Frankfurt to the New York
bank. The Frankfurt bank simply switches the name of the
owner of the deutschemarks from the London bank to the New
York bank. The New York bank now owns X-number of
fungible, unregistered (but completely traceable) deutschemarks
at the Frankfurt bank.
"I remember my shock when I learned that the fastest way for
two banks in Hong Kong to settle a dollar transaction was to
wire the money from Hong Kong to New York and back again,"
said Manhattan assistant district attorney John Moscow [21]. He
was shocked because he didn't understand how the process
works. The "wired" dollars were sitting in New York all along
as numbers in a bank computer, originally labeled as owned by
the first Hong Kong bank. After the transaction is completed,
they are still in the same place, but labeled as owned by the
second Hong Kong bank. There is nothing mysterious about this
at all.
Now let's modify the basic scenario again: Yankee bond trading.
Yankee bonds are dollar-denominated bonds issued by non-U.S.
citizens in the U.S. bond market. Yankee bonds are registered. If
you buy a bond, your name is attached to a particular bond with
a particular serial number. If someone steals the bond, he will
not be able to receive interest or principal, because his name is
not attached to the bond serial number. So when Yankee bonds
are traded, the seller's name is removed from the serial number
of the bond being sold, and the buyer's name is attached.
To this point we have talked about things that potentially exist
in physical form. I can take a bond out of the vault, or I can cash
in my electronic deutschemarks for printed bills. The final
modification to these various scenarios is to get rid of the

physical paper entirely. Such purely electronic creatures already

exist: U.S. Treasury bills- -short-term debt instruments issued
by the U.S. government. You buy, for example, a $10,000 T-bill
at a discount, and it pays $10,000 at maturity. But you don't see
printed T-bill certificates, because there aren't any. T-bills are
electronic entries in the books of the Federal Reserve System.
You can trade your T-bill to someone else by having the Fed
change the name of the owner, but you can't stuff one in your
pocket. You can "wire" your T-bill from one bank to another,
because the "wire" is just a message that tells the Federal
Reserve bank to switch the name of the owner from one
commercial bank to another.

Smart and Not-So-Smart Cards

In the previous section we saw that most of the financial system
is already on an electronic basis. And we understand that
"wiring" money doesn't at all correspond to the mental image of
stuffing bills down an electrical wire or phone line. To bring this
story closer to home, let's consider how most of us use a
computer and a modem on a daily basis to make financial
transactions. Even if we don't own a computer. Or a modem.
Let's talk about smart and dumb cards--ATM cards, credit cards,
phone cards, and much more.
Some "smart cards" have microprocessors and are actually
smart (and relatively expensive). They are really computers, but
missing a keyboard, video screen, and power supply. Others,
such as laser optical cards and magnetic stripe cards, are
chipless and only semi-smart.
Laser optical cards are popular in Japan, and can hold up to 4
megabytes of data--enough for your tax and medical files and
extensive genealogical information besides. The cards are a
sandwich, usually a highly reflective layer on top of a
nonreflective layer. A laser beam is used to punch holes through
the reflective layer, exposing the nonreflective layer underneath.
The presence or absence of holes represents bits of information.
A much weaker laser beam is then used to read the card data.
You can later mark a file of information as deleted, or turn it
into gibberish, but you can't reuse the area on the card.
Magnetic stripe cards, popular everywhere, doesn't hold much
information. An ATM card is one example. Data is recorded on
the magnetic stripe on the back of the card similar to the way an
audio tape is recorded. There are three tracks--the first of which
is reserved for airline ticketing [22]. This track holds up to 79
alphanumeric characters including your name and personal
account number (PAN). The ATM doesn't actually use the first
track for transactions, but it may read off your name, as when it
says, "Thank you, Joe Blowup, for allowing me to serve you."

The second track contains up to 40 numerical digits, of which

the first 19 are reserved for your PAN, which is followed by the
expiration date. The third track will hold 107 numerical digits,
starting again with your PAN, and perhaps information related
to your PIN (personal identification number, or "secret
password"), along with other information, all of which
potentially gets rewritten every time the track is used.
The ATM machine into which you insert your card is itself a
computer. The ATM typically has both hard and floppy drives, a
PC mother-board which contains the microprocessor, and a
power supply--as well as drawers for deposits, cash, and
swallowed cards. If the ATM is "on-line" (i.e. one that is
connected to a distant central bank computer, which makes all
the real decisions), then it also has a modem to communicate
over phone lines with the central computer. When you make a
request for cash, the ATM machine compares your password to
the one you entered. If they are the same, it then takes your
request and your PAN, encrypts (hopefully) the information, and
sends it on to the central computer. The central computer
decrypts the message, looks at your account information, and
sends an encrypted message back to the ATM, telling it to
dispense money, refuse the transaction, or eat your card.
In between the ATM and the authorizing bank is usually a
controller, which services several ATMs. The controller
monitors the transaction, and routes the message to the correct
authorization processor (bank computer). Some transactions, for
example, will involve banks in different ATM networks, and the
transaction will have to be transferred to a different network for
approval. The controller would also generally monitor the status
of the different physical devices in the ATM--to see that they are
operating properly and that the ATM is not being burglarized.
Consider some of the security problems in this framework. The
first duty of the local ATM is to verify you've entered the correct
PIN. A typical way of doing this is to recreate your PIN from
your card information and then to compare it to the one you
Here is a general example of how PINs are created (there are
many variations). The bank first chooses a secret 16-digit "PIN
key" (PKEY). This key will be stored in the ATM's hardware.
The PKEY is then used as a DES- encryption key to encrypt 16digits of your account number, which the ATM reads off your
card. The result of the encryption is a 16-digit hexadecimal
(base 16) number. Hexadecimal numbers uses the digits 0 to 9
and also the letters A to F (the latter standing for the decimal
numbers 10 to 15). Next a table is used to turn the 16-digit
hexadecimal number back into a 16-digit decimal number [23].
The first four numbers of the resulting 16-digit number are the
"natural PIN". (If you are allowed to choose your own PIN, a

four digit "offset" number is created, and stored on the third

track of your ATM card. This offset will be added to the natural
PIN before it is compared to the one you entered at the ATM
Since this comparison between the natural and entered PIN is
done locally in the ATM hardware, the customer's PIN is not
transmitted over phone lines. This makes the process relatively
more secure, assuming no one knows the PKEY. But if an evil
programmer knows the PKEY, he can create a valid PIN from
any customer's account number. (Customer account numbers
can be found by the hundreds on discarded transaction slips in
the trash bin.) He can easily and quickly loot the ATM of its
cash contents.
The security problems worsen when the ATM gets a "foreign"
card. A foreign card is essentially any card from any bank other
than the one that runs the ATM. The local ATM does not know
the PKEYs of these other banks, so the PIN which is entered at
the ATM must be passed on to a bank that can authorize the
transaction. In this process, the account number and PIN will be
encrypted with a communication key (COMKEY), and then
passed from the ATM to the ATM controller. Next the account
number and PIN will be decrypted at the controller, and then reencrypted with a network key (NETKEY) and sent on to the
proper bank.
Foreign PINs give the evil programmer three additional
possibilities for defeating security. The first way is to get hold of
the COMKEY. He then taps the line between the ATM and the
controller, and siphons off account number/PIN pairs. A second
possibility is to get access to the controller, because the account
number/PIN pairs may be temporarily in the clear between
encryptions. The third possibility is to obtain the NETKEY, and
tap the line between the controller and the foreign network. [24]
The COMKEY and NETKEY are generally transmitted over
phone lines, so the chances of acquiring them are pretty good.
These two encryption keys are themselves usually transmitted in
an encrypted form, but the keys used to encrypt them are
sometimes sent in the clear. Thus while banks are generally
somewhat careful with their own customers, they are often quite
helpful in giving rip-off artists access to the customers of other
banks. The evil programmer simply reads off the encryption
keys, uses them to decrypt the COMKEY and NETKEY, which
are in turn used to decrypt account numbers and PINs.
The way to solve these security problems is to use smart cards
and public key cryptography. Banks can transmit their public
keys in the open without worrying about evil wire-tapping
programmers. Customer messages encrypted with a bank's
public key can only be decrypted with the bank's private (secret)

key. Digital cash issued by the bank can be signed with the
bank's private key, and anyone will be able to check that the
cash is authentic by using the bank's public key. In addition, the
bank will not be able to repudiate cash signed in this way,
because only the bank had access to its own secret key.
Communications between ATM machines and bank computers
can also take place with randomly-generated encryption keys
that can be determined by each of the two parties, but which
cannot be discovered by someone who listens in on both sides
of the traffic. [25]

Are Smart Cards the Mark of the

Besides optical and magnetic stripe cards, there are two types of
"chip" cards. Chip cards are basically any cards with electronic
circuits embedded in the plastic. One type of chip card, called a
memory (or "wired logic") card, doesn't have a microprocessor
and isn't any smarter than the cards we discussed previously.
Prepaid phone cards are of this type. They may have about 1K
of memory, and can execute a set of instructions, but can't be
Then there are the truly smart cards that have a microprocessor
and several kilobytes of rewritable memory. Smart cards allow
for greatly increased security, since access to their data is
controlled by the internal microprocessor. And there can be
built-in encryption algorithms. This versatility has made smart
cards controversial.
The negative reputation arises from certain cases where smart
cards were imposed by force, as well as from smart-card storage
of biometric data. The use of smart cards became a prerequisite
for Marines to receive paychecks at Parris Island, S.C. Fingerprint based smart-card ID systems were implemented by the Los
Angeles Department of Public Social Services and the U.S.
Immigration and Naturalization Service. The "Childhood
Immunization" bill, introduced by Sen. Ted Kennedy (D-MA),
would have tracked vaccination of all children under six years
of age, together with at least one parent, across geographical
areas through smart cards Access control at the U.S. Department
of Energy Hanford Site requires smart card badges which store
the cardholder's hand geometry. Security access through retinal
scan patterns stored in smart card memory have been tested at
the Sandia National Laboratory.
Visa recently announced plans for creating an "electronic
purse." The purse would be a reloadable spending card. You
would charge the card up at an ATM machine, where it would
suck some cash value out of your account, and store it in
memory. You would then use the card instead of cash to make

small purchases. Visa is attracted by the estimate that consumer

cash transactions in the U.S. are about five times the size of
bank-assisted transactions (those that use checks, credit cards,
and debit cards). Visa has been joined in this endeavor by a
consortium that includes VeriFone, the leading supplier of pointof-sale transaction systems, and Gemplus, the leading
manufacturer of smart cards.
There may be increased security in the use of an electronic
purse, but it is not clear how replenishing one's card balance at
an ATM is any more convenient for the user than getting cash at
an ATM. Since Visa is not advertising the privacy aspects of
electronic purse payments, one must assume this feature was
omitted in the planning. Hence a cynic could conclude that the
"electronic purse" is little more than a Rube Goldberg device
which, by substituting for cash, will create a better set of
PROMIS-type transaction records.
These and other examples suggest possible uses of smart cards
for more general surveillance and social control. The truly
paranoid envision the use of a single smart card for every
financial transaction, medical visit, and telephone call. This
information would be sent directly to a common PROMIS-like
data base, which would constitute a record of all your activities.
In addition, "your card could be programmed to transmit its
identification code whenever you use it. So you (or your card,
anyway) could be instantly located anywhere on earth via the
satellite-based Global Positioning System" [26].
But smart cards don't have to be used this way. Recall that
mainframe computers once appeared destined to turn the
average citizen into Organization Man, a creature to be folded,
spindled and mutilated in lieu of IBM's punched cards. The
advent of the personal computer, however, showed the same
technology could be a tool of individual freedom and creativity.
There is nothing intrinsically evil in storing a great deal of
information about ourselves, our finances, and our current and
future plans. That is, after all, exactly why some of us carry
around portable computers. But in this case the use of the
computer is voluntary, and we ourselves control both access to,
and the content of, the information. The same principle applies
to smart cards. It is smart cards more than any other aspect of
banking technology, I believe, that will allow for financial
privacy through cryptology, for anonymous and secure digital
cash transactions. It's simply a matter of taking control of the
technology and using it to enhance personal freedom.

Electronic Cash the Way It Ought To Be

Suppose we had it our way. Suppose we sat down to create

digital cash that had all the right properties. What would these
be? Think of the attractive properties of currency--physical
cash. [27]
1) Physical cash is a portable medium of exchange.
You carry it in your pocket to give to people when
you make purchases. The digital equivalent of this
process could be provided by smart cards, which
would have the mobility of physical cash and even
improve on it. The weight of $1,000,000 in digital
money is the same as the weight of $1.
2) You would want the ability to make digital cash
payments off-line, just like you can with physical
cash. A communication link between every store
you shop at and your bank's authorization computer
shouldn't be required. Moreover, if digital cash is to
have all the desirable qualities of physical cash, you
should be able to transfer digital cash directly to
another smart-card-carrying individual. Smart cards
that could connect directly to other smart cards
would be ideal in this respect, and would represent
an improvement over physical cash. Even if
everyone observed two smart cards communicating,
they would have no way of knowing whether the
transaction involved $5 or $50,000. There would be
no need to slide money under the table.
3) Digital cash should be independent of physical
location--available everywhere and capable of being
telecommunication channels. So we want a smart
card that can jack into the communication nodes of
the global information network. One should be able
to pop into a phone booth to make or receive
4) Got change for a dollar for the quarter slots in the
pool table? Just as we "make change" or divide
physical currency into subunits, so should electronic
cash be divisible. Is this a problem? Hmm.
Electronic calculators can perform an operation
know as division, and so can third-graders. So smart
cards ought to be able to handle this also, even if it
presents a few difficulties for theoretical cryptology.
5) To be secure against crooks and rip-off artists,
digital cash should be designed in such a way that it
can't be forged or reused. We wouldn't want people
spending the same money twice, or acting as their
own mini-Federal Reserve Systems and creating
money from nothing. This cryptological problem is

different between on-line and off- line cash systems.

In on-line systems the bank simply checks whether a
piece of cash has been spent before.
Proposed off-line systems rely on a framework
developed by David Chaum. Chaum has been the
preeminent cryptological researcher in the field of
digital cash [28]. In his framework for off-line
systems, one can double-spend the same piece of
digital cash only by losing one's anonymity. This has
considerable value, because the bank or the person
defrauded, knowing the identity of the devious
double- spender, can send out a collection agent.
But I consider this way of enforcing the "no doublespending" rule a serious flaw in Chaum's
framework. Catching thieves and rip-off artists is
not the comparative advantage of either banks or the
average citizen. (Banks are usually only good at
providing transactions services, and charging
interest and fees.) Would you really want to see, say,
The First Subterranean Bank of Anonymous Digital
Cash merge with the Wackenhut Corporation?
Luckily, however, there are alternative approaches
that will prevent double-spending from ever taking
place [29].
6) The most important requirement for individual
freedom and privacy is that digital cash transactions
should be untraceable, yet at the same time enable
you to prove unequivocally whether you made a
particular payment. Untraceable transactions would
make impossible a PROMIS- type data sorting of all
your financial activities. In Joe Blowup's financial
chronology, discussed previously, you wouldn't be
able to connect Joe Blowup's name to any of his
purchases. Similarly, no one would know about the
money you wired to Lichtenstein, your purchase of
Scientology e- meters and the banned works of
Maimonides, or your frequent visits to the Mustang
Ranch. Privacy-protected off- line cash systems can
be made nearly as efficient as similar systems that
don't offer privacy.

Parallel Money Systems

To set up a digital cash service meeting these requirements, you
would need to buy the rights to use patents held by David
Chaum and RSA, or equivalent rights, and then set up a bank to
issue accounts and smart cards in a legal jurisdiction where the
service won't run foul of the local banking and money-

laundering laws. Of course, in many other countries the moneylaundering statutes will be quickly amended in an attempt to
apply the same reporting requirements to anonymous digital
cash transactions as currently apply to currency transactions.
Such laws will probably generate little compliance. [30] Since
the transactions in question are unconditionally untraceable,
there won't be any evidence of wrong-doing.
The system of anonymous digital cash will arise as a parallel
system to the existing one of ordinary money. Therefore there
will be a record of the initial entry into the anonymous system.
For example, you might write a $10,000 check drawn on
Citibank to The First Subterranean Bank of Anonymous Digital
Cash. This check will be recorded, but no subsequent
transactions will be traceable, unless you make transfers back
out into the ordinary banking world. Over time, as more people
begin to use the anonymous cash system, some wages will be
paid in anonymous digital cash. This will enable all income
transactions, as well as expenditures, to take place entirely
outside the ordinary monetary system.
Since the anonymous cash system will exist parallel to the
existing system, a floating exchange rate will be created by
market transactions between ordinary money and anonymous
money. Think, by analogy, of a currency board. Such a board
issues domestic currency through the purchase of foreign "hard"
currencies. In the same way, anonymous digital cash will be
issued through the purchase of ordinary cash or bank deposits.
That is, when you make a deposit at The First Subterranean
Bank of Anonymous Digital Cash, First Subterranean will issue
you an anonymous digital cash account, and will in turn acquire
ownership of the ordinary money. The exchange ratio will not
necessarily be one-for- one. Anonymous digital cash that does
not meet some of the ease-of-use requirements listed previously
may exchange for less than 1 ordinary dollar. On the other hand,
digital cash that meets all those requirements will trade at a
premium, because anonymous digital cash has enhanced privacy
aspects. Money launderers, for example, currently get about 20
percent of the value of money that is made anonymous. That
represents an exchange rate of 1.25 "dirty" dollars for one
"clean" dollar. The market will similarly determine the
exchange ratio between ordinary and anonymous digital money.
In the 1960s various tax and regulatory burdens, and political
risk considerations, gave rise to a new international money
market, the eurodollar market, which was created specifically to
get around these regulatory and political road- blocks [31].
When a junior staff member of the Council of Economic
Advisors named Hendrik Houthakker discovered the eurodollar
market's existence, he thought it was an important development,
and recommended that some discussion of it be included in the
annual Economic Report of the President. "No, we don't want to

draw attention to it," he was told. When Houthakker himself

later became a member of the Council under Nixon, he made
sure the Report included a discussion of the euromarkets. But it
was only much later, in the mid-70s, that the Report said, in a
burst of honesty: "The emergence and growth of the Eurodollar
market may be viewed as a classic example of free market
forces at work, overcoming obstacles created by regulations,
and responding to market incentives to accommodate various
needs" [32].
In a similar way it will be said in some future Report, that "the
emergence and growth of anonymous digital cash may be
viewed as a classic example of free market forces at work,
overcoming obstacles created by surveillance technologies and
money-laundering regulations, and responding to market
incentives to accommodate the public's need for financial

Go to Part I of this article.

[1] Quoted in Money Laundering Bulletin, January 1995, p. 3.
[2] Some may view this as a trade secret of the Church of the
Subgenius, so let me cite two sources of publicly available
information. Firstly, I heard it in a sermon by David Meyer,
Pope of All New York, at the Kennel Club in Philadelphia in the
fall of 1985. Secondly, it is similarly proclaimed in Subgenius
Recruitment Tape #16, which may be rented from Kim's Video
in the East Village of Manhattan.
[3] Bryan Burrough, Vendetta: American Express and the
Smearing of Edmond Safra, HarperCollins, New York, 1992.
[4] Sec. 1517 (c) states: "Any financial institution that makes a
disclosure of any possible violation of law or regulation or a
disclosure pursuant to this subsection or any other authority, and
any director, officer, employee, or agent of such institution, shall
not be liable to any person under any law or regulation of the
United States or any constitution, law, or regulation of any State
or political subdivision thereof, for such disclosure or for any
failure to notify the person involved in the transaction or any
other person of such disclosure."
[5] "A completely cashless economy where all transactions
were registered would create enormous problems for the money
launderers" (emphasis added), Report of the Financial Action

Task Force on Money Laundering, Paris, February 7, 1990.

[6] Kirk W. Munroe, "Money Laundering: the Latest Darling of
the Prosecutor's Nursery," law firm of Richey, Munroe &
Rodriguez, P.A., Miami, FL, 1994.
[7] President's Commission on Organized Crime, The Cash
Connection: Organized Crime, Financial Institutions, and
Money Laundering, U.S. Government Printing Office, October
1984. This definition is certainly more coherent than Michael
Sindona's circular statement that "laundering money is to switch
the black money or dirty money . . . to clean money."
The U.S. definition of money laundering is found in 18 U.S.C.
1956, which was enacted in 1986, and strengthened in 1988,
1990, and 1992. It sets out three categories of offenses:
transaction offenses, transportation offenses, and "sting"
Transaction Offenses: It is a money laundering transaction
crime for any person to conduct, or to attempt to conduct, a
financial transaction which, in fact, involves the proceeds of
specified unlawful activity, knowing that the property involved
in the transaction represents the proceeds of some crime, and,
while engaging in the transaction, with either a) the intent to
promote the carrying on of the specified unlawful activity, or b)
the intent to commit certain tax crimes, or with the knowledge
that the transaction is designed at least in part a) to conceal or
disguise the nature, location, source, ownership, or control of
the proceeds, or b) to avoid a cash reporting requirement.
Transportation Offenses: It is a money laundering transportation
crime for any person to transport, transmit or transfer, or to
attempt to transport, transmit or transfer, a monetary instrument
or funds into or out of the U.S., and, while engaging in the act,
with either a) the intent to promote the carrying on of specified
unlawful activity, or b) the knowledge the monetary instrument
or funds represent the proceeds of some crime, and the
knowledge that the transportation, etc., is designed, at least in
part, (i) to conceal or disguise the nature, location, source,
ownership, or control of the proceeds, or (ii) to avoid a cash
reporting requirement.
"Sting" Offenses: It is a money laundering crime for any person
to conduct, or to attempt to conduct, a financial transaction
which involves property represented to be the proceeds of
specified unlawful activity, or property used to conduct or to
facilitate specified unlawful activity, said representation being
made by a law enforcement officer or by another person at the
direction of, or with the approval of, a federal officer authorized
to investigate or to prosecute Section 1956 crimes, and, while
engaging in the transaction, with the intent to a) promote the

carrying on of specified unlawful activity, or b) conceal or

disguise the nature, location, source, ownership, or control of
the property believed to be the proceeds of specified unlawful
activity, or c) avoid a cash reporting requirement.
[8] See Samuel J. Rabin, Jr., "A Survey of the Statute and Case
Law Pertaining to 26 U.S.C. 60501 (Forms 8300)," in Money
Laundering, Asset Forfeiture and International Financial
Crimes, by Fletcher N. Baldwin, Jr., and Robert J. Munro, 3
vols., Oceana Publications, New York, 1994.
[9] Section 4702 of P.L. 100-690.
[10] 31 C.F.R. 103.11(p) (1991).
[11] "The means should, in fact, include access by Interpol to
the telecommunications system SWIFT . . .," Draft Explanatory
Report on the Convention on Laundering, Search, Seizure and
Confiscation of the Proceeds from Crime," September 8, 1990.
[12] Money Laundering Bulletin, March 1995, p. 3.
[13] U.S. Congress, Committee on the Judiciary, The Inslaw
Affair, House Report 102-857, September 10, 1992.
[14] Memorandum to Judge Nicholas Bua from Elliot
Richardson, p. 34. The NSA, naturally, is not acknowledging the
existence of such a chip, much less providing technical
information. But in order to avoid detection of the chip's
transmission signal by the organization being spied upon, the
chip would be designed so its broadcast would be masked by the
general--or some characteristic--electronic noise of the
computer. This could imply a low-probability-of-interception
digital spread spectrum (SS) communication system with a
broad bandwidth, perhaps with a transmission frequency in the
range of 1 to 10 gigahertz. As a related example of this
technique, a "low level wideband SS signal, can easily be
hidden within the same spectrum as a high power television
signal where each signal appears to be noise to the other"
("Spread Spectrum Techniques," in Geoff Lewis, Newnes
Communications Technology Handbook, Oxford, 1994). The
broadcast power requirements of such a chip would not be large,
but rather similar to a walkie- talkie's. The information
broadcast by the chip could then either be monitored locally and
re-transmitted to satellite, or transmitted directly to a
geosynchronous signals-collection satellite such as Magnum.
The Magnum and other U.S. spy satellites are operated by the
Air Force on behalf of the National Reconnaissance Office,
while NSA does the signal processing. (I am grateful to John
Pike, Director of Space Policy & CyberStrategy Projects,
Federation of American Scientists, for advice on the information
in this footnote. He is not responsible for any errors or the

specific content of any statement.)

[15] I have in mind an NSA operation. But after Part I of The
End of Ordinary Money was circulated, the CIA approached my
own former company (which sells banking software) and
proposed that it provide cover for their agents to enter foreign
banks. The CIA also separately offered to pay $100,000 for the
customer list of a particular bank among the Swiss big four.
[16] Barry A. K. Rider, "Fei Ch'ien Laundries--the Pursuit of
Flying Money," in Money Laundering, Asset Forfeiture and
International Financial Crimes.
[17] Money Laundering Bulletin, April 1995, p. 2.
[18] Ibid, p. 4.
[19] Details of the foreign exchange, eurocurrency, and
eurobond markets are covered at length in J. Orlin Grabbe,
International Financial Markets, 3rd edition, Simon & Schuster,
New York, 1995.
[20] Eurobonds are bearer bonds. So if you have the bond in
your pocket, you own it, in the same way you own the dollar in
your pocket. The same goes for interest coupons--they are to be
paid to bearer. Most eurobond-issuing companies pay interest to
Euroclear, which distributes the payments to the owners of the
bonds stored in its depository vaults. But the companies are
afraid that if the bonds are stolen, they will have to pay the same
coupons again. Hence they insist coupons be clipped and
destroyed as they are paid. When I visited Morgan Guaranty
(which operates Euroclear) in Brussels in 1982, there were 20
employees whose full-time job was clipping coupons.
[21] John W. Moscow, "The Collapse of BCCI," in Money
Laundering, Asset Forfeiture and International Financial
[22] Details of the card size, layout, coding, and recording are
laid out in ISO standards 7810 to 7813. The first track is
sometimes called the International Air Transport Association
(IATA) track, the second the American Bankers Association
(ABA) track, and the third the Mutual Institutions National
Transfer System (MINTS) track.
[23] This may be as simple as assigning the numbers 0 to 5 to
the letters A to F. If this assignment is made, the probability is
three-fourths that a digit in the resulting decimal number is one
of 0 to 5, while there is only one- fourth probability that a digit
is 6 to 9.
[24] Computer logs are often kept for each part of a transaction.

So the evil programmer doesn't have to tap lines if he can get

hold of the logs instead.
[25] Public key encryption is implemented in the Datakey smart
card of the National Institute of Standards and Technology. This
card uses the Hitachi H8/310 processor. Atmel and Phillips
chips also include public-key encryption hardware, and allow
algorithms to be implemented by the card's application designer.
Smart and other chip card standards are laid out in ISO 7816.
(More on smart cards can be found in Jose Luis Zoreda and Jose
Manuel Oton, Smart Cards, Artech House, Boston, 1994.) The
recent ANSI X9F standards include those for using public key
systems to secure financial transactions. The communication
link would involve two-way authentication using DiffieHellman key exchange.
[26] Clark Matthews, "Tomorrow's 'Smart Cards': Technical
Marvels That Give Government Fearful Power," reprinted from
The Spotlight, undated.
[27] Some of the following points were broached in a different
way by T. Okamoto and K. Ohta, "Universal Electronic Cash,"
Advances in Cryptology--Crypto 91, Springer-Verlag, Berlin,
[28] See David Chaum, "Achieving Electronic Privacy,"
Scientific American, August 1992, pp. 96-101; "Blind
Signatures for Untraceable Payments," Advances in
Cryptology-- Crypto 82, D. Chaum, R.L. Rivest, & A.T.
Sherman (Eds.), Plenum, pp. 199-203; "Online Cash Checks,"
Advances in Cryptology--Eurocrypt 89, J.J. Quisquater & J.
Vandewalle (Eds.), Springer-Verlag, pp. 288-293; "Efficient
Offline Electronic Checks," with B. den Boer, E. van Heyst, S.
Mjxlsnes, & A. Steenbeek, Advances in Cryptology--Eurocrypt
89, J.-J. Quisquater & J. Vandewalle (Eds.), Springer-Verlag, pp.
294-301; "Cryptographically Strong Undeniable Signatures,
Unconditionally Secure for the Signer" with E. van Heijst & B.
Pfitzmann, Advances in Cryptology--Crypto 91, J. Feigenbaum
(Ed.), Springer-Verlag, pp. 470-484; "Numbers Can Be a Better
Form of Cash than Paper," Smart Card 2000, D. Chaum (Ed.),
North Holland, 1991, pp. 151-156; "Privacy Protected
Payments: Unconditional Payer and/or Payee Untraceability,"
Smart Card 2000, D. Chaum & I. Schaumuller-Bichl (Eds.),
North Holland, 1989, pp. 69-93; "Security Without
Identification: Transaction Systems to Make Big Brother
Obsolete," Communications of the ACM, vol. 28 no. 10,
October 1985, pp. 1030-1044; "Smart Cash: A Practical
Electronic Payment System," J. Bos & D. Chaum, CWI-Report
CS-R9035, August 1990; "Untraceable Electronic Cash," with
A. Fiat, & M. Naor, Advances in Cryptology--Crypto '88, S.
Goldwasser (Ed.), Springer- Verlag, pp. 319-327.

[29] "[P]rior restraint of double-spending can be achieved by

using a tamper-resistant computing device that is capable of
merely performing a signature scheme of the Fiat-Shamir type
(of one's own choice), such as the Schnorr signature scheme"
(Stefan Brands, "Highly Efficient Electronic Cash Systems,"
March 17, 1994.)
[30] I highly recommend Henry David Thoreau's essay Civil
Disobedience. .
[31] These included the interest ceilings set by the Federal
Reserve's Regulation Q, Kennedy's Interest Equalization Tax,
and the Foreign Credit Restraint Program. See International
Financial Markets, Chapter 1.
[32] Economic Report of the President, 1975.
Go to Part I of this article.

First posted to the Internet May 1995.

Web Page: http://orlingrabbe.com/