Thank you, Mr Chairman, for the opportunity to testify on the direction of the Administration's encryption policy. We have made a great deal of progress since my last testimony on this subject in September 1997.
Even so, encryption remains a hotly debated issue. The Administration continues to support a balanced approach which considers privacy and commerce as well as protecting important law enforcement and national security equities. We have been consulting closely with industry and its customers to develop a policy that provides that balance in a way that also reflects the evolving realities of the market place.
The Internet and other electronic media are becoming increasingly important to the conduct of international business. One of the many uses of the Internet which will have a significant affect on our everyday lives is electronic commerce. According to a recent study, the value of e-commerce transactions in 1996 was $12 million. The projected value of e-commerce in 2000 is $2.16 billion. Many service industries which traditionally required face to face interaction such as banks, financial institutions, and retail merchants are now providing cyber service. Customers can now sit at their home computers and access their banking and investment accounts or buy a winter jacket with a few strokes of their keyboard.
Furthermore, most businesses maintain their records and other proprietary information, such as health records or sales strategies, electronically. They now conduct many of their day-to-day communications and business transactions via the Internet and E-mail. An inevitable byproduct of this growth of electronic commerce is the need for strong encryption to provide the necessary secure infrastructure for electronic communications, transactions and networks. The disturbing increase in computer crime and electronic espionage has made people and businesses wary of posting their private and company proprietary information on electronic networks if they believe the infrastructure may not be secure. A robust secure infrastructure can help allay these fears, and allow electronic commerce to continue its explosive growth.
Developing a new encryption policy has been complicated because we do not want to hinder its legitimate use -- particularly for electronic commerce; yet at the same time we want to protect our vital national security, foreign policy and law enforcement interests. We have concluded that the best way to accomplish this was to continue a balanced approach: to promote the development of strong encryption products that would allow lawful government access to plaintext under carefully defined circumstances; to promote the legitimate uses of strong encryption to protect confidentiality; and continue looking for additional ways to protect important law enforcement and national security interests.
During the past three years, we have learned that there are many ways to assist in lawful access. There is no one-size-fits-all solution. The recovery encryption plans we received showed that different technical approaches to recovery of plaintext exist. In licensing exports of encryption products under individual licenses, we also learned that, while some products may not meet the strict technical criteria of our regulations, they are nevertheless consistent with our policy goals.
Additionally, we learned that the use of strong non-recovery encryption within certain trusted industry sectors is an important component of our policy in order to protect private consumer information and allow our U.S. high tech industry to maintain its lead in the information security market while minimizing risk to national security and law enforcement equities.
Taking into account all that we have learned and reviewing international market trends and realities, in 1998 we made several changes to our encryption policy that I will summarize for you.
On September 22, 1998, we published a regulation implementing our decision to allow the export, under a license exception, of unlimited strength encryption to banks and financial institutions located in countries that are members of the Financial Action Task Force or have effective anti-money laundering laws. The regulation also allows exports, under a license exception, of encryption products that are specially designed for financial transactions. This new policy recognizes the fact that we need to secure and safeguard our financial networks, and the banking and financial communities cooperate with government authorities when information is required to combat financial and other crimes. The direct result of this policy change is that over 100 of the world's largest banks and almost 70% of the international financial institution market is now eligible for strong American-made encryption.
As I mentioned earlier, we have been looking for ways to make our policy consistent with both market realities and national security and law enforcement concerns. Since last March, the Administration has been engaged in a dialogue with U.S. industry, law enforcement, and privacy groups on how our policy might be improved to find technical solutions, in addition to key recovery, that can assist law enforcement in its efforts to combat crime. At the same time, we wanted to find ways to assure U.S. technology leadership, promote secure electronic commerce, and protect important privacy concerns. The purpose of this dialogue was to find cooperative solutions that could assist law enforcement, while protecting national security, plus assuring continued U.S. technology leadership and promoting the privacy and security of U.S. firms and citizens in electronic commerce. We believed then and now that the best way to make progress on this issue is through a constructive cooperative dialogue, rather than seeking legislative solutions. Through our dialogue, there has been increased understanding among the parties. And we have made progress.
The result of this dialogue was an update to our encryption policy which Vice President Gore unveiled last September 16. The regulations implementing the update were published on December 31. This will not end the debate over encryption controls, but we believe the regulation addresses some private sector concerns by opening large markets and further streamlining exports.
The policy update liberalizes controls on 56-bit products and on products of unlimited bit length, whether or not they contain recovery features, to certain industry sectors. Many of the new reforms permit the export of encryption to certain end-users under a license exception. That is, after the product receives a one-time review, it can be exported by the manufacturer, resellers and distributors without the need for a license or other additional review. In developing our policy we identified the key sectors that will form the basis of creating a reliable secure infrastructure for communicating and storing critical personal information: banks, financial institutions, insurance companies, on-line merchants, and health facilities.
Specifically, the new policy allows for:
the export of 56-bit hardware and software worldwide to any end user under a license exception;
exports of strong encryption, including technology, to U.S. companies and their subsidiaries under a license exception
to protect important business proprietary information;exports of strong encryption to the insurance and medical/health sectors in 46 countries under a license exception for use in securing proprietary medical and health information;
exports of strong encryption to secure on-line transactions between on-line merchants and their customers in 46 countries under a license exception.
"recovery capable" or "recoverable encryption products of any key length, such as the so-called "doorbell" products, can now be approved under a kind of bulk license called an "encryption licensing arrangement" to recipients in 46 countries.
Examples of such products are systems that are managed by a network or corporate security administrator.I would note that these provisions apply to products with or without key recovery features. One of the aspects of our policy update is to permit exports of strong encryption with or without key recovery to protect electronic commerce while also minimizing the risk to national security and law enforcement. For example, in some cases we have limited our approval policy to a list of countries or a set of end users, rather than permit exports on a global basis, to help protect national security interests.
We have also expanded our policy to encourage the marketing of a wider variety of "recoverable" products that may not be key recovery in a narrow sense but which may be helpful to law enforcement pursuant to strict authorities. Again, these are typically systems managed by a network or corporate administrator. We also further streamlined exports of key recovery products by no longer requiring a review of foreign key recovery agents and no longer requiring companies to submit business plans.
This past year, we also made progress on developing a common international approach to encryption controls through the Wassenaar Arrangement, which was established in 1996 as the successor to COCOM. It is an international export control arrangement among 33 countries whose purpose is to prevent destabilizing accumulations of arms and civilian items with military uses in countries or regions of concern. It is the multilateral basis for many of our export controls.
In December, through the hard work of Ambassador Aaron, the President's special envoy on encryption, the Wassenaar Arrangement members agreed on several changes relating to encryption controls. These changes go a long way toward increasing international security and public safety by providing countries with a stronger regulatory framework for managing the spread of robust encryption.
Specific changes to multilateral encryption controls include removing controls on all encryption products at or below 56 bit and certain consumer items regardless of key length, such as entertainment TV systems, DVD products, and on cordless telephone systems designed for home or office use.
Most importantly, the Wassenaar members agreed to remove encryption software from the General Software Note and replace it with a new cryptography note. First drafted in 1991, the General Software Note allowed countries to export mass market encryption software without restriction. It was essential to modernize the GSN and close the loophole that permitted the uncontrolled export of encryption with unlimited key length. Under the new cryptography note, mass market hardware has been added and a 64-bit key length or below has been set as an appropriate threshold. This will enable governments to review the dissemination of 64-bit and above encryption.
I want to be clear that this does not mean encryption products of more than 64 bits cannot be exported. Our own policy permits that. It does mean, however, that such exports must be reviewed by governments consistent with their national export control procedures.
Export control policies without a multilateral approach have little chance of success. Agreement, by the Wassenaar members, to close the loophole for mass market encryption products is a strong indication that other countries are beginning to share our public safety and national security concerns. Contrary to what many people thought two years ago, we have found that most major encryption producing countries are interested in developing a harmonized international approach to encryption controls.
At the same time, we recognize that this is an evolutionary process, and we intend to continue our dialogue with industry. Our policy should continue to adapt to technology and market changes. We will review our policy again this year with a view toward making further changes. An important component of our review is input from industry, which we are receiving through our continuing dialogue.
With respect to H.R.850, the Administration opposes this legislation as we did its predecessor in the last Congress. The bill proposes export liberalization far beyond what the Administration can entertain and which would be contrary to our international export control obligations. Despite some cosmetic changes the authors have made, the bill in letter and spirit would destroy the balance we have worked so hard to achieve and would jeopardize our law enforcement and national security interests. I defer to other witnesses to describe the impact of the bill on their equities, but let me describe two of its other problems
First, I want to reiterate that this Administration is not seeking controls or restraints on domestic manufacture or use of encryption. We continue to believe the best way to make progress on ways to assist law enforcement is through a constructive dialogue. As a result, we see no need for the statutory prohibitions contained in the bill.
Second, once again we must take exception to the bill's export control provisions. In particular, the references to IEEPA as I understand them would preclude controls under current circumstances and in any future situation where the EAA had expired, and the definition of general availability, as in the past, would preclude export controls over most software.
In addition, whether intended or not, we believe the bill as drafted could inhibit the development of key recovery even as a viable commercial option for those corporations and end users that want it in order to guarantee access to their data. The Administration has repeatedly stated that it does not support mandatory key recovery, but we endorse and encourage development of voluntary key recovery systems, and, based on industry input, we see growing demand for them, especially corporate key recovery, that we do not want to cut off.
As this Committee knows better than most, public debate over encryption policy has been spirited. Many on both sides of the debate have had difficulty grasping their counterparts' views or realizing that there is a middle ground. Our dialogue with industry has gone a long way toward bridging that gap and finding common ground. We will continue this policy of cooperative exchange as it is clearly the best way to pursue our policy objectives of balancing public safety, national security, and the competitive interests of U.S. companies.