Testimony of William A. Reinsch
Under Secretary for Export Administration
Department of Commerce
Security and Freedom Through Encryption Act -- H.R. 850
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 before this
Committee on this subject.
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 digital media are becoming increasingly important to the conduct of
international business. There were 43.2 million Internet hosts worldwide last January compared to
only 5.8 million in January 1995. One of the many uses of the Internet which will have a
significant effect 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. To cite one example, travel booked on Microsoft's Website has doubled
every year since 1997, going from 500,000 to an estimated 2.2 million this year. 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
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
digital 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 is 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 plans for recovery encryption products we received
from more than sixty companies showed that a number of different technical approaches to
recovery 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 US 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 which have effective
anti-money laundering laws. This regulation also allows exports, under a license exception, of
encryption products that are specially designed for financial transactions. This policy recognizes
the need to secure and safeguard our financial networks, and that the banking and financial
communities have a history of cooperation with government authorities when information is
required to combat financial and other crimes.
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. For more than a year, 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 continued 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
The update reduced controls on exports of 56-bit products and, for certain industry sectors, on
exports of products of unlimited bit length, whether or not they contain recovery features. In
developing our policy we identified key sectors that can form the basis of a secure infrastructure
for communicating and storing information: banks, a broad range of financial institutions,
insurance companies, on-line merchants, and health facilities. Many of the updates permit the
export of encryption to these end-users under a license exception. That is, after the product
receives a technical review, it can be exported by manufacturers, resellers and distributors without
the need for a license or other additional review. Specifically, the new policy allows for:
exports of 56-bit software and most hardware 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
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
"Doorbell" products developed by a number of companies, can now be approved under a
kind of bulk license called an "encryption licensing arrangement" to recipients in located in
46 countries. Such products include systems that are managed by a network or corporate
I would note that these provisions apply to exports of 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 acting pursuant to strict legal 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. Established in 1996 as the successor to
COCOM, it is a multilateral 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. Wassenaar provides the basis for many of our export controls.
In December, through the hard work of Ambassador David 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 multilateral 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
Wassenaar's General Software Note and replace it with a new cryptography note. Drafted in
1991, when banks, government and militaries were the primary users of encryption, the General
Software Note allowed countries to permit the export of mass market encryption software
without restriction. The GSN was created to release general purpose software used on personal
computers, but it inadvertently encouraged some signatory countries to permit the unrestricted
export of encryption software. 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 result in government review of the dissemination of
mass market software of up to 64 bits.
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, as does the policy of most other Wassenaar members. 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
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 does not seek 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
might have the effect of precluding 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.
The Administration does not seek encryption export control legislation, nor do we believe such
legislation is needed. The current regulatory structure provides for balanced oversight of export
controls and the flexibility needed so that it can continue to promote our economic, foreign policy
and national security interests while adjusting to advances in technology. This is the best
approach to an encryption policy that promotes secure electronic commerce, maintains U.S. lead
in information technology, protects privacy, and protects public safety and national security
As this Committee knows better than most, public debate over encryption policy has been
spirited. Many in the debate have had difficulty grasping different 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, which is clearly
the best way to pursue our policy objectives of balancing public safety, national security, and the
competitive interests of US companies.