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Study: Crypto loss to hit $35 billion

The U.S. economy could miss out on $35 billion over the next five years because of export restrictions on strong encryption, a new study says.

The U.S. economy could miss out on $35 billion over the next five years if the Clinton administration continues to enforce export restrictions on strong encryption, according to a study by the Economic Strategy Institute.

Backing ongoing complaints from the software industry and privacy advocates, the Washington policy group is pushing the administration to drop its regulations--or risk bilking the country of billions in future earnings.

Encryption, which secures digital messages or files by rendering them unreadable if intercepted, has been the center of an international struggle between law enforcement agencies, high-tech companies, and computer users.

The ESI's 94-page report released yesterday says worldwide encryption sales will hit $20 billion by 2002. But U.S. companies won't capture international consumers' dollars if they are forced to turn out products that can be cracked by law enforcement agencies that have obtained a court order, asserts the ESI.

"Encryption lies at the heart of the major growth markets within each of these industries: wireless communications, online banking, corporate intranets and extranets, financial smart cards, and much more," the ESI said in its report.

"Export controls on encryption technology should be dropped," it argued. "The record shows that these controls have had no discernible impact on national security, but have demonstrably compromised America's economic security."

The ESI's estimates come as no surprise to those who are fighting to overturn the export limits.

U.S. regulations require that all encryption products shipped overseas must have a built-in system to allow law enforcement recovery of users' private keys during an investigation. The keys allow users--and law enforcement, with a court order--to read encrypted messages. The policy also limits the strength of export products. Companies argue that they can't compete with foreign manufacturers that develop more effective products.

But criminal investigators say products without key recovery features make it nearly impossible for them to bust high-tech suspects. Attorney General Janet Reno said she is working over the next two months to negotiate a compromise between law enforcement officials and the high-tech industry.

"The current policy on export controls has had little to no discernible impact on the ability of law enforcement to act or the ability of firms to protect themselves from cyberterrorists," the report said. "Meanwhile, encryption products continue to be readily available from foreign sources and, therefore, the control of U.S. encryption does nothing to prevent a criminal from using powerful encryption to stymie law enforcement officials."

Moreover, imposing a domestic key recovery system--which has been pushed by the FBI--"would cause about $140 billion in losses to the U.S. economy over the next five years, as foreign producers took over the encryption market," according to the ESI.

The ESL report validates ongoing developments in the quest for crypto export relief. Last month, a Justice Department official testified before the Senate that the agency and the FBI were not lobbying for domestic key recovery--for the moment.

A few weeks later, a 1996 memo was released in which a high Clinton official admitted that such systems were considered "costly and less efficient" by overseas users.