From: Tim May <tcmay@got.net>
Date: Tue, 25 Nov 1997 01:18:29 +0800
To: cypherpunks@Algebra.COM
Subject: Encrypted Economic Speech is Protected
In-Reply-To: <1.5.4.32.19971121122153.006cd9fc@pop.pipeline.com>
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Some thoughts on the proposal floating around to require all electronic
transactions be identified and have IRS-endorse tags. I believe this runs
smack up against the First Amendment (and possibly the Fourth), and that
private transactions, contracts, IOUs, and such are essentially untaxable
and nonvisible to the government (practically speaking, a la the situation
today and at all times in the past).

Encrypted financial speech is indistinguishable from encrypted political or
religious or romantic speech, for example, so any requirement that economic
speech be visible to the government for taxation or regulatory purposes
would have an unconstitutional effect on speech in general.

(Not all speech is free of government regulation, obviously. Many examples
of regulated speech: medical claims, speech to minors, obscenity, and so
on. But the regulation of this speech is done "ex post facto," not by prior
restraint or official censorship (where a censor has to approve material),
and not by the government opening letters to determine if they comply with
regulations. Bear this in mind when reading the stuff below.)


At 5:21 AM -0700 11/21/97, John Young wrote:
> Network World, November 15, 1997:
>
> Welcome To Cyberspace. Your Papers Please?

> Under active consideration is a plan to require taxpayers to obtain digital
>IDs for all
> electronic transactions, keeping records that could be examined on audit.
>The IDs
> would be issued by IRS certified agencies, subject to government developed
> standards to ensure that proper identity checks are performed before
>anyone is
> allowed to shop online. The IRS would enforce this by issuing its own digital
> certificates to issuers of digital IDs so that they can electronically
>prove that they
> have received IRS certification. The technology they need to make this
>happen is
> available. All that's missing are the regulations forcing compliance. So,
>stay tuned.
> If you enjoyed the encryption key escrow debate, you'll love this one.


I doubt this would pass court challenges. Yes, I now about "the power to
regulate commerce," but consider these points:

1. There are no specified transaction forms in commerce.  (With only a few
exceptions, such as firearms purchases and some "big ticket" items like
houses, which have complicated sets of contract agreements, waivers, title
checks, etc.)

2. There is generally no requirement whatsoever for identification of a
purchaser, or a seller, for that matter. When Alice buys a disk drive, or a
box of cereal, or a carton of cigarettes, there is no governmental
requirement that she provide a True Name, or any kind of name at all.

(Caveats: It will be tiresome to repeat these caveats, so I will list them
once. Note that they do not mean there is either a requirement for identity
in transactions, or for specific forms of paperwork to be completed. Some
caveats: age credentials may be needed for some purchases (alcohol,
tobacco, firearms, R- or X-rated material, etc.). Firearms generally now
have required paperwork, restrictions, and waiting periods. Pharmaceuticals
have various ID requirements. Courtesy of the "War on Terrorism," airlines
now require ID. Etc.)

3. Many businesses have started asking for ID for more purchases (perhaps
because they think it will lessen liability problems, perhaps because they
just think that all customer-units should be tracked). An example: hotel
rooms. (Used to be one could just pay cash...now ID is demanded at some
hotels.) Some businesses are even demanding Social Security numbers. (And I
don't mean banks or other businesses with IRS reporting requirements...a
local gun range demanded my SS number for their range ID card.)

However, these ID requirements are not the norm, and most merchants will
happily take cash money for any and all purchases.

4. "Receipts" are not even required by law for transactions. Alice and Bob
can complete a transaction without any paperwork. Or with handwritten
notes. Or a Xeroxed receipt form. Or with their Palm Pilots or Newtons, or
whatever.

(Something Ian Goldberg has demonstrated with a Pilot linking to an e-cash
server in Finland, for example.)

5. Transactions may be undertaken over telephone or computer lines, perhaps
to sites in other countries. A variety of receipts, ID systems, etc.

6. True Names may be required for certain transactions so as to ensure
collection of promised monies. Especially in time-lapse payment
arrrangements. Cf. the usual debate about on-line vs. off-line clearing,
and the role of escrow agents.

7. "Money is Speech."  An encrypted message making arrangements for some
transaction may be indistinguishable from other encrypted messages. A law
requiring that all encrypted transmissions be compliant with reporting
requirements would impinge on speech. (It is not possible to distinguish
"money speech" from "political speech," or "other speech" in general. This
is a point both Michael Froomkin and I emphasized in our panel discussion
and papers for CFP '97.)

Also, certain forms of political and private speech would be chilled if
identification of all electronic transactions were to be required. Think of
someone buying information on birth control methods, or books from the John
Birch Society, etc.

(Buyer anonymity is obviously a good thing in many cases. Seller anonymity
is also a good thing in many cases. I constructed for Chaum, who has not
been supporting full, two-way anonymity of late, a plausible scenario where
seller anonymity is required to prevent government sting operations.
Purchasing porn electronically is a current example. One can imagine
Islamic countries using seller traceability in all sorts of bad ways. Only
true "Chaumian" e-cash, not the "new Chaumian" semi-traceable form, meets
goals we are interested in.)

8. Tax collection issues are generally separate from the details of the
transaction. Sales taxes (and VATs) are generally the responsibility of the
seller to collect at the time of the transaction, and to report. The seller
need not know the identity of the buyer to collect a sales tax.

(Of course, part of the reason for the "electronic ID" mentioned in the
article John Young quotes is the difficulty of collecting sales taxes
across national and state boundaries.)

9. In the U.S. at least, there is essentially no attempt to collect sales
taxes on private, two-party transactions.  This is not enforceable at flea
markets, garage sales, and other such markets, let alone in private
transactions between Alice and Bob.

10. To enforce tax collection in such areas, the state would have to become
intrusive at an Orwellian level. (And Alice and Bob could _still_ perform
"unmonitored transactions" in the time-honored ways.)

11. To enforce tax collection when Alice is using computer communications
to contact Bob in Holland, or in Japan, or in cypherspace, the state would
have to become intrusive in all computer communications.

12. The expression "to utter a check" dates back before Eric Hughes' usage
a few years ago (so I was told by M. Froomkin). A check is a kind of
promise to pay.  So is an IOU. So is a promissory (sp?) note. So are many
kinds of contracts.

The state cannot inject itself into all of these private negotiations,
contracts, IOUs, etc., at least not before they are litigated because of
some agreement. (There's a big difference between the state getting
involved because parties to a contract disagree on enforcement, and the
state becoming a third party even in early stages, or when no disagreement
about enforcement exists.)



In summary, much as the government and various advisory panels might wish
for some role in "regulating cyberspace commerce," or in taxing it, any
attempt to mandate the forms of such commerce or to require that certain
identification be used, will directly impinge on the rights of individuals
to communicate as they wish with others.

Practically speaking, the idea is a non-starter. There are so many ways to
skirt the proposed ID systems, using cut-outs, off-shore accounts,
pseudonyms, etc., that enforcement would be a nightmare.

And the system could probably be monkey-wrenched by staging some major
court challenges, where Alice and Bob "break the law" about using digital
IDs...and it turns out in court that they were discussing some clearly
protected subject, like religious beliefs, personal matters, etc.

Once again, the First Amendment provides core protections.

--Tim May

The Feds have shown their hand: they want a ban on domestic cryptography
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
ComSec 3DES:   408-728-0152 | anonymous networks, digital pseudonyms, zero
W.A.S.T.E.: Corralitos, CA  | knowledge, reputations, information markets,
Higher Power: 2^2,976,221   | black markets, collapse of governments.
"National borders aren't even speed bumps on the information superhighway."