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Cryptography and Paranoia in Anguilla

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On the face of it, the invitation to speak at the Financial Cryptography conference here at the end of February looked like a classic junket. The presentations were highly technical forays into the frontiers of electronic finance, but they were only scheduled between 8:30 and 12:30 each morning, and most afternoons were left free to enjoy the pristine beaches, the coral reefs and almost infinite sun of this Caribbean island.

Beneath an atmosphere of warmth and comfort and the happy beat of steel drums ran a dark current of suspicion, worry and outright paranoia that dominated the conference.

But beneath this atmosphere of warmth and comfort and the happy beat of steel drums a dark current of suspicion, worry and outright paranoia dominated the conference. When the technology and mathematical buzzwords were stripped away, much of the discussions focused on the nature of power and who was going to wield it.

In this crowd, worrying is just a sign of professionalism. Most of the attendees make their living designing computerized transaction systems and ensuring that a criminal never has the power to steal or destroy.

Even so, the tension ran deeper than usual, reflecting the shifting and amorphous definition of power at the beginning of a new millennium. Banks and financial corporations are worried about how the technology will change the balance of power, and they wonder whether a company like Microsoft might one day become a dominant bank. A popular program like Microsoft Money or Intuit's Quicken could easily absorb much of the responsibilities of a bank and even put it out of business.

The hackers were paranoid because they have watched the United States government push harder to regulate encryption software and to limit the scope of privacy in order to make it easier to enforce laws. Many are strident libertarians, and more than a few tell stories of having been searched and of what they feel is government harassment.

All of this was framed by the island's politics, because Anguilla, a self-governing British Crown Colony, is also wrestling with the question of power in the future. The island wants to avoid the Caribbean's lawless reputation of harboring drug dealers and money launderers, and they see the Internet as a chance to compete on an even ground with more developed parts of the world.

Of course, the fact that money laundering may be facilitated by the kinds of fast Internet-based economies discussed at the conference contributes to the conundrum. Much of the debate about the power of offshore havens to provide sanctuary from tax and regulation is straining Anguilla's relations with Britain. The British, who sent paratroopers in 1969 after the island unilaterally seceded from the associated state of St. Kitts-Nevis-Anguilla, is pushing the island hard to adopt stronger controls on banking to throttle the flow of drug money.

The mood of the conference floated between paranoia and pleasure. In morning sessions about cash systems, debate raged over security, practicality and the nature of defenses against fraud. Afternoons, people enjoyed piņa coladas and chattered about a lizard with almost translucent skin. One such lizard, known as a gecko, played an important role in the conference, bringing down the island's Internet connection after crawling into a computer and getting electrocuted.

Heavy media presence also helped amplify the excitement. Wired, the People magazine of the Internet, validated the conference by sending a regular contributor with instructions to write a long story. A reporting team of four people came from NHK, one of Japan's television channels, to follow the software company, C2Net, as it demonstrated its product. Samir Parekh, the company's president, said, "It feels like we're on MTV's 'The Real World.' "

The Technology Advances

The bulk of the conference papers were devoted to finding the best way to use the Internet to ship money from place to place. The combination of a bit of encryption and a digital signature makes it possible to imitate most of the paper systems used by banks.

The bulk of the conference papers were devoted to finding the best way to use the Internet to ship money from place to place.

Monday's session was dominated by papers trying to offer a varying degree of anonymity to the customers who use the system. The ability of a system to protect the identity of either the customer or the merchant is an important point of debate between defenders of privacy and law enforcement authorities who want the ability to track the flow of money.

The Janus system from Bell Labs, for instance, was developed by Eran Gabber, Phil Gibbons, Yossi Matias and Alain Meyer. It involves reconfiguring Web browsing software to send requests for pages through a proxy that would strip away identifying marks. This would allow people to read information on the Web without leaving a trail that could identify them later.

Many of the papers concentrated upon finding ways to minimize the amount of computation necessary to perform the transaction, because this would affect the power of the computers held by the banks and the customers. More powerful computers cost more, adding to the cost of transactions. Everyone would like to make the cost low enough to make it easy for people to send amounts as small as a penny without paying a 30-cent transaction fee.

One major theme was reducing the overhead by only checking a percentage of the transactions. Stanislaw Jarecki from the Massachusetts Institute of Technology and Andrew Odlyzko of Bell Labs described a more efficient electronic cash system and described how to measure the tradeoff between loss and increased vigilance. Yacov Yacobi, a scientist from Microsoft, also explored the continuum of control and compared it with the problem of building quality digital stereo systems that must balance the accuracy of the signal with the amount of data needed to represent it.

Ron Rivest (the R in the famous encryption system RSA), offered a fascinating proposal for using lottery tickets as micropayments on the Web. A customer would give each Web site vendor a lottery ticket instead of some other form of payment. At the end of the month, the customer would hold a drawing and pay the entire monthly bill to the winner. Frequently visited Web sites would hold many tickets and stand a better chance of winning. If the drawings are held often enough, most Web sites will see the same amount of money because they will win their customers' lotteries at a rate proportional to the hits on their page.

Reduced clearance costs are the main advantage of a system like this. There is no need for each merchant to clear each transaction with a bank or a central computer network. They hold their tickets until the day of the lottery and then are done with them.

The T-Shirts

While the sessions revolved around highly technical details, they were not without moments of humor. T-shirts are an important currency for establishing street credibility and cementing the social order. One attendee wore a T-shirt that proclaimed "Hackers for Jesus" on the back and "Legion of Doom" on the front. The Japanese television reporters wore T-shirts from the software company C2Net announcing "High quality, munitions-grade, export-restricted cryptography inside."

T-shirts are an important currency for establishing street credibility and cementing the social order.
The greatest fans of the shirts, however, were the lawyers on the panel exploring the legal issues of digital signatures. Michael Froomkin, a professor at the University of Miami School of Law, wore a shirt with the source code for the RSA encryption system printed on the front. At the time the shirt was created, the United States government's export laws forbade taking the shirt from the country. New, relaxed rules recently allowed the export of encryption software for personal use. Froomkin said he would file the necessary paperwork when he returned to the States.

Charles Merrill, a lawyer with the McCarter & English firm, brought along his shirts from RSA Data Security, a major vendor of encryption software. One sported the RSA motto, "Some things are better left unread." The other lawyer on the panel, Benjamin Wright, also wore an RSA T-shirt sporting a Clipper ship, perhaps aground on a Caribbean shoal. The message called for the end of "Son of Clipper," a reference to the United States government's Clipper chip, which would insert a backdoor that the police could use to read a message's contents.

The official shirt for the conference was a staid cream color with a silhouette of the island and the letters "FC 97." Some found irony in the coincidence that these were the same letters the Unabomber often engraved in his bomb workings to identify his handiwork. It was often hypothesized that the "F" stood for a profanity and "C" stood for computers.

Adam Shostack, a financial consultant in Boston and one of the workshop instructors, said he planned to mint a less stodgy shirt when he returned home. It will mimic the look of the dollar bill, but the portrait oval will contain a picture of Alan Turing, the legendary British cryptographer. The shirt will also contain a bar code for a banknote produced by the Dutch company, Digicash. If someone scans the bar code from the T-shirt, they'll be able to spend the note over the Internet.

Spending this bar code, however, is something of a race. Only the first person to cash in the note will get anything of value from Digicash. The rest will be refused, because the company keeps track of transactions to defend against double spending. Digicash's technology is notable because it can prevent this counterfeiting without revealing the identity of the customer.

Under a British Heaven

In many ways, Anguilla was the perfect place for the conference because the country is also searching for a happy middle ground in the battle between the long arm of the world powers like the United States and England and romantic dreams of freedom that flourish in a sun-drenched paradise. Just as the cryptographers at the conference argued about the proper amount of anonymity for the marketplace, the government of Anguilla is trying to balance the amount of privacy it provides the corporations and trusts set up on the island.

Related Article
Anguilla Anguishes Over Relations With Mother Britain
(Feb. 3, 1997)

The conference organizers made sure that attendees understood the resonance by distributing copies of Donald Westlake's "Under a British Heaven," a history of the island's rebellion during the end of the 1960's. Westlake is better known for writing comic novels about political foibles with titles like "The Spy in the Ointment," but he felt drawn to this subject, he explained, because "the British action [was] flagrant and unwarranted competition with his own comic fiction."

The author clearly developed a warm regard for the quiet, stable democracy that developed on Anguilla, thanks in part to the poor climate. He notes that the plantation system never took hold, and slave owners often gave their slaves four days off a week to tend their personal crops because there was not enough work to support them on the plantation. Soon after slavery was officially ended in 1834, Westlake reports that "every Anguillian, white or black, owned its own home on its own plot of land." It was this foundation of equity that led to the current stability and strong democracy.

Today, the island itself is still rebuilding its banking system after the regulators revoked all licenses in 1991 and refused to grant new licenses to any offshore bank unless it was, as one official put it dryly, "effectively regulated in its home jurisdiction." Soon afterward in 1993, the banking system took another jolt after the United States set up a sting bank in order to identify and arrest money-laundering criminals.

Today, the country's lawyers and accountants are careful in making promises. "These days we talk about 'confidentiality' not 'secrecy,' " said Richard Carpenter, the Director of Financial Services, who reports to the British Governor. "It has a nicer ring to it."

The laws now prevent banks or trustees from covering up illegal activity like drug smuggling or money laundering. The veil of confidentiality, however, continues to cover people accused of not paying taxes. In fact, one lawyer said of tax avoidance, "Technically, it's not illegal here." The island has no taxes for corporations or individuals, and many legitimate trading companies choose to locate their operations on the island to avoid taxes levied against corporations in countries like the United States.

The rest of the Caribbean is rapidly undergoing the same change. Five banks were closed in Antigua during the conference, and the effect of the United States campaign to reign in money laundering is having widespread effects. In the next several weeks, Anguilla stands a good chance of following many other Caribbean nations in adopting even stronger legislation, giving the police a bigger net for catching sham transactions.

While the laws may be passed, they don't seem to be establishing a good foundation of trust or a solid understanding of what is to be expected. One local Anguillian trust holder told the conference that the definition of money laundering is "damned hard to define." Nevertheless, the nature of power makes it clear that the island will need to work hard to control it, because the United States and Britain are committed to eradicating it.

All this activity is forcing Anguilla to turn its sights toward other industries. The island had 9,960 residents when the last census was taken in 1992, and tourism is by far the largest local industry. There are few natural resources, and the island is largely covered by scrub brush. Water is scarce, and many rely on rain collectors to catch the water before it drains through the island's porous coral limestone.

While the island is well-regarded by travelers drawn to its deserted sandy beaches and excellent restaurants, the tourist industry can be cyclical. Hurricane Luis devastated the island both physically with the force of its winds and economically by the force of fear it placed in vacationers who canceled. The debt accrued in the wake of the hurricane led the island's leaders to begin searching for more stable industries.

Naturally, the Internet is very attractive, and there are many reasons to believe that the island is having some success. C2Net is the maker of the second-most-popular commercial Web server for UNIX platforms and they have chosen to set up a subsidiary on the island to hold most of their intellectual property. Sameer Parekh, the president of the company, says that they already do their development outside of the United States because the laws controlling the export of encryption software. They plan to use the Anguilla subsidiary to coordinate this development.

He said he regretted moving jobs from the United States but added, "It's the only way we can provide software worldwide without going to jail." Anguilla's lack of taxes was not really part of the attraction, and he predicted that the tax saving would be minor because the United States marketing operations would continue to pay taxes.

Carrie Liddy, the founder of Keywitness Canada, agrees. Her company distributes certificates on the Web to help people and companies establish their identities over the Internet. The new SET protocol for secure credit card transactions, for instance, uses the certificates to curtail fraud. Keywitness recently announced a new offshore corporation in Barbados.

Liddy said her partners insisted on avoiding the United States because of the excessive regulation. Canadian banks have a large international presence, and the nation continues to trade with Cuba. Liddy said that the United States' Helms-Burton act, which penalizes companies doing business with Cuba, is major impediment to working in the United States.

The lack of regulation in the Caribbean also makes it easier to simply design cutting-edge banking systems without worrying about violating a regulation. "We have to push the technology and not wait until the government makes up its mind," Liddy said.

This sentiment was echoed again and again by conference attendees. Patrick Richard, vice president of technology at the Canadian company Xcert, asserted, "We can move a lot faster because we don't spend five hours a day talking about U.S. crypto laws."

Phoning Home

The process of trying to communicate with the island was a mixture of yesterday and tomorrow. Some hotels have no phones in their rooms, and checking voice mail from a pay phone is often impossible: Cable and Wireless, the British company that holds a telecommunications monopoly on the island, disconnected the star and pound keys on the phone. A company employee said that was done to prevent people from hacking into the phone system to avoid toll charges. In reality, it was probably intended to prevent dial-back services, which charge substantially less than Cable and Wireless.

The process of trying to communicate with the island was a mixture of yesterday and tomorrow.
Two of the conference sponsors, C2Net and Offshore Information Services, set up a network into which attendees could plug their laptops for Internet access. You could sign up for a temporary IP for the week.

Cable and Wireless was not popular. One attendee estimated that he could do a much better job serving the island and added, for emphasis: "I should know. I used to own a telephone company." Of course, it may not be fair to judge the quality of service by asking the opinions of a group of highly technical people. At least one confessed to having a T1 line into his home.

The island's official cell-phone service is limited to a small area surrounding the Cable and Wireless office in what might be called the downtown region. The conference was held at the InterIsland Hotel, which, like much of the island, is out of cell range. Many attendees quickly discovered, however, that they could register their phone with St. Martin, another island that lies about three miles away. The only hurdle was lying to say that you weren't on Anguilla.


Even the paranoia and the weight of government had its lighter moments. The United States export rules governing encryption software, for example, prevent any U.S. citizen from speaking to or educating a foreigner unless it is an "academic" situation. Several conference attendees noted that they were dual nationals with citizenship in both the United States and other countries. They wondered aloud whether they could speak to themselves and whether developing a case of schizophrenia could be considered a felony.