The New York Times, February 27, 1998, p. D1. Clinton Continues to Stumble Over the 'E' Word (Encryption) By John Markoff San Francisco, Feb. 26 -- President Clinton described the economic impact of the Internet today in glowing terms to an audience of technology investors here, but he failed to touch on the issue that increasingly appears to matter most to Silicon Valley: the fiery debate over the Administration's policy on data scrambling. The Clinton Administration has endeared itself to the nation's high-technology center by cutting capital gains taxes and by calling today for a bill that would bar state and local governments from enacting taxes on the Internet until 2004. But encryption may prove to be the Administration's Achilles' heel in its otherwise friendly ties with Silicon Valley. The debate over encryption -- which has pitted industry and civil liberties groups against law enforcement and intelligence agencies -- has sharpened in recent weeks. New legislation that would restrict the unlimited use of encryption is about to be introduced on Capitol Hill. A series of intense behind-the-scenes negotiations over a compromise solution between the Clinton Administration and a small group of high-technology executives suggests that no simple resolution is in sight. Encryption policy has become a flash point because it is both essential for the growth of Internet commerce and vital for the protection of privacy. Techniques that use mathematical formulas permit computers to scramble data so they cannot be read without access to a special "key," usually a large number that permits a user to unscramble the information. Law enforcement officials want to force users to put such keys in escrow with independent authorities to allow for electronic surveillance in criminal investigations. President Clinton has told Silicon Valley executives in private meetings that he is sympathetic with their viewpoint but that he is under great pressure from law enforcement and national security officials to put even greater controls in place on encryption technology. "To us this is really important, but it's just an irritant to him," said one Silicon Valley executive who met with the President before his speech today and asked not be identified further. "His basic message to us was, 'Can we get this thing done?' " Senators John McCain, Republican of Arizona, and Bob Kerrey, Democrat of Nebraska, are circulating a revised version of their encryption bill, which includes several changes in response to industry and privacy concerns but it has so far won few adherents outside of the law-enforcement community. Critics say the legislation is simply a placeholder for future laws that would restrict the use of the technology. "Everyone who is looking at the export issue is looking at it as a prelude to domestic controls," said Mark Rasch, a former Federal prosecutor who is now a specialist in encryption and computer security issues at the Science Applications International Corporation in McLean, Va. Industry opponents of encryption controls, heavily financed by high-technology companies, are preparing to announce on Wednesday a new coalition, Americans for Privacy, aimed at ending restrictions on encryption technology exports. At the same time Hewlett Packard plans to announce on Friday a new set of encryption technologies, with endorsements from the Department of Commerce and companies like I.B.M.. These technologies known as the International Cryptographic Framework, would let individual governments establish potentially conflicting encryption policies -- or even place no restrictions. Silicon Valley executives argue that the law-enforcement demand for the continued ability to wiretap in the information age is wishful thinking at best. The easy availability of powerful encryption software has made it possible for any two people, anywhere in the world to hold a secret conversation beyond the prying of even the most powerful code-breaking computer, they say. The White House is now considering several other industry proposals intent on finding a compromise between industry and law enforcement interests. Another approach that is now being raised in negotiations between industry executives and the White House has been put forth by executives from Cisco Systems, the company that is the dominate provider of Internet routing equipment. The Cisco proposal, known as Clearzone, would place encryption in the network instead of from personal computer to personal computer. Then, if a law-enforcement agency had a warrant to wiretap, it would be possible to go to an Internet provider that could then turn off encryption. But this proposal makes no provision for retrieving stored information also sought by law-enforcement agents. [Photo] President Clinton and Sandy Robertson of BancAmerica Robertson Stephens, at a conference of technology executives and investors in San Francisco yesterday. [End]