U.S. Treasury Seal
UNDER SECRETARY
         DEPARTMENT OF THE TREASURY
                                    WASHINGTON


                                    April 29, 1998

The Honorable Alfonse D'Amato
Chairman
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Mr. Chairman:

I am writing to express the Administration's views on S. 1594, the Digital Signature and Electronic Authentication Law, which I understand the Committee may soon consider. Introduction of S. 1594 and the hearings held on it have focused public debate on complex electronic transaction issues, notably the importance of electronic authentication technologies in promoting electronic commerce. I commend you and Senator Bennett for your leadership in this important work. We have significant concerns with the bill, however, because we believe that legislation may be unnecessary and that this bill may have uncertain effects and an unfavorable effect on competition.

At its most basic, S. 1594 could be read -- though we are uncertain as to its effect -- to recognize the legal validity of electronic authentication techniques used by financial institutions. At this time, however, the need for federal legislation to establish legal validity has not been shown. The Uniform Commercial Code (UCC), developed by the national Conference of Commissioners on Uniform State Laws and the American Law Institute, and adopted by all fifty states, generally addresses such matters of commercial law. Zions First National Bank has recently received federal regulatory approval to offer digital signature products through a subsidiary, under existing law. Moreover, the drafters of the UCC are already at work on a Uniform Electronic Transactions Act (ETA) to revise state law as necessary to support the use of electronic transactions. State common laws and the UCC have been sufficiently flexible to incorporate past innovation in payments and communications technology without the need for federal intervention. We have concerns that the bill could inadvertently undermine existing and future efforts in this area.

The bill would exempt financial institutions that elected to be governed by the provisions of S. 1594 from any state laws regarding the use of electronic authentication, including serving as a digital certification authority or the equivalent. However, existing state regulatory regimes generally permit financial institutions to choose to not be bound by those state regulatory regimes. In addition, although the earliest state statutes might be viewed as overly prescriptive, the decided trend among recent enactments has been toward simply enabling electronic signatures while avoiding unnecessary regulation.

The scope of the preemption under S. 1594 is also unclear. Even if electronically "signed" documents are treated as legally valid in the same way as handwritten documents, there will be remaining issues that will need to be addressed under state common law. Issues might arise, for example, where there are liabilities to be assigned in the event a customer loses his or her certificate, or allows a third party to use a computer that contains the certificate, or loses control over the computer but fails to notify the certificate authority.

Moreover, we are concerned that although the bill would not preempt any "general" consumer law, it would presumably preempt any state law specifically tailored to address consumer protection issues raised by electronic authentication. The business models that support applications of the technology in the marketplace are still developing, and therefore we cannot know whether such consumer protections will prove necessary. To foreclose them prematurely at the state level could create a significant gap in consumer protection.

With respect to competitive issues, we believe that any legislation should not inhibit the growth of technology by conferring advantages on certain technologies or industries, absent some compelling justification for such distinctions. We are therefore concerned that the bill applies only to financial institutions, however broadly defined. If a compelling case were to be made for federal preemption of state laws regulating electronic authentication, then relief from state laws should be applied broadly to non-financial providers of authentication as well; otherwise the competitive market for such services would be distorted.

In addition to these points, we have a series of more technical concerns, such as the savings clause giving bank regulators continuing supervisory authority in this area, which may have unintended effects.

In presenting these views we have consulted closely with other Executive agencies interested in electronic authentication. The agencies include the Department of Commerce, which, under Presidential direction, has been leading a year-long effort to gain agreement domestically and internationally on common approaches for authentication of electronic transactions. Within Treasury, which has been directed by the President to monitor payments systems issues in this area, we have drawn heavily on the experience of the Financial Management Service (FMS). As the chief disburser and a key receiver of government payments, the FMS has been a technology leader in developing methods to secure and verify on-line financial transactions. Our views have also been informed by the on-going activities of the Administration's Public Key Infrastructure Steering Committee, the FMS and the other agencies working to develop systems that use public key and other technologies to enable a broad range of on-line communications and payments between the federal government and individual citizens and vendors. These efforts have proceeded without the need for federal legislation.

In closing, we believe that it is important to stress that, in our experience, greater use of electronic authentication in electronic commerce is not being hindered by state law or the absence of federal intervention. We believe that this area is one that may require more experience before any significant legislation is considered. You have taken important strides this session, and the Administration stands ready to work with you in the future.

The Office of Management and Budget advises that there is no objection to the presentation of these views to the Committee from the standpoint of the Administration's program.

cc: Senator Robert F. Bennett
     Senator Paul S. Sarbanes
     Senator Barbara Boxer