[Senate Hearing 106-893]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-893
 
                MILLENNIUM DIGITAL COMMERCE ACT, S. 761
=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION
                               __________

                              MAY 27, 1999
                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

















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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                       Mark Buse, Staff Director
                  Martha P. Allbright, General Counsel
     Ivan A. Schlager, Democratic Chief Counsel and Staff Director
               Kevin D. Kayes, Democratic General Counsel













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held May 27, 1999........................................     1
Statement of Senator Abraham.....................................     1
Statement of Senator Burns.......................................     4
Prepared statement of Senator Lott...............................    25
Statement of Senator Wyden.......................................     3

                               Witnesses

Callcott, W. Hardy, senior vice president and general counsel, 
  Charles Schwab & Co., Inc......................................    14
    Prepared statement...........................................    16
Campbell, Ray A., III, general counsel, Information Technology 
  Division, Commonwealth of Massachusetts........................     5
    Prepared statement...........................................     7
Miller, Harris N., president, Information Technology Association 
  of America.....................................................    18
    Prepared statement...........................................    21
Parker, Ira H., vice present and general counsel, GTE 
  Internetworking................................................     9
    Prepared statement...........................................    12

                                Appendix

Callcott, W. Hardy, senior vice president and general counsel, 
  Charles Schwab & Co., Inc., letter dated June 21, 1999, to Hon. 
  Spencer Abraham................................................    37
PenOp, Inc., prepared statement..................................    38
















                 MILLENNIUM DIGITAL COMMERCE ACT S. 761

                              ----------                              


                         THURSDAY, MAY 27, 1999

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:10 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Spencer 
Abraham presiding.
    Staff members assigned to this hearing: Kevin Kolevar, 
legislative assistant to Senator Abraham; Lauren Belvin, 
Republican senior counsel; Maureen McLaughlin, Republican 
counsel; Moses Boyd, Democratic senior cousel; and Gregg Elias, 
Democratic senior counsel.

          OPENING STATEMENT OF HON. SPENCER ABRAHAM, 
                   U.S. SENATOR FROM MICHIGAN

    Senator Abraham. Welcome. We will begin our hearing at this 
time. We had had, at least it had been posted, a 10 a.m. 
rollcall vote that was vitiated very recently, and I suspect 
maybe one or two other Members were like myself, heading toward 
the Capitol expecting to vote and come back here, and they may 
join us.
    Today's Commerce Committee hearing will focus on S. 761, 
the Millennium Digital Commerce Act, a bill introduced by 
Senators Wyden, who is joining us now, McCain, Burns, Lott, and 
myself, designed to promote electronic commerce.
    All of us by now have heard the prophetic pronouncements 
the Internet will change all of our lives, the computer age is 
reshaping the world, and so on, and we all have seen the 
figures that document the Internet's extraordinary growth. In 
1993, about 90,000 Americans had access to these online 
resources. By early 1999, that number had grown to about 81 
million, an increase of about 900 percent.
    The computer industry almanac predicts 20 million Internet 
users worldwide by the end of the year 2000, and now the 
figures are coming in on how electronic commerce is 
transforming the way we do business. E-commerce between 
businesses has grown to an estimated $64.8 billion for 1999. 
Ten million customers shopped for some product using the 
Internet in 1998 alone.
    International Data Corporation estimates that $31 billion 
in products will be sold over the Internet in 1999, and 5.3 
million households had access to financial transactions like 
electronic banking and stock trading by the end of 1999, or 
will have.
    It seems quite clear, then, that the Internet users are 
ready to go far beyond buying books and apparel online. The 
Internet is set to lead a revolution in the execution of 
business transactions involving thousands or millions of 
dollars in products and services, transactions so important 
they require that both parties enter into legally binding 
contracts.
    The vehicle that will move us into this new era of e-
commerce is the electronic signature. Electronic authentication 
methods, or electronic signatures can allow organizations to 
enter into contractual arrangements without ever having to 
drive across town or fly thousands of miles for personal 
meetings, or mail reams of paperwork back and forth. It can 
allow individuals to positively identify the person with whom 
they are transacting business, and to ensure that shared 
information has not been tampered with.
    In fact, many forms of electronic signatures are far more 
secure than manual, handwritten signatures. They cannot be 
forged in the same relatively easy way as handwritten 
signatures. These electronic signatures are also verifiable, 
and most become invalid if any of the data in the electronic 
document is altered or deleted. They can make electronic 
commerce the safest commerce as well as the most convenient 
commerce available.
    More than 40 States recognizing the importance of 
authentication technology have adopted rules covering its use, 
but no two States have adopted the same approach. This means 
that our present greatest barrier to the use of electronic 
signatures in business transactions and contracts is the lack 
of a consistent and predictable national framework of rules. 
Individuals and organizations are not willing to rely on 
electronic signatures when they cannot be sure that they will 
be held valid.
    Our Millennium Digital Commerce Act will ensure that 
individuals and organizations in different States are held to 
their agreements and obligations, even if their respective 
States have different rules concerning electronically signed 
documents. It provides that electronic records, produced and 
executing a digital contract, shall not be denied legal effects 
solely because they were entered into over the Internet or in 
any other computer network. This will help provide uniform 
treatment of electronic signatures in all the States until such 
time as they enact uniform legislation on their own.
    Our bill also lets the parties who enter into a contract 
determine through that contract which technologies and business 
methods they will use to execute it. This will give those 
involved in the transaction the power to determine for 
themselves how they want to allocate liability and fees as well 
as registration and certification requirements.
    Our legislation sets forth principles for the use of 
electronic signatures in international transactions. Over the 
last year, American negotiators have been meeting with their 
European counterparts to discuss electronic signatures in 
international commerce. The United States has been working in 
support of a free and open system in this regard.
    To bolster these efforts, our legislation lays out 
principles we believe should govern international use of 
electronic signatures, including control by the parties over 
terms of their agreements and authentication technology, access 
to the courts for the purpose of proving the validity of 
authentication and transaction approaches, and keeping 
governments out of the business of choosing which technologies 
should be favored or disfavored.
    Finally, our legislation directs the Department of Commerce 
and the Office of Management and Budget to report on Federal 
laws and regulations that might pose barriers to e-commerce and 
to report back to Congress on the impact of such provisions and 
provide suggestions for reform.
    In drafting this bill we face a challenging balancing act 
between the Federal Government's role in regulating interstate 
commerce and the States' rights to make their own laws in this 
area. With the input of experts from States and the high tech 
industry, we believe our bill strikes this balance, thus 
providing businesses with the legal certainty they need to 
conduct commerce across America without intruding upon the 
States' rights.
    Today, we are joined by representatives from the States and 
the high tech industry who present their views, comments, and 
advice on this legislation.
    In closing my opening statement I just want to stress that 
this effort remains a work in progress, and I want to assure my 
colleagues, as well as all those who are interested in the 
development of this legislation as well as the witnesses, that 
we will continue to work with everyone to ensure that the best 
possible bill emerges from the Commerce Committee.
    In putting together our legislation I have been very, very 
pleased to work once again with my colleague from the State of 
Oregon, Senator Wyden. He has a great interest in the 
development of all of the high tech sectors, and has been a 
leader, as everyone, I think, knows, on a variety of 
legislation that has been either passed or introduced for 
consideration in both the last Congress as well as this one.
    As usual, without his help we would not be as far down the 
road in terms of putting together a good piece of legislation 
here, and I want to thank him for that publicly, and express 
once again how much I enjoy working with him and look forward 
to continuing to do so and I want to at this point turn to him 
for his opening statement.

           STATEMENT OF HON. RON WYDEN, U.S. SENATOR 
                          FROM OREGON

    Senator Wyden. I thank my friend, and I do not want to turn 
this into a bouquet-tossing kind of exercise.
    Senator Abraham. Well, that's OK.
    [Laughter.]
    Senator Wyden. This is, as you said, just one of several 
bills that the two of us have worked on together. We have got 
the important education bill to make it easier to donate 
technology to the schools that we hope to pass as well, and I 
just want to say how much I have enjoyed teaming up with you. 
There is absolutely nothing partisan about these issues, and I 
think as you and I have discussed, Mr. Chairman, one of the 
most important jobs this committee is going to have in the 
years ahead is essentially updating principles and laws that 
were in place before the revolution in terms of technology, and 
so this will just be one of the measures that we are going to 
have to tackle.
    It seems to me the heart of our bipartisan bill can be 
summed up in a sentence, and that is, it is a whole lot better 
to be online than waiting in line. I think what you will have 
with the obstacles that you outlined in your opening statement 
is a whole lot of folks all across this country waiting in 
lines that essentially could be expedited by pressing the enter 
button a few times.
    I had a chance to be one of the speakers at the National 
Association of Realtors Convention over the last few days, and 
we talked, for example, about what is going to happen in a very 
mobile society as young people get recruited to come to a town 
and get excited about a potential position. They may want to 
see a place, have a chance to look at potential housing 
arrangements, and in effect conclude a housing transaction 
within a day.
    Now, to do that, we are going to have to have this 
opportunity through our legislation to facilitate digital 
signatures in a way that is convenient and accessible to folks, 
and we have wrestled with this now through two Congresses and 
are very hopeful that at this time we will be able to address 
this in a comprehensive way.
    I will also say that I think it is a natural complement to 
what this committee did in terms of the Internet Tax Freedom 
Act in the last session of Congress. We may not have invented 
electronic commerce on this committee----
    Senator Burns. Senator Gore did.
    [Laughter.]
    Senator Wyden. Did you invent the auction? My good friend 
Senator Burns is always modest, and I accused him of inventing 
the auction, and he wanted to be more modest and back away from 
that.
    Senator Burns. I want to look my prospective buyer right in 
the eye.
    [Laughter.]
    Senator Wyden. The fact is, we promoted in a significant 
way electronic commerce in the last session. Now we have a 
chance to build on that with digital signatures, and I look 
forward to working with you.
    Senator Abraham. Thank you, Senator Wyden, and I have been 
trying to convince Senator Roth that at least in Michigan they 
ought to be called Abraham IRA's, but I have not had much luck 
with that, either.
    We are joined today by the chairman of the Communications 
Subcommittee here in the Commerce Committee, Senator Burns, and 
I will turn to him.
    Senator Burns. Mr. Chairman, I think in view of the time, 
let us hear from the witnesses. I have got a little old bitty 
statement here, but it don't mean nuthin'.
    [Laughter.]
    Senator Burns. I would thank you for holding these 
hearings. I appreciate that very much.
    Senator Abraham. Senator Burns, thank you for helping us 
and for being here today. We will then turn to our panel, and I 
want to thank each of them ahead of time for having taken extra 
time out of their day to be here with us. We have got four 
witnesses, and I am going to introduce them.
    Just from my left to right here we have Mr. Ray Campbell, 
general counsel of the Information Technology Division of the 
Commonwealth of Massachusetts, Mr. Ira Parker, vice president 
and general counsel for GTE Internetworking. We have Mr. Hardy 
Callcott, who is senior vice president as well as deputy 
general counsel for Charles Schwab, and then we have Mr. Harris 
Miller, who is the president of ITAA, the Information 
Technology Association of America.
    Each of you, I know, has a perspective on what we are 
trying to accomplish here, and we really appreciate your 
offering it here today, as well as the work you and your 
organizations and others have done to help us as we have tried 
to craft this legislation.
    Mr. Campbell, we will begin with you, and we appreciate 
your being here.

    STATEMENT OF MR. RAY A. CAMPBELL III, GENERAL COUNSEL, 
 INFORMATION TECHNOLOGY DIVISION, COMMONWEALTH OF MASSACHUSETTS

    Mr. Campbell. Thank you very much, Senator, Members of the 
committee. My name is Ray Campbell. I am the general counsel of 
the Commonwealth of Massachusetts Information Technology 
Division, and I greatly appreciate the opportunity to come 
before you and testify on Senate bill 761, the Millennium 
Digital Commerce Act.
    The Commonwealth of Massachusetts has been at the forefront 
of the information revolution ever since Alexander Graham Bell 
invented the telephone in Boston in 1876, and we have been at 
the forefront of the Internet revolution ever since Cambridge-
based BBN was selected to build the original ARPA-Net in 1968, 
and it has been said that failure is an orphan, and success has 
many parents, so in that spirit Massachusetts would like to 
stake its claim to having created the Internet.
    [Laughter.]
    Senator Abraham. For the record, if anybody in the audience 
would like to also be given some of the credit for the Internet 
after the hearing today, if you would like to, we will take 
your names for the record.
    [Laughter.]
    Mr. Campbell. I want to commend Senator Abraham and the 
cosponsors of the Millennium Digital Commerce Act for an 
excellent piece of legislation, and I want to express to this 
subcommittee my wholehearted support for the bill. Over the 
past several years, many attempts have been made at the State 
and Federal levels to introduce legislation to promote the 
growth of electronic commerce. In my opinion, many of these 
attempts have been based on mistaken assumptions about the 
nature of the information economy and about Government's proper 
role in encouraging its development.
    I believe Senate bill 761 avoids all of these pitfalls, and 
its enactment will make a meaningful contribution toward a 
consistent, predictable, minimalist framework for interstate 
electronic commerce.
    I would like to confine my comments to two topic areas. 
First, I want to articulate briefly a set of general principles 
that I think should govern or should guide Government 
policymaking in the information economy and electronic commerce 
areas, and I also want to highlight some of the key 
characteristics of the bill that I think are fully consistent 
with these principles.
    The first principle I would offer is that policymakers need 
to recognize the unique characteristics of the Internet. The 
industrial revolution and industrial society was characterized 
by stability, standardization, hierarchy, centralization. The 
Internet, on the other hand, is a highly decentralized, 
dynamic, and complex adaptive system. It is almost organic in 
its ability to self-organize and respond to changes in its 
environment.
    In light of this, I think we need to be extremely 
suspicious of the notion that traditional legislative and 
regulatory mechanisms can shape the Internet or electronic 
commerce in predictable ways. I think we really need to be 
conscious of the law of unintended consequences when attempting 
to regulate something as dynamic as the Internet.
    The second principle I would offer is that Government 
action to promote electronic commerce will be most effective 
when it is narrowly tailored to address specific actual market 
failures or legal impediments.
    Too much State and Federal electronic commerce legislation 
has been motivated by the mistaken belief that policymakers can 
divine where the markets and technology will be a few years 
into the future, and that we can hasten that future or steal a 
march on our competitors by creating a legal infrastructure 
that supports that specific vision. I believe such attempts are 
doomed to failure both because they rely on linear 
extrapolations of current technologies and business models, and 
because they rely on the assumption that laws create markets.
    I think that is fundamentally untrue. I think that the 
explosive growth of the Internet has been the result of the 
hard work and the vision of entrepreneurs, and I think that the 
explosive growth in the amount of commerce being conducted by 
the Internet makes it clear that these people are not waiting 
for lawyers and legislators to pave the road to the future for 
them. They are doing it on their own.
    The third principle for successful electronic commerce 
legislation is that to the greatest extent possible it should 
leverage existing sources of State law to promote a more 
flexible and stable legal basis for electronic commerce. I 
think this is particularly true in such established areas as 
the law of signatures and the law of contract formation and 
defensive wholesale changes in these bodies of law will 
introduce unnecessary complications and untested concepts, 
leading to confusion and litigation.
    Further, the common law is more flexible and responsive to 
changing circumstances, including changing technologies, than 
is prescriptive legislation.
    Finally, the fourth principle for electronic commerce 
policymaking that I would offer is that Government action 
should preserve and promote a competitive marketplace where 
private actors are free to choose the technologies and business 
models that best satisfy their cost, benefit, and risk 
requirements.
    The use of contracts between private parties is ideally 
suited to the unique characteristics of the Internet. As noted 
previously, the Internet is a highly decentralized medium. Any 
legislation that seeks to restrain rather than harness the 
ability of private parties to order their own relations is 
swimming against the tide of the Internet revolution.
    The Internet promises to give rise to vastly more efficient 
and transparent markets in which market participants can 
evaluate for themselves the specific technologies and business 
models that best suit their needs.
    Having summarized those four principles that I think should 
govern electronic commerce policymaking, I want to point out 
some of the key ways in which I think the Millennium Digital 
Commerce Act is fully supportive of those principles.
    First, the bill broadly validates the use of electronic 
records and signatures in Interstate commercial transactions, 
but does not attempt to address the use of such methods in 
other types of transactions, where such a rule would be more 
problematic.
    Second, the bill does not favor any particular technology 
or business model by granting special presumptions or 
evidentiary privileges.
    Third, the bill acknowledges the freedom of parties to 
establish by contract the technologies and methods they can use 
to create legally binding records and signatures.
    Fourth, the bill preserves and leverages the existing law 
of signatures and contracts that exist in the States, and 
finally, the bill only preempts State law on an interim basis 
until such time as uniform State law addressing electronic 
commerce is in place.
    So based on the foregoing, I am of the opinion that the 
Millennium Digital Commerce Act is a timely and appropriate 
piece of legislation. It takes cognizance of the unique 
characteristics of the Internet. It is narrowly tailored to 
address specific legal barriers. It leverages existing sources 
of law in a way that promotes stability and certainty, and it 
preserves freedom of choice for market participants.
    I would like to thank the Chairman and Members of the 
committee for the opportunity to testify today on this 
important issue, and if there is anything I can do in the 
future to be of assistance, please feel free to call on me.
    Thank you very much.
    [The prepared statement of Mr. Campbell follows:]

Prepared Statement of Ray A. Campbell III, General Counsel, Information 
           Technology Division, Commonwealth of Massachusetts

    Mr. Chairman and members of the Subcommittee, my name is Ray 
Campbell and I am the General Counsel of the Commonwealth of 
Massachusetts Information Technology Division. Thank you for the 
opportunity to testify on Senate Bill 761, the ``Millennium Digital 
Commerce Act.''
    The Commonwealth of Massachusetts has been at the forefront of the 
information revolution ever since Alexander Graham Bell invented the 
telephone, in Boston, in 1876. Massachusetts has also been at the 
forefront of the Internet revolution ever since Cambridge-based BBN won 
the contract to build the original ARPA-Net in 1968. Since that time, 
Massachusetts has been fertile ground for an amazing number and variety 
of companies that have helped transform the Internet from an isolated 
defense and research network into a global communications tools that is 
fundamentally changing our economy and our society. In addition to the 
role played by our companies and universities, Massachusetts state 
government has also been a leader in using the Internet to deliver 
better, more convenient government services at less cost to the 
taxpayers. Governor Paul Cellucci and Lieutenant Governor Jane Swift 
are firm believers that we should offer citizens the option to conduct 
their business with the state online rather than in line.
    I would like to confine Senator Abraham and the cosponsors of the 
Millennium Digital Commerce Act for an excellent piece of legislation, 
and I want to express to the Subcommittee my whole-hearted support for 
this bill. Over the past several years, many attempts have been made at 
the state and Federal levels to introduce legislation to promote the 
growth of electronic commerce. In my opinion, many of these attempts 
have been based on mistaken assumptions about the nature of the 
information economy and government's role in encouraging its 
development. I believe Senate Bill 761 avoids all of these pitfalls, 
and its enactment will make a meaningful contribution toward a 
consistent, predictable, minimalist framework for interstate electronic 
commerce.
    I would like to confine the balance of my testimony to two topics. 
First, I would like to articulate a set of general principles that I 
believe should guide government efforts to make public policy for the 
Information Age. Second, I would like to highlight the key aspects of 
the Millennium Digital Commerce Act that are, in my opinion, perfectly 
consonant with these principles.
    While adherence to principle is essential in any policymaking 
endeavor, it is particularly important when crafting electronic 
commerce legislation because we are operating in an arena generally 
devoid of empirical guideposts. Electronic commerce is such a recent 
development that there is no reservoir of experience on which to draw 
as we consider the likely consequences of government action. 
Recognition of, and reliance on, first principles is crucial in such an 
environment. As such, I would offer the following four principles to 
guide policymaking for the Information Economy.
    First, policymakers must recognize the unique characteristics of 
the Internet. The industrial revolution, and hence industrial-era 
economic policy, was characterized by stability, standardization, 
hierarchy, and centralization. The Internet, on the other hand, is a 
highly decentralized and complex adaptive system, and is almost organic 
in its ability to self organize and respond to changes in its 
environment. Given this, we should be extremely suspicious of the 
notion that traditional legislative and regulatory mechanisms can shape 
the Internet or electronic commerce in predictable ways.
    Indeed, there is a widespread appreciation that a lack of 
government regulation has been one of the key factors behind the 
phenomenal growth of the Internet. Congress itself, in the 
Telecommunications Act of 1996, stated that ``the Internet and other 
interactive computer services have flourished, to the benefit of all 
Americans, with a minimum of government regulation'' and further 
declared that ``it is the policy of the United States . . . to preserve 
the vibrant and competitive free market that presently exists for the 
Internet and other interactive computer services, unfettered by Federal 
or State regulation.''
    The second principle I would offer is that government action to 
promote electronic commerce will be most effective when it is narrowly 
tailored to address specific, actual market failures or legal 
impediments. Too much state and Federal electronic commerce legislation 
has been motivated by the mistaken belief that policymakers can divine 
where the markets and technology will be a few years in the future, and 
that we can hasten that future or steal a march on our competitors by 
creating a legal infrastructure to support that specific vision. I 
believe such attempts are doomed to failure, both because they rely on 
linear extrapolations of current technologies and business models, and 
because they rely on the assumption that laws create markets.
    In fact, the future course of electronic commerce is being charted 
this very minute by someone none of us has ever heard of, working in a 
small office paid for with a second mortgage, on the outskirts of Route 
128, Silicon Valley, or Buffalo, Wyoming. The explosive growth of the 
Internet and electronic commerce is convincing proof that these 
visionary men and women are not waiting for lawyers and legislators to 
pave the road to the future for them. In truth, the law has always been 
more effective at codifying and ratifying established business 
practices than it has been at creating such practices out of whole 
cloth. Any such attempt to regulate the future into existence will 
surely be counterproductive. If advocates of this approach are 
successful, the future of electronic commerce will not be a Field of 
Dreams--where if we build it, they will come--but rather a Field of 
Nightmares--where because they built it, we have come--to regulate, to 
prescribe, and to tax.
    The third principle for successful electronic commerce legislation 
is that, to the greatest extent possible, it should leverage existing 
sources of state law to promote a more flexible and stable legal basis 
for electronic commerce. While the advent of electronic commerce 
changes many things, it does not change everything. Massachusetts is 
home to the oldest judicial system in this hemisphere, and over the 
centuries our courts and the courts in other jurisdictions have 
established a solid foundation of precedent that lends tremendous 
stability and predictability to the legal relations between parties. 
This is particularly true in such established areas as the law of 
signatures and the law of contract formation and defenses. Wholesale 
changes in these bodies of law will introduce unnecessary complications 
and untested concepts, leading to confusion and litigation. Further, 
the common law is more flexible and responsive to changing 
circumstances, including changing technologies, than is prescriptive 
legislation.
    Finally, the fourth principle for electronic commerce policymaking 
is that government actions should preserve and promote a competitive 
marketplace where private actors are free to choose the technologies 
and business models that best satisfy their unique cost/benefit and 
risk requirements. The use of contracts between private parties is 
ideally suited to the unique characteristics of the Internet. As noted 
previously, the Internet is a highly decentralized medium. Any 
legislation that seeks to restrain, rather than harness, the ability of 
private parties to order their own relations is swimming against the 
tide of the Internet revolution. The Internet promises to give rise to 
vastly more efficient and transparent markets, in which market 
participants can evaluate for themselves the specific technologies and 
business models that best suit their needs.
    Having summarized what I believe are the core principles that 
should guide government policymaking in the electronic commerce sphere, 
I would like to point out some of the key ways in which the Millennium 
Digital Commerce Act is fully supportive of the principles.
    First, the proposed bill broadly validates the use of electronic 
records and signatures in interstate commercial transactions, but does 
not attempt to address the use of such methods in other types of 
transactions where such a rule would be more problematic. Second, the 
bill does not favor any particular technology or business model by 
granting special presumptions or evidentiary privileges. Third, the 
bill acknowledges the freedom of parties to establish by contract the 
technologies and methods they can use to create legally binding records 
and signatures. Fourth, the proposed bill preserves and leverages the 
existing law of signatures and contracts. And, finally, the bill only 
preempts state law on an interim basis until such time as uniform state 
law addressing electronic commerce is in place.
    Based on the foregoing, I am of the opinion that the Millennium 
Digital Commerce Act is a timely and appropriate piece of legislation. 
It takes cognizance of the unique characteristics of the Internet, it 
is narrowly tailored to address specific legal barriers, it leverages 
existing sources of law in a way that promotes stability and certainty, 
and it preserves freedom of choice for market participants. As a 
policymaker with a state at the forefront of the Internet revolution, I 
strongly encourage this Subcommittee to act favorably on this bill.
    I thank the Chairman and the members of the Subcommittee for the 
opportunity to testify today on this important issue. If there is 
anything I can do in the future to be of assistance as you weigh these 
crucial matters, please feel free to call on me. Thank you.

    Senator Abraham. Mr. Campbell, I want to thank you for 
being here. I also want to note the National Conference of 
Commissioners on Uniform State Law is expected soon to report 
on their recommendations with respect to a model State 
electronic transactions legislation, so as we are trying to 
provide some sort of interim option here until the States both 
have a chance to react to those proposals as well as to flesh 
them out further. We appreciate your testimony, and look 
forward to working with you and others of your counterparts as 
we go ahead here.
    Mr. Parker, we welcome you today. Thank you very much for 
being here, and we will turn to you at this time.

STATEMENT OF IRA H. PARKER, VICE PRESIDENT AND GENERAL COUNSEL, 
                      GTE INTERNETWORKING

    Mr. Parker. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the committee, my name is Ira Parker. I am the vice 
president and general counsel at GTE Internetworking. I welcome 
this opportunity to offer my views on electronic 
authentication. I commend you and your colleagues for exploring 
this important issue now.
    GTE Internetworking is really the successor to the company 
that actually did create the Internet.
    Senator Abraham. Oh, sure.
    [Laughter.]
    Mr. Parker. We will even take a lie detector on that one. 
GTE Internetworking, to tell you a little bit about us, is a 
division of GTE Corporation, responsible for our consumer and 
business Internet offerings. We were formed just about 2 years 
ago, when GTE Corporation acquired BBN and, as I said, BBN, one 
of the original developers of the Internet--it actually was a 
contract from the Defense Department to create the ARPA-Net to 
prove that packet switch technology really could work.
    GTE Internetworking is an integrated Internet company, 
providing many products and services to businesses and 
consumers. We are one of the largest Internet backbone 
providers. There are five, basically, providers that carry all 
Internet traffic kind of aggregated in the world, and we are 
one of the five, and we are building a nationwide high speed 
fiberoptic network to carry data traffic throughout the United 
States and abroad.
    We are also a leading consumer and small business Internet 
service provider with more than 800,000 consumer customers. 
Additionally, GTE offers managed access to the Internet. We are 
posting services and a variety of value-added Internet services 
for businesses and other organizations.
    Now, I point this out not because, to be a commercial for 
GTE, although I think I would get a bonus if I do that, but 
really to point out that we are really involved in all aspects 
of this space. If you think about it from the most basic level, 
one network, all the way kind of to the high end, kind of 
consumer and business services, we are involved in the Internet 
space in a very big way.
    As a result, when we look at this legislation, we look at 
it from that perspective, but we also look at it from the 
perspective that we have a subsidiary called CyberTrust 
Solutions, which is a certificate management products and 
services subsidiary that generates digital certificates to 
support secure communications, secure access control, secure 
messaging, and secure electronic transactions for electronic 
commerce applications.
    So when you look at this from our perspective, electronic 
authentication is key to our product offerings and our digital 
certificate business, but it is also key to our offerings in 
how we see the development of the Internet and what is going to 
be important on the Internet for the future.
    So why is it important, and I think the answer, as we look 
at it, is because business is really being transformed by the 
Internet. Electronic commerce has the potential to change--I 
would say the potential. It actually has changed in some 
respects the way every American can or will do business. We 
already see signs of this change in almost every aspect of our 
lives.
    According to one recent study, the number of U.S. 
households with Internet access rose from 5.8 million in 1994 
to 38.8 million in 1999. This figure is projected to rise to 60 
million in 2003, and many of these people are conducting 
business over the Internet.
    I would add parenthetically that all of these analyses have 
always been wrong. They have always understated the actual 
growth of the Internet. The economic power of the Internet was 
recently demonstrated by the unexpected surge in Internet sales 
during the Christmas 1998 season, and by the meteoric rise in 
technology shares, albeit not during the last 3 or 4 days, 
which has helped fuel the recent record-breaking rise of the 
Dow.
    Some analysts predict that electronic commerce will be a 
$300 billion a year business by the year 2000. While no one 
knows for sure whether these predictions are reliable, it is 
increasingly evident that the global use of electronic commerce 
is here and is here to stay.
    There is also much evidence to suggest that the 
productivity gains associated with Internet technologies was a 
major factor in the ability of our economy, the U.S. economy, 
to withstand the perils of the economic turmoil affecting much 
of the rest of the world over the last couple of years.
    Now, in order to transact business over large open networks 
like the Internet, parties must find a way to authenticate, 
that is, to identify each other, and to ensure that the 
messages sent to each other were not tampered with during their 
transmission.
    This is critical to me as we look at the Internet. The fact 
is that we are dealing with a medium where you do not know the 
person on the other side. I may go to a Web site. I might 
believe that Web site belongs to somebody, but today I really 
do not know that that is the case, or a merchant might choose 
to do business with me, Ira Parker, but the fact is, that 
merchant today really may not be sure that they are dealing 
with Ira Parker and, as a result, you need a technological base 
that really solves this issue.
    Now, there are many technologies out there, and I applaud 
this bill for being technology neutral, because the truth is, 
we do not know which technology will rule the day. We are 
betting on one or two in our company but the truth is, is that 
there may be other ones which rule, but there are three 
principles that I believe, and believe fundamentally have to be 
addressed in any piece of legislation, and this legislation 
pending does it.
    Which is, No. 1, you have to be able to authenticate the 
identity of the person or the information that sends the 
document or message, determine that the document was not 
modified during transmission, because it does you no good 
basically to know that I sent it but that was not the document 
I sent, and verify that the document received was the one sent 
by the party claiming to be the sender.
    If you embody those three principles in a piece of 
legislation, I think you will really find that it covers any 
technology that comes along today, tomorrow, in the future, 
that can meet that, so effectively it lets the bill be very 
flexible in terms of how it addresses not only today's 
applications in this space, but applications for the future.
    So why is legislation necessary or desirable? Senator 
Abraham said it in the beginning, and that is because there are 
so many States that have passed so much legislation in this 
area. As of January 31, 1999, some 43 States had enacted laws 
that dealt with electronic authentication.
    These States have varying approaches regarding such matters 
as registration and regulation of certificate authorities. Some 
of them are technology neutral, some of them are technology 
specific, some of them deal with limitations on liability and 
differ from State to State. They define key terms like 
authentication and digital signatures differently, and they 
also define the minimal content and technological scope of 
digital certificates in very different ways.
    Now, I will tell you, having said that, I think we should 
commend the States for their effort in this regard. They took 
it on. They took it on quickly. Utah, I believe, was the first 
State to approach it, and so I do not find--I am not critical 
of the States for taking this on, but the reality is, we find 
ourselves today with approaching 50 different regimes for 
electronic authentication, and the one thing that we know about 
the Internet is that the Internet is a space which does not 
respect borders.
    It does not respect State borders. It barely respects, 
depending upon how you look at it, national borders, and so as 
a result, when you look at the technologies that have to be 
employed, they need a legal basis, just a basis, not a whole 
lot of stuff around it, just a basis that makes sure that we 
are all playing on the same level playing field.
    There is also a foreign competitiveness issue, and I would 
say this is incredibly important. Foreign countries, 
particularly in the European Union, are allowing electronic 
authentication without a variety of conflicting intracountry 
rules and regulations. Thus, they facilitate commerce and the 
competitiveness of their companies.
    For the U.S. electronic commerce industry to compete in the 
world market it needs uniformity and simplicity at home. That 
does not address the issues of uniformity internationally, and 
that will be looked at by U.S. Government agencies as they 
explore dealing with other countries on these issues, but we at 
least need uniformity and simplicity at home.
    This is an important issue for Internet service providers 
like GTE Internetworking. Again, it is not just in terms of our 
business selling the certificates, selling the authentication. 
Everything that we do, whether we offer a consumer-based 
service to 800,000 consumers today, what they are doing, 
electronic commerce, or at least some of them are, or whether 
we are selling Web-hosting services to businesses, or whether 
it is selling connectivity to businesses, the reality is, in 
almost everything we do on the Internet, we see it as a kind of 
an overriding principle that kind of brings it all together.
    So with this in mind we believe that points embodied in 
Senate bill 761 are consistent with our view that the private 
marketplace should take the need in promoting and directing new 
technologies. I agree with my colleague on that. That is 
critically important. Government does not have a role, I do not 
believe, in setting the technologies.
    Where it does have a role, and this bill does it very well, 
is, it should take all action necessary to remove the obstacles 
to private market use, development, and deployment of the 
technologies. These are exactly the goals of Senate bill 761, 
and we therefore strongly endorse it and urge its enactment, as 
well as the enactment of similar legislation in the House.
    I appreciate the opportunity to be here today.
    [The prepared statement of Mr. Parker follows:]

    Prepared Statement of Ira H. Parker, Vice President and General 
                      Counsel, GTE Internetworking

    Mr. Chairman and members of the Committee, my name is Ira H. 
Parker. I am Vice President and General Counsel of GTE Internetworking. 
I welcome this opportunity to offer my views on electronic 
authentication. I commend you and your colleagues for exploring this 
important issue.
    GTE Internetworking is the division of GTE Corporation responsible 
for our business and consumer Internet offerings. We were formed just 
about 2 years ago when GTE Corporation acquired BBN, one of the 
original developers of the Internet. GTE Internetworking is an 
integrated Internet company providing many products and services to 
businesses and consumers. We are one of the largest Internet Backbone 
Providers and we are building a nationwide high-speed fiber optic 
network to carry data traffic throughout the United States and abroad. 
We are also a leading consumer and small business Internet Service 
Provider, with more than 800,000 customers. Additionally, GTE offers 
managed access to the Internet, Web Hosting services, and a variety of 
value added Internet services for businesses and other organizations. 
Through our CyberTrust Solutions subsidiary we offer a suite of 
certificate management products and services that generate digital 
certificates to support secure communications, secure access control, 
secure messaging and secure electronic transactions for electronic 
commerce applications. Electronic authentication is key to our product 
offerings, to our customers and to the development of electronic 
commerce.
    Why is this important? Because business is being transformed by 
Internet. Electronic commerce has the potential to change the way every 
American does business. We already see signs of this change in almost 
every aspect of our lives. According to one recent study, the number of 
U.S. households with Internet access rose from 5.8 million in 1994 to 
38.8 million in 1999. The figure is projected to rise to 60 million in 
2003, and many of these people are conducting business over the 
Internet. The economic power of the Internet was recently demonstrated 
by the unexpected surge in Internet sales during Christmas 1998 and by 
the meteoric rise in technology shares which has helped fuel the recent 
record-breaking levels of the Dow. Some analysts predict that 
electronic commerce will be a $300 billion a year business by the year 
2000. While no one knows for sure whether these predictions are 
reliable, it is increasingly evident that the global use of electronic 
commerce will change business as we know it. There is also much 
evidence to suggest that the productivity gains associated with 
Internet technologies was a major factor in the ability of our economy 
to withstand the perils of the economic turmoil effecting much of the 
rest of the world.
    In order to transact business over large, open networks like the 
Internet, parties must find a way to authenticate--that is, to 
identify--each other and to ensure that the messages sent were not 
tampered with during their transmission. The technique known as 
electronic authentication meets these goals.
    Electronic authentication is an electronic technique that allows 
the user to (i) authenticate the identity of, or information associated 
with, a sender of a document, (ii) determine that a document was not 
modified during transmission and (iii) verify that the document 
received was the one sent by the party claiming to be the sender.
    These are simple and necessary attributes. They are a useful tool 
that allows certainty and knowledge about customers and transactions.
    Why is legislation necessary or desirable? Internet service 
providers like GTE Internetworking put priority on being able to offer 
their services in a simple, uniform way throughout the United States. 
This goal is threatened by a burst of state legislation that has 
produced a patchwork quilt of conflicting and inconsistent state laws. 
While the states should be commended for their willingness to come to 
grips early on with electronic commerce, the resulting disparate state 
statutory regimes concern GTE Internetworking and other Internet 
service providers who seek to offer nationwide electronic commerce 
services over the Internet. I think all of us can agree that the 
Internet, and commerce conducted over the Internet, transcends state 
boundaries. As a result, anything short of uniformity will hinder our 
ability to provide these products and services and of consumers to 
enjoy the full fruits of Internet commerce.
    What are the states doing? As of January 31, 1999, some 43 states 
had enacted laws that deal with electronic authentication. These states 
have varying approaches regarding such matters as registration and 
regulation of certificate authorities, limitations on liability, 
definitions of key terms like ``electronic authentication'' and 
``digital signature'' and the minimal content and technological scope 
of digital certificates that provide electronic authentication.
    The problem is that if there are a multitude of state regimes 
governing electronic authentication, the implementation of secure 
electronic commerce over the Internet will become costly and 
inefficient. Up to 50 differing legal regimes will diminish the 
likelihood of seamless and uniform electronic commerce, which by its 
very nature is interstate in nature. Up to 50 different regimes will 
reduce the incentive for new market entrants to offer electronic 
commerce products and services. Up to 50 different regimes will confuse 
consumers doing business over the Internet and will result in a 
patchwork quilt of differing legal protections, commercial standards 
and levels of security.
    There is also a foreign competitiveness issue. This is very 
important. Foreign countries, particularly in the European Union, are 
allowing electronic authentication without a variety of conflicting 
intra-country rules and regulations. Thus, they facilitate commerce and 
the competitiveness of their companies. For the U.S. electronic 
commerce industry to compete in the world market it needs uniformity 
and simplicity at home.
    This is an important issue for Internet Service Providers (ISPs) 
like GTE Internetworking. While we support such state efforts as the 
drafting of the Uniform Electronic Transactions Act by the National 
Conference of Commissioners on Uniform State Laws, Internet electronic 
commerce is moving forward at too fast a pace to rely solely on them. 
We need uniform national legislation more rapidly than the current 
state efforts are likely to produce this result. We need national 
uniform legislation today.
    We believe that the Millenium Digital Commerce Act (S. 761) is just 
such legislation. We support this bill because it does six things:

          First, it provides recognition and effect for electronic 
        authentication used in any contract that relates to an 
        interstate transaction.
          Second, it authorizes parties to an interstate transaction to 
        establish by contract, electronically or otherwise, 
        technologies or business models (including legal or other 
        procedures) to create, use, receive, validate or invalidate 
        electronic signatures and electronic records. It would do this 
        notwithstanding any state law that specifies one or more 
        acceptable or required technologies or business models. It thus 
        largely preempts conflicting state laws.
          Third, and very importantly, S. 761 was drafted with a view 
        to the state uniform law effort that is currently under way. 
        Thus, if a state enacts or has in effect uniform electronic 
        transactions legislation that is substantially similar to that 
        reported to the state legislatures by the National Conference 
        of Commissioners on Uniform State Laws it would be deemed not 
        to be preempted, provided such law is not inconsistent with the 
        principles enunciated above, namely that it gives recognition 
        and effect to electronic authentication and allows parties to 
        establish by contract the technologies and business models that 
        govern their interstate transactions. Thus, the states can 
        legislate on electronic authentication consistent with the 
        uniform state law effort.
          Fourth, the bill is a minimalist, market-oriented, 
        technology-neutral approach. It does not purport to allocate 
        obligations and liabilities between users and providers of 
        electronic authentication. It leaves this up to the parties to 
        establish by contract.
          Fifth, S. 761 establishes no new bureaucracies or regulatory 
        schemes. Electronic commerce is an infant industry, and it 
        should not be strangled by unnecessary licensing or regulatory 
        schemes.
          Sixth, this bill does not affect existing consumer 
        protections or the rules governing the validity of formation of 
        agreements or system rules under the Uniform Commercial Code or 
        uniform state laws dealing with electronic contracting.

    These six points, as embodied in S. 761, are consistent with our 
view that the private marketplace should take the lead in promoting and 
directing new technologies. Government should take action to remove 
obstacles to the private market use, development and deployment of the 
technologies. These are exactly the goals of S. 761, and we therefore 
strongly endorse it and urge its enactment, as well as the enactment of 
similar legislation in the House.
    Thank you.

    Senator Abraham. Thank you very much, Mr. Parker.
    Mr. Callcott.

   STATEMENT OF W. HARDY CALLCOTT, SENIOR VICE PRESIDENT AND 
          GENERAL COUNSEL, CHARLES SCHWAB & CO., INC.

    Mr. Callcott. Thank you. I am Hardy Callcott from Charles 
Schwab & Co., Inc. I thank you for the opportunity to testify 
on behalf of the Millennium Digital Commerce Act, which we 
believe will help create the kind of predictable market-
oriented environment necessary to foster the continued growth 
of electronic commerce in the United States. This is good, 
bipartisan legislation that we believe deserves your 
consideration and support.
    I am here today to concede that Schwab did not invent the 
Internet. However, we are one of the largest, if not the 
largest company in the United States today in terms of Internet 
commerce. To give you a sense of scale, Amazon.com currently 
does about $3 million of business today on their Internet Web 
site. We currently do $2 billion a day in securities trading on 
our Web site.
    Schwab has become today the second largest securities 
brokerage in the United States in terms of active customer 
accounts, and we are the largest Internet brokerage firm in the 
world. We currently have 2\1/2\ million customers with active 
online accounts containing a total of over $219 billion in 
customer assets.
    If we are already doing this much commerce online, why do 
we feel this legislation is necessary, and the answer is, as my 
colleagues have stated, that Schwab and other businesses need 
greater certainty that electronic authentication will have the 
same legal effect as traditional pen-and-ink signatures.
    Today, if someone wants to open an account at Schwab, they 
have to fill out a paper application, manually sign it, and 
submit it to us either in person, at a branch or through the 
mail. With electronic authentication, this entire process could 
be done entirely online. So could other transactions which 
require signatures and are now handled manually.
    Examples would be change of address forms, IRA distribution 
forms, or wire transfer requests. Handling these transactions 
online would be quicker and more convenient both for brokerage 
firms and for our customers.
    There are a number of reasons why we support this 
legislation. First is that it provides uniformity. The 
securities markets are interstate in nature. We do business in 
all 50 States, and we may not even know where one of our 
customers who is using a laptop or the next generation of hand-
held wireless computers, we may not even know where that 
customer is located.
    Consistent, uniform Federal standards in our view are 
necessary if the securities industry is to engage in electronic 
commerce with certainty. The same need for Federal uniformity 
led Congress to adopt the National Securities Market 
Improvements Act and the Internet Tax Freedom Act, and we 
believe uniformity in electronic signatures is the logical next 
step.
    As we have heard, although there are efforts, which we 
strongly support, at the State level to create uniform 
electronic authentication legislation, currently patchwork 
regulation at the State level is a significant barrier. The 
State statutes that exist today vary greatly in terms of their 
definitions, the types of transactions they cover, the scope, 
some of them are technology-specific, and the result is a lack 
of consistency between States and continuing legal uncertainty 
for businesses.
    Second, this bill is technology-neutral. As you all know, 
technology in the electronic commerce area is evolving very 
rapidly, and we believe technological neutrality is important 
so that legislation does not stifle continued innovation by 
broadly defining electronic signature.
    This bill allows the markets to select the technologies 
that work, to balance the cost and the risk, and to reach an 
innovative and cost-effective result for businesses and 
consumers.
    Finally, we strongly support Senator Abraham's introduction 
of a companion bill, the Electronic Securities Transactions 
Act, 
S. 921. The securities industry faces not only contract law 
concerns but also Federal regulation. We therefore need 
certainty that electronic signatures will also satisfy the 
Federal securities laws.
    S. 921 does this while also continuing to recognize the 
SEC's authority to ensure that the use of electronic signatures 
is consistent with investor protection. So we are very pleased 
that Members of Congress on both sides of the aisle, including 
all three of the Senators here today, as well as Senator 
McCain, have supported electronic signature legislation.
    We would also like to thank Chairman Tom Bliley in the 
House, who has introduced H.R. 1714, which contains similar 
provisions.
    To conclude, the Millennium Digital Commerce Act is simple, 
forward-looking, market-oriented legislation, and precisely the 
kind of approach which is needed if the United States is to 
continue to lead the world in electronic commerce, and it is an 
approach that is sensitive to the concerns and interests of the 
States. We urge you to support and pass this bill.
    [The prepared statement of Mr. Callcott follows:]

  Prepared Statement of W. Hardy Callcott, Senior Vice President and 
              General Counsel, Charles Schwab & Co., Inc.

    Mr. Chairman and members of the Committee, my name is Hardy 
Callcott. I am General Counsel at Charles Schwab & Co., Inc. of San 
Francisco, California. Thank you for the opportunity to testify on 
behalf of the Millennium Digital Commerce Act (S. 761). We at Schwab 
believe that this is good legislation and that it deserves your serious 
consideration and support.
    Schwab is the second largest securities brokerage firm in the 
United States in terms of customer accounts, with over 6 million active 
accounts. In just 3 years, Schwab has become the largest online 
brokerage in the world, with 2.5 million active online accounts holding 
some $219 billion in total customer assets. For purposes of comparison, 
Amazon.com currently conducts about $3 million per day of 
business on its Internet website. Schwab conducts about $2 billion of 
Internet commerce per day.
    Online investing offers tremendous benefits to individual 
investors, the most important of which is better information: real-time 
access to investment research, market news, company press releases and 
SEC filings, earnings estimates and consensus recommendations, quotes, 
account balances, and other investment tools such as stock screening, 
stock charting, and portfolio tracking. The Internet has done more to 
put individual investors on a level playing field with large 
institutional investors than any development since fixed commissions 
were abolished in the 1970's.
    Online investing has also dramatically reduced costs for individual 
investors. Most online trades at Schwab cost $29.95, compared to 
average commissions of several hundred dollars per trade at full-
commission firms. Online investing is also convenient: customers can do 
research and place trades at their convenience for execution during 
market hours. Online investing offers speed, accuracy and control. And 
online investing allows customers to make their own decisions without 
having to trade through a broker who, especially at full-commission 
firms, may not have the customer's interest at heart. These factors 
help explain the rapid growth in customer demand for online investing.
    If so much business is already being successfully conducted online, 
why, then, is electronic authentication legislation necessary? The 
answer is a simple one. Schwab and other broker-dealers need greater 
certainty that electronic authentication will have the same legal 
effect as traditional pen-and-ink signatures.
    Take the simple example of account-opening procedures. Currently, 
customers must fill out account applications on paper, sign them 
manually, and then submit them in person or through the mail. With 
electronic authentication, this could be done entirely online and would 
save the industry--and, inevitably, the customer--tens, if not 
hundreds, of millions of dollars in operating costs. It also would be 
quicker and more convenient for the customer. Other transactions which 
require signatures and now must be handled manually could also be 
performed online if we are able to obtain legal assurances that 
electronic authentication would be recognized. These include: allowing 
margin trading, allowing option trading, power of attorney forms, 
change of address forms, wire transfer requests, beneficiary forms, IRA 
distributions, and letters of authorization.
    Let me address the issue of uniformity. The securities markets are 
national in scope and operation, and they involve transactions that are 
entirely interstate in nature. Schwab does business in all fifty 
states, and we may not even know from where a customer with a laptop is 
accessing our systems. Consistent and uniform Federal standards are 
therefore imperative if brokers and others in the securities industry 
are to engage in electronic commerce with any degree of certainty and 
reliability. Congress has already recognized this reality in the area 
of books and records, for example, and uniformity was the impetus 
behind the National Securities Markets Improvement Act (``NSMIA''), 
adopted in the last Congress. Uniformity in electronic authentication, 
then, is the logical and necessary next step.
    Today, patchwork regulation by the states poses the greatest 
barrier to the use and development of electronic signature technology 
and the continued evolution of e-commerce. This marketplace reality 
coexists uneasily with the fact that virtually every state either has 
already adopted or is in the process of adopting its own individualized 
law governing electronic authentication. The unfortunate fact is that 
the states have taken widely disparate approaches to electronic 
authentication. Thus, some states, such as in Utah's Digital Signatures 
Act of 1996, address the use of electronic authentication by the 
general public and regulate the providers of electronic authentication 
services through various systems of registration, licensing and payment 
of fees. On the other hand, several states have adopted laws that 
regulate only transactions with the state government. An example of 
this approach would be the Florida Electronic Signature Act of 1996.
    Beyond these two basic formats, state laws take varying approaches 
with respect to such matters as registration of certificate authorities 
and the definition of ``digital signature'' and other basic terms. They 
contain varying treatment of licensed and unlicensed certificate 
authorities, differing fee payment schemes, different rules for 
suspension of certificates, varying treatment of liability between 
parties, divergent standards for agreement between parties on the use 
of electronic formats, and similar considerations. Some of these state 
laws favor particular technologies, such as public key infrastructure, 
or ``PKI,'' technology, while others are technology-neutral.
    One important effort to rectify the problem of conflicting state 
laws is the Uniform Electronic Transactions Act (``UETA''), sponsored 
by the National Conference of Commissioners on Uniform State Laws, due 
to be presented to state legislatures later this year. We 
enthusiastically endorse this effort. However, there is no assurance 
that it will be adopted by all or even a majority of states, or that it 
will be achieved in a reasonable timeframe. It is worth recalling that 
it took eleven years (from 1958-1967) for the Uniform Commercial Code 
(``UCC'') to be adopted nationally, and even then two jurisdictions, 
Louisiana and the District of Columbia, failed to adopt it. Very 
simply, the electronic commerce industry does not have the luxury of 
that kind of time. We need Federal action now to allow us to go forward 
with certainty and clarity in the marketplace.
    We are therefore pleased that Members of Congress, on both sides of 
the political aisle, including the Leadership of both bodies, have made 
electronic authentication legislation a policy priority in this 
Congress. In particular, we want to congratulate both Senator Abraham 
and Chairman McCain, among others, for the introduction of S. 761 and 
S. 921 in the Senate, as well as Congressman Tom Bliley of Virginia, 
the Chairman of the House Commerce Committee, who has kicked off the 
debate in the House through the introduction of his bill, H.R. 1714.
    In our view, it is essential that these bills be quickly considered 
and acted upon, and that Federal legislation, such as S. 761 proposes, 
be put in place to provide the uniformity we need without usurping 
traditional state functions or continued efforts at the state level to 
address these issues. Indeed, we believe that, while the states should 
continue to proceed on a parallel track through UETA, S. 761 now 
represents a careful and sensitive balancing of needs between those of 
the industry and the legitimate needs of the states, and it is a 
measure that can and should be supported by all parties.
    I would like now to focus briefly on some of the main attributes of 
the legislative approach that we support. In its July 1, 1997, 
Framework for Global Electronic Commerce, the administration called for 
a predictable, minimalist, consistent and simple legal environment for 
[electronic] commerce. We at Schwab endorse this approach to 
legislation in this area: that is, enabling legislation that removes 
existing barriers to the use of, and reliance upon, electronic 
signatures. We believe in the creativity and innovation of the 
marketplace, and we see no need for legislation that over-regulates, 
attempts to resolve all open issues in this area or sets up new 
standards or regulatory regimes. What is needed is simple legislation 
that constructs the framework within which the market and its 
participants can develop the technologies and systems that work best 
for our various and wide ranging needs.
    Similarly, we would like to see a broad definition of electronic 
signature that enables market participants to choose among themselves 
which technology and which level of security and liability meets their 
individualized needs for any particular situation. In this connection, 
we note that the definitions in S. 761 generally follow those of UETA. 
Existing law does not establish minimum standards of security and 
liability for pen and ink signatures (for example, there are no minimum 
standards to make signatures harder to forge). Similarly, it seems to 
us, this legislation should not set minimum standards for electronic 
signatures. The market will quite naturally work this out, selecting 
the best technologies, balancing costs and risks, and inevitably 
reaching a result which is innovative and cost effective, both to the 
broker and the customer.
    In Schwab's view, technology neutrality also is critical. 
Technology in the electronic commerce area is evolving rapidly. 
Legislation must be neutral so as not to stifle continued innovation. 
We must allow technology to develop and compete in the marketplace. 
Federal legislative attempts to dictate what technology is or is not 
acceptable, however well-intentioned they might be, will be a 
prescription for failure. The administrations Framework also endorsed 
technology neutrality in the application of any rules affecting e-
commerce. The market therefore should naturally select those 
technologies that work and deliver appropriate security and 
reliability, and it will, equally naturally, reject those which do not. 
Legislation that enshrines any particular technology, such as public 
key infrastructure, or sets standards that give one technology an 
advantage over others will stifle innovation at these critical early 
stages.
    Allowing and fostering technological innovation through competitive 
market forces has historically worked well in all areas, particularly 
the securities industry. For example, in the 1975 amendments to the 
Securities Exchange Act of 1934 (the 34 Act), Congress mandated that 
the SEC follow a facilitate-but-not-design approach to overseeing the 
development of the national securities markets. A technology-neutral 
enabling statute like S. 761 would follow this same approach by 
facilitating the development of electronic commerce without mandating a 
particular system or design. We believe that such an approach will 
result in the same beneficial technological innovation that has made 
the U.S. securities markets the envy of the world.
    Finally, Schwab supports separate provisions dealing specifically 
with the securities industry because the industry is faced with not 
only contract law concerns but regulatory requirements. We therefore 
need the certainty that electronic signatures will meet the 
requirements of the 34 Act, as well as the Investment Advisers Act of 
1940, while at the same time recognizing the SECs authority to provide 
guidance to ensure that the use of electronic signatures is consistent 
with investor protection. For this reason, we also support Senator 
Abraham's introduction of a separate but related bill, the Electronic 
Securities Transactions Act (S. 921).
    In conclusion, Charles Schwab believes that the Millennium Digital 
Commerce Act (S. 761) constitutes simple, forward-looking, market-
oriented legislation, precisely the kind of approach which is needed if 
the United States is to continue to lead the world in electronic 
commerce. And it is an approach that is sensitive to the concerns and 
interests of the states. We urge you to support and pass this bill.
    Thank you.

    Senator Abraham. Mr. Callcott, thank you very much. We turn 
now to Mr. Miller.

     STATEMENT OF HARRIS N. MILLER, PRESIDENT, INFORMATION 
               TECHNOLOGY ASSOCIATION OF AMERICA

    Mr. Miller. Senators, it is really an honor to be before 
this committee, and three of the leading Senators in terms of 
promoting the information technology age. On behalf of the 
Information Technology Association of America and our 11,000 
member companies, I want you to know we strongly endorse the 
Millennium Digital Commerce Act of 1999 and urge its quick 
passage.
    Our companies are involved in software services, the 
Internet, electronic commerce, professional services, 
information services, and telecommunications. I also serve as 
president of the World Information Technology and Services 
Alliance, which consists of 38 high tech associations around 
the world, so I have an international interest in this 
legislation as well as a national perspective.
    Our companies are helping to shape the future of the 
electronic commerce age. The importance of electronic commerce, 
as the previous witnesses have indicated, cannot be overstated. 
Estimates vary widely, but the most recent estimates are by 
Forrester Research that electronic commerce will grow to over 
$327 billion within 2 years. Our own recent surveys indicate 
that the electronic commerce marketplace will double in just 
the next 6 months.
    Given this rapid growth, we did a recent survey to get some 
indication of what kind of concerns people have about using the 
Internet. We did this in conjunction with the well-known firm, 
Ernst & Young. The survey, which measured the perceptions of 
top executives from across the information technology industry 
and their customers, found that 60 percent of respondents 
believed lack of trust was the top overall barrier to 
electronic commerce.
    When probed for more specifics, they identified privacy 
protection, authentication, and security as the three top level 
areas of concern.
    Privacy and security have garnered a lot of attention in 
the media, and in Congress, but the issue that this bill 
focuses on, authentication, has not received as much attention. 
We believe it needs it, deserves it, and that is why we support 
this bill.
    Given the importance of electronic commerce, we have to 
realize that the famous New Yorker cartoon which says that the 
great thing about the Internet is that you can be a dog on the 
Internet really is not very funny in the commercial world. What 
real people want to know, whether they are consumers or 
business people, is that the people that they are dealing with 
are not dogs.
    Protecting the integrity of the content is critical. They 
want to know that what you have communicated is what you mean. 
The continued growth of electronic commerce depends upon the 
development of an updated legal framework, as Senator Wyden 
said, so that contract law can exist in the digital age.
    We were very strong supporters of your legislation last 
year, Senator Abraham, S. 2107, the Government Paperwork 
Elimination Act. It was the first legislative step in 
electronic authentication by pushing the U.S. Government to 
recognize electronic signatures have the same legal recognition 
as the handwritten signature. We are pleased that the U.S. 
Office of Management and Budget appears to be following through 
on this law which you authored, Senator Abraham, with the 
strong support of your Commerce Committee colleagues.
    S. 2107 dealt with how private parties relate to the 
Federal agencies in the realm of electronic signatures. S. 761, 
as you and the other witnesses indicated, focuses on commercial 
environment, and it is the next right step. It is an important 
bill, but at the same time, it is a modest bill that strikes a 
successful balance.
    For example, as you indicated in your opening statement, 
this bill uses a very light form of State preemption. It will 
not apply to States that embrace the forthcoming Uniform 
Electronic Transactions Act which, as you stated, will be 
forthcoming soon. It is also cautious in that Government does 
not skew the evolving marketplace for authentication services. 
In other words, it does not get out ahead of the private sector 
in the development of technologies and standards.
    An important provision in S. 761 which will help to build 
trust in electronic commerce is what are called the party 
autonomy provisions. These provisions ensure that if several 
parties agree to use a specific authentication technique, then 
this should be respected in the courts regardless of 
jurisdiction.
    Examples abound of why this legislation is important. Mr. 
Callcott talked about how much this will simplify the ability 
for individual customers to get online and use the various 
trading services that his company and many others are now 
offering. It is also important in business to business 
transactions.
    For example, a company that is selling auto parts, as many 
are frequently doing online now, needs to know that the person 
who is buying the auto parts product is a legitimate vendor who 
will install them correctly and follow the prescribed 
procedures. Obviously, the person who is buying the auto parts 
wants to know that the parts being supplied are legitimate, and 
he or she can adequately represent that.
    They require types of transactions authentication. They 
require legal standing. They require that you cannot 
subsequently go back and repudiate a transaction because this 
transaction took place online.
    Just yesterday, I had the opportunity to testify before the 
House Small Business Committee. One of the witnesses was a 
lobster fisherman and salesman from Maine who has now gone 
online, and is now selling lobster dinners online. By the way, 
they did a transaction in the middle of the hearing, but at the 
end of the day Chairman Talent decided not to give him his 
credit card number, so we did not have lobster dinners as part 
of the hearing.
    This gentleman described that one of the concerns he has 
about electronic commerce is that as much as 10 percent of his 
customer orders are later repudiated by the people who ordered 
the products.
    Now, he has to make a business decision about how far he 
wants to carry the authentication. Clearly in larger orders if 
he knew that there was an authentication process he could go 
through which would not be repudiated, that would give him 
simple recourse. Then he could expect to be much more confident 
that when he sells a large order online, that he would be able 
to collect the moneys which he is properly owed.
    As indicated by previous witnesses, there are important 
basic principles that we support. The private sector must lead 
in the setting of standards. The legislation must be 
technology-neutral. It must be industry-neutral. It must let 
the marketplace decide what is the appropriate level of the 
solution to any questions on agreement of transaction.
    Encryption and the issues of trust of third parties should 
be treated as separate issues from electronic signatures. We 
need not just State harmonization, not just national 
harmonization, but also international harmonization, with 
mutual recognition of national and subnational laws.
    Now, S. 761 cannot deal with all these questions. But it is 
consistent with these goals, and we particularly commend you, 
Senator Abraham and your colleagues, for introducing provisions 
in the bill which encourages the negotiating position of the 
United States in both its bilateral and multilateral 
discussions.
    Legislation which establishes a consistent legal framework 
for electronic authentication and thereby fosters a secure 
environment for electronic commerce will maximize the benefits 
of the global electronic marketplace for American consumers and 
the economy. We wish to thank you for your leadership on this 
bill. We look forward to supporting the legislation as it moves 
through the Senate and Chairman Bliley's bill moves through the 
House of Representatives and onto the President's desk.
    [The prepared statement of Mr. Miller follows:]

    Prepared Statement of Harris N. Miller, President, Information 
                   Technology Association of America

    Mr. Chairman, and distinguished members of the Committee, on behalf 
of the over 11,000 direct and affiliate member companies of the 
Information Technology Association of America (ITAA), I thank you for 
inviting me to participate in today's hearing on the ``The Millennium 
Digital Commerce Act of 1999,'' S. 761. Our companies are involved in 
software, services, the Internet, electronic commerce, professional 
services, information services, and telecommunications. In addition to 
serving as ITAA President, I am President of the World Information 
Technology and Services Alliance (WITSA), consisting of 38 information 
technology associations around the world. Because electronic commerce 
is a global issue, ITAA is interested in the topic of today's hearing 
from both a national and international perspective.
    ITAA member companies are helping to shape the information age by 
creating thousands of new sources of information, turning local and 
regional markets into global markets, and giving businesses and 
consumers new and efficient means of trading goods and services. In 
short, our members are at the forefront of the revolution called 
``Electronic Commerce.''
    The importance of electronic commerce to the U.S. economy and to 
American consumers cannot be understated. While estimates of the growth 
and size of the electronic marketplace vary widely, the Department of 
Commerce predicts that electronic commerce will account for more than 
$70 billion in sales in the year 2000, and Forrester Research projects 
that more than $327 billion will change hands over the Internet by 
2002. Based on ITAA's own surveys, we see a doubling of the electronic 
commerce marketplace in just the next 6 months. Given this dramatic 
growth, the creation of a secure environment for electronic commerce is 
vital to both American consumers and the American economy.
    ITAA last month released the results of a survey on electronic 
commerce barriers that--we conducted in conjunction with Ernst and 
Young. The survey--measuring the perceptions of top executives from 
across the information technology industry and their customers--found 
that 62 percent of respondents believed lack of trust was the top 
overall barrier to e-commerce. When probed for specific obstacles, 
respondents identified privacy protection (60 percent), authentication 
(56 percent) and security (56 percent) as the three top-level trust 
concerns. While privacy and security have received a good deal of media 
attention, concerns about authentication--knowing who you are really 
dealing with on the Internet--appear to be growing in significance.
    We are clearly in a remarkable stage of growth in electronic 
commerce. It is no surprise that concerns about authentication are 
growing, too. When people are online, they want to know with whom they 
are dealing. They want to know that people are who they say they are 
and are going to follow through with commitments made over the 
Internet.
    The famous New Yorker cartoon says the great thing about the 
Internet is that no one knows you're a dog. That is humorous, but it is 
not what buyers and sellers really want. They want to know they are not 
dealing with dogs. Protecting the integrity of the content is also 
critical. They want to know you mean what you communicated you mean. 
The continued growth of electronic commerce depends on the development 
of a legal framework of contract law that will supply uniformity and 
legal certainty to transactions in cyberspace.
    We were strong supporters last year of S. 2107, The Government 
Paperwork Elimination Act. This legislation was the right first 
legislative step on electronic authentication. The bill was simple and 
straightforward: it required Federal agencies to make all of their 
forms available online in a reasonable period of time, and gave an 
electronic signature the same legal recognition as a handwritten 
signature. We are pleased to see that the Office of Management and 
Budget (OMB) is following through on this important new law, and 
prodding the agencies to move forward with the implementation.
    S. 2107 dealt with how private parties deal with Federal agencies 
in the realm of electronic signatures. S. 761 addresses the commercial 
environment, and is the right next step. It would do what is needed 
more than anything else to encourage the growth of electronic commerce: 
it will build trust in the medium by creating a consistent legal 
framework across the states. It is a modest bill that strikes a 
successful balance in a number of ways. For example, the bill uses a 
very light form of state preemption. Its provisions will not apply to 
states that have embraced the Uniform Electronic Transactions Act, 
which should be completed soon. S. 761 is also cautious in ensuring 
that the government does not skew the evolving marketplace for 
authentication services. In short, the bill does not get out ahead of 
the private sector in the development of technologies and standards.
    An important cornerstone of S. 761--which will help to build trust 
in electronic commerce--is what are called the ``party autonomy'' 
provisions. These provisions ensure that if several parties agree to 
use a specific authentication technique, then this should be respected 
in the courts, regardless of jurisdiction.
    Why is this bill important?
    Let me illustrate how S. 761 will create legal trust and certainty 
in authentication techniques, creating efficiencies and reducing costs. 
Let's assume that a major auto manufacturer is based in the U.S. with 
operations and dealers around the world. The company has created a site 
on the Internet not only for its dealers but also for the hundreds of 
companies globally that perform repairs and do maintenance on these 
cars. So the web site contains catalogue information--which is changing 
constantly and needs to be kept up to date--on what models are 
available at what cost, and the prices associated with all the various 
parts available for repairs. The web site is password protected, but 
also requires dealers to authenticate the purchase of cars using a 
digital signature to verify the purchase. Such a system creates 
enormous efficiencies and reduces costs by improving inventory 
management and reducing paperwork costs. It also improves the company's 
supply chain management, and allows the dealers to tell its customers 
what kinds of cars are available with what features and when they will 
be delivered. There may still be some negotiation over price--the 
Internet can't change all realities overnight!
    S. 761 creates the legal trust and certainty necessary to make it 
easier for our car manufacturer to develop and use such an efficient 
Internet-based system. The bill ensures that when a dealer buys 30 new 
cars, a legal framework exists to authenticate the purchase using the 
digital signature that all the parties have agreed upon. And it ensures 
that the laws of individual states respect the agreement reached on the 
specific authentication technique used by the car manufacturer and its 
dealers should any disputes arise. Such a system also makes it 
virtually impossible for a hacker to corrupt the system or submit false 
orders.
    In our example, the overall benefit of such a system is reducing 
the cost of cars for consumers, and allowing consumers to order cars 
with specific features that will be delivered in shorter time-frames.
    S. 761 also ensures that if the company and its dealers wanted to 
use a different kind of authentication technique (for example, a 
biometric method), that they could do so. So the bill is technology 
neutral and allows the marketplace to develop the best possible 
procedures.
    Further, S. 761 supports a similar consistent framework on an 
international level. It supports the U.S. Government's efforts to 
negotiate multilateral and bilateral treaties to accomplish the same 
goals. This is important because the Internet is a global medium that 
transcends national boundaries.
    ITAA has embraced a number of important principles on 
authentication and electronic signatures. S. 761 is totally consistent 
with these principles:

          The private sector must lead in the setting of standards and 
        approaches on digital signatures. For example, any 
        accreditation standards for certificate authorities (CAs) 
        should be developed by the private sector. Legislation and 
        regulation should not impede development of industry-led, cost-
        effective, market-trusted authentication services created in a 
        competitive environment.
          Any legislation on electronic signatures must be technology 
        neutral.
          Any legislation on electronic signatures must be industry 
        neutral.
          Let the marketplace decide what is the most appropriate 
        solution for any given level of agreement or transaction. For 
        example, a major financial transaction involving the transfer 
        of millions of dollars might involve a CA, hewing to a 
        specified level of standards, protected by unbreakable 
        security. Whereas a consumer buying a product over the Web 
        might accept a lower and less expensive standard with high, but 
        not unbreakable security.
          Encryption and the issue of trusted third parties should be 
        treated as a separate issue from electronic signatures.
          State, national, and international laws governing electronic 
        authentication need to be harmonized, with mutual recognition 
        of national and subnational laws. A framework needs to be in 
        place that allows for electronic authentication to be used 
        across national borders. Governments must avoid using 
        electronic authentication laws as non-tariff barriers.
          Legal authorities should recognize the equivalency of 
        traditional and electronic signature and record requirements.

    While S. 761 cannot deal with all of these questions, it is 
consistent with these goals. For example, the bill is supportive of the 
negotiating position of the U.S. in both bilateral and multilateral 
discussions designed to foster trust in electronic authentication 
across borders, without mandating legislative solutions.
    Legislation that establishes a consistent legal framework for 
electronic authentication and thereby fosters a secure environment for 
electronic commerce will maximize the benefits of the global electronic 
marketplace for American consumers and the economy.
    We wish to thank the sponsors of this bill for your leadership. 
ITAA looks forward to supporting this bill aggressively as it moves 
through the Senate, as well as similar legislation in the House.

    Senator Abraham. Thank you, Mr. Miller.
    In that you deferred on an opening statement, Senator 
Burns, I will start with you for questions and we will go to 
Senator Wyden.
    Senator Burns. Is anybody out there against this bill?
    [Laughter.]
    Senator Burns. I just want to throw out a couple of 
questions here, and I have to run, but again I want to thank 
Senator Abraham for doing this. How important a role does 
encryption or e-privacy play, and Mr. Miller, I was interested 
in your statement that encryption should be treated in a 
different light.
    I know, and you know, that around our different States, 
Montana we set up a long time ago a committee out there to 
oversee systems to make sure that all the systems were 
interoperable. We did not want a bunch of different systems 
that could not talk to one another, because sometime down the 
line we are going to have to do that, because we are all 
interfaced, so to speak. What role do you think those two 
issues play?
    Now, I am an old-fashioned guy. I like to go and I like to 
see who I am doing business with, and I like to give a check, 
OK, and I have a little bit of nervousness about a lot of 
things on the Internet, not all of them, but about some of 
them, and I would like to find some way that we could build 
confidence.
    To me, the integrity, and to really do a lot of business on 
the Internet is going to depend upon what we do here on this 
issue and on encryption for security.
    Mr. Miller. I would say, Senator, encryption is absolutely 
essential to electronic commerce. We very much appreciate your 
efforts and those of many of your colleagues who are trying to 
convince the Administration either to change its policies 
regulatorily or to pass legislation.
    We are very pleased at the support of the Full Committee 
Chairman, Senator McCain, who is now a supporter of the reform 
legislation. It would change the current situation, which 
restricts the ability of the U.S. companies to export products 
above a certain encryption strength, except in limited cases of 
financial services.
    It is a global economy, Senator, as you said over and over 
again, and because of that we have to have absolutely strong 
encryption. Without it, as Mr. Parker and Mr. Campbell and Mr. 
Callcott indicated in their testimony, it is impossible to do 
electronic commerce because of the issue that we must be able 
to protect the integrity of the information that goes across 
the Internet.
    Privacy is also an incredibly important issue. That is why 
the entire community on the Internet, all of the stakeholders, 
the information technology industry, and all the people that 
are selling over the Internet, are working together for an 
important self-regulatory effort, the Online Privacy Alliance.
    You may have seen the results of the privacy survey that 
came out just a couple of weeks ago that was done by Georgetown 
University. It indicated the dramatic increase to now over 70 
percent of all Web sites, and something like 90 percent of the 
most heavily trafficked Web sites having very explicit, clearly 
posted privacy policies. This is because individual consumers 
as well as business people, when they come to the Web sites and 
they do a commercial transaction, want to know that their 
privacy is being protected. They want to understand what the 
privacy roles are of the merchants they are doing business 
with. So when you decide you are going to stop walking down the 
street and handing out a check and ordering lobster online.
    Senator Burns. I am not going to do that.
    [Laughter.]
    Mr. Miller. Whenever your children or grandchildren or 
friends and neighbors begin to do that, they want to be sure 
that the information they are giving is first of all trusted 
and confidential, and is not going to be stolen by some hacker 
or given away. They want to make sure that the information they 
are giving to a merchant is not then going to end up in the 
hands of hundreds and thousands and millions of other people 
who have no right to that information, except to somehow take 
advantage of it for purposes that do not serve your interest as 
the consumer.
    Senator Burns. Mr. Callcott, I am interested in--give me 
some kind of ideas of the problems you run into, and what your 
biggest complaint is when individuals start doing business with 
Schwab on an individual basis in the market. I know it cannot 
be all roses. Give me your idea, your biggest challenge you 
have.
    Mr. Callcott. Well, the biggest challenge we have had, and 
I think it is true for a number of people in the securities 
industry, is keeping up with the customer demand for our 
services. Last year we had almost a 1,000 percent increase in 
the capacity of our Web site, and this year we are going to 
increase the capacity of our Web site another 900 percent.
    To do that is a complicated matter. We have gone from two 
mainframes at the beginning of last year. We are going to have 
10 mainframes by the end of next month. That is very 
complicated to do, to add that much additional capacity, and as 
a result we have had a few times where our Web site has gone 
down.
    Now, I must say, our Web site has gone down on average 
between 1 and 2 hours per month so far this year, which we will 
put up against any computer system anywhere in the country, 
especially one that is adding capacity as fast as we are, so I 
think that is an area, like the privacy area, where the market 
is very aware of what the issues are, and the market is 
addressing those issues.
    But if I can followup on your encryption question, Schwab 
runs what we believe is the largest secure encrypted Web site 
in the world. Any time you are looking at your customer account 
data, you are doing research for a security you might buy, or 
are trading, that is all coming back to you in a secure, 
encrypted form, and that, of course, takes much more capacity 
to run than an unencrypted Web site.
    Similarly, we were a leader in posting our privacy policy 
on our Web site. I think we were the first brokerage firm to do 
that, and we think that is absolutely critical for our 
customers, and in the privacy area our view is that if people--
people should be required to post a privacy policy, and if they 
violate that policy, they should be subject to sanctions, but 
we do not support sort of broad Federal legislation telling 
firms what their privacy policy should contain.
    Senator Burns. You have a person, let us say, violates the 
law. How tough are they to find, and how tough are they to 
prosecute?
    Mr. Callcott. We have had less problems with fraud in the 
online area, frankly, than in the telephone area, where we have 
had problems of what is called account takeovers, where people 
will call up and impersonate a customer. Every time you go onto 
the Schwab Web site, if you are a customer you have got to use 
your password, and so far we have had very few instances where 
people have had their passwords stolen or mislaid. It is 
frankly not one of our top three security problems that we have 
had.
    Senator Burns. Thank you, Mr. Chairman. I just think that 
these other elements are very important as we walk hand-in-hand 
with this legislation, and I am certainly happy that the 
chairman of the full committee has come to the altar on 
encryption.
    [Laughter.]
    Senator Abraham. Thank you, Senator Burns. Before I turn to 
Senator Wyden, I just will indicate that Senator Lott is also 
one of our original cosponsors and has provided us a statement 
for the record which we will enter into the record of this 
hearing.
    [The prepared statement of Senator Lott follows:]

  Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi

    Senator Abraham, thank you for holding this important and timely 
hearing on the Millennium Digital Commerce Act. A solid legislative 
measure that will promote exponential growth in electronic commerce.
    Your sponsorship of this bipartisan legislation is yet another 
example of your continuing leadership on important technology issues. I 
am truly grateful for your efforts to author and spearhead common sense 
legislation that both directly and indirectly benefits the citizens of 
Michigan, Mississippi, Arizona, and every other state.
    This hearing follows the Department of Commerce's public conference 
on ``Understanding The Digital Economy--Data, Tools, and Research.'' A 
workshop that included leaders from industry, government, and academia. 
Government-sponsored conferences and Congressional hearings, like the 
one being held today, that explore the challenges and opportunities of 
the Internet and approaches to facilitate electronic commerce, are good 
for all Americans.
    As my colleagues are aware, it was Senator Abraham's initiative 
last year that led to the 105th Congress' enactment of the Government 
Paperwork Elimination Act. An important first step toward the eventual 
broad use and acceptance of electronic signatures. The act, now law, 
requires Federal agencies to automate their forms and allows computer 
users to complete, electronically sign, and submit government forms 
online.
    Because of Senator Abraham's efforts, the Federal Government will 
save thousands of square feet of storage space. More importantly, 
Americans in every state, every county, and every city and town will 
save countless hours completing and submitting government paperwork. It 
will allow parents to spend more quality time with their children and 
will save them billions of dollars over time.
    The Government Paperwork Elimination Act, which I proudly 
cosponsored, was also supported by the Administration. This good 
government measure also facilitates the Federal Government's transition 
to a paperless document management system. It allows agencies to 
collect and maintain forms and other records faster, easier, and 
cheaper.
    Now it is time for the 106th Congress to take the next logical 
step. To enact 
e-commerce friendly legislation that is a direct outgrowth of and a 
natural extension to the Government Paperwork Elimination Act.
    Senator Abraham, your bipartisan Millennium Digital Commerce Act 
provides a baseline national framework for online business to business 
transactions. It is important to interstate commerce because it 
provides legal standing for electronic signatures on contracts and 
other business transactions.
    As we all know, advancing interstate Commerce and establishing 
appropriate and necessary parameters for state-to-state transactions 
falls squarely within Congress' jurisdiction under Article I, Section 8 
of the Constitution of the United States.
    Electronic signatures are a revolutionary communication tool. 
Unlike manual signatures, which can easily and fraudulently be 
duplicated, automated signatures are highly controlled and extremely 
safeguarded. A document that contains an electronic signature is far 
more secure than a hardcopy signed and passed off by hand. While 
someone can easily make an unnoticeable pen and ink change to a paper 
document, an electronically signed file becomes invalid if any of the 
data in it is altered or eliminated. Electronically signed documents 
can also provide additional security measures by automatically time and 
date stamping a document so all parties to the agreement know exactly 
when the signature was placed. No more post dating that electronic 
check. Electronic signatures are an emerging technology that will 
springboard even greater electronic commerce than our nation has 
experienced to date.
    As Secretary Daley commented just last month, ``the proportion of 
retailers selling on the Internet tripled in just one year, from 12 
percent in 1997 to 39 percent in 1998. In the year 2000, Internet 
shopping is expected to generate $30 billion [in revenue].''
    Promoting continued growth in electronic commerce is good for 
business, consumers, and the overall American economy. It is Congress' 
responsibility to ensure that roadblocks to the e-commerce superhighway 
are taken down.
    Senator Abraham's bill, which Chairman McCain, and Senators Wyden, 
Burns, Allard, and I have cosponsored, would help eliminate one 
potential barrier that stands in the way of progress.
    The Internet is local, regional, national, and global. Businesses 
and customers are becoming increasingly frustrated with the hodgepodge 
of state laws aimed at governing what is clearly a ubiquitous 
communication tool. Today, more than forty states have laws on the 
books concerning the use of authentication technology such as 
electronic signatures. While such rules are well intentioned, the fact 
that no state has chosen to adopt the same approach has had a chilling 
effect on the potential growth in interstate commerce available through 
the World Wide Web.
    Congress cannot sit idly by and watch the milieu of state laws on 
electronic signatures adversely impact electronic commerce. Interstate 
and international commerce that benefits us all. Commerce that is a 
significant contributor to our nation's economic health. Commerce that 
creates new businesses, big and small, and thousands of new jobs all 
across the country.
    In our fast-paced global and highly technical environment, where 
time is money, companies transacting business across state lines need 
assurance that electronically signed documents are fully and legally 
executable. Senator Abraham's measure will ensure that businesses 
located in different states are held to their agreements and 
obligations even if their respective states have different rules and 
approaches concerning electronically signed documents. It creates a 
much needed level playing field across all fifty states. It is a 
baseline--not a floor. It is an approach that recognizes that all 
states in the union need to participate if America is to have a 
successful electronic signature regime.
    The Millennium Digital Commerce Act is a much needed and timely 
precursor to state-by-state adoption of the Uniform Electronic 
Transactions Act (UETA). Once UETA is finalized, its enactment by all 
fifty states is not expected to occur for several years. Those who want 
to transact business online cannot wait until then. They want 
Congressional action now. They are looking to the members of this 
committee for leadership now.
    Without objection, I would like to introduce a few documents into 
the record, following my statement, that will help inform the 
discussion we are having today. The first is an April 1998 report from 
the Department of Commerce on ``The Emerging Digital Commerce'' and a 
specific appendix from the report on ``Electronic Commerce Between 
Businesses: Analysis and Case Studies.'' The second document is an 
Executive Summary of the OECD's report on ``The Economic and Social 
Impact of Electronic Commerce.'' \1\
---------------------------------------------------------------------------
    \1\ This  material  is  maintained  in  the  Committee's  files.  
In  addition,  the  U.S.  Department  of  Commerce  Report,  ``The  
Emerging  Digital  Economy'' and  Appendix  3, ``Electronic Commerce 
Between Business: Analysis and Case Studies'' can be obtained at
www.ecommerce.gov/emerging.htm.
---------------------------------------------------------------------------
    In its report on the digital economy, the U.S. Department of 
Commerce concluded that:

          Internet Commerce is growing fastest among business. It is 
        used for coordination between the purchasing operations of a 
        company and its suppliers; the logistics planners in a company 
        and the transportation companies that warehouse or retailers 
        that sell its products; and the customer service and 
        maintenance operations and the company's final customers.

    The report goes on to say that:

          Companies are quickly moving to utilize the expanded 
        opportunities created by the Internet. For instance, Cisco 
        Systems, Dell Computers and Boeing's spare parts business 
        report almost immediate benefits after putting their ordering 
        and customer service operations on the Internet. They are so 
        convinced of its benefit to their own companies and their 
        customers that they believe most of their business will involve 
        the Internet in the next three to 5 years. . . . Growth of 
        business-to-business electronic commerce is being driven by 
        lower purchasing costs, reductions in inventories, lower cycle 
        times, more efficient and effective customer service, lower 
        sales and marketing costs and new sales opportunities.

    Senator Abraham, enactment of your bill is an important interim 
step toward eventual national uniformity. The kind of uniformity needed 
to support electronic commerce. Baseline national standards that the 
Commerce Department's case study participants, Federal Express, Cisco 
Systems, Dell Computer Corporation, Boeing, Garden Escape, W.W. 
Grainger, and General Electric, can realize the tens of billions of 
dollars worth of online transactions possible as a result of Congress' 
enactment of the Millennium Digital Commerce Act.
    Senator Abraham's Millennium Digital Commerce Act merely 
establishes legal certainty for electronic signatures when they are 
used for interstate business transactions. It strikes a necessary 
balance between a state's individual interests and the need for 
reciprocity among and between states. It fosters the expansion of trade 
on a state-wide, national, and international basis while promoting 
continued innovation.
    This much needed and desired legislation is technology neutral. It 
allows businesses to determine their own methods for executing online 
transactions. It also establishes guiding principles for the use of 
electronic signatures for international transactions. A framework 
founded on open, non-discriminatory standards. Last, this legislation 
requires Federal agencies to identify rules or regulations that impede 
electronic commerce and make recommendations for improvements. Another 
important step toward eliminating unnecessary and harmful barriers to 
trade.
    Our trading partners east of the Atlantic are already working 
toward recognition of electronic signatures. The United States should 
not--cannot--lag behind our industrial trading partners.
    I also appreciate Chairman McCain's efforts to move the Millennium 
Digital Commerce Act forward. Today's hearing and the questions and 
answers provided by the esteemed panel before us, will help move the 
Commerce Committee forward on this necessary journey.
    This important pro-technology, pro-electronic commerce legislation 
will help stimulate our nation's economy and move us forward into the 
21st Century.
    I hope my colleagues on both sides of the aisle will consider the 
bill's merits and join in supporting this legislative effort.
    Again, I want to say thank you to Senator Abraham for his continued 
stewardship on technology and other public policy issues facing 
Congress. The folks back in Michigan should be proud to have you here 
promoting their interests.

    Senator Abraham. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. I think Senator 
Burns' questions were very helpful as well, and I only have a 
couple of followups. In fact, you all were so supportive in 
your statements one is almost thinking one should quit while 
one is ahead.
    [Laughter.]
    We will get the proxies and move this. One question I had 
for you, Mr. Callcott, is, tell us the difference in terms of 
time saved between what we have today with the filing of all 
the paperwork that you are talking about and what would happen 
under the legislation that we are talking about here. What kind 
of time will actually be saved, in your judgment?
    Mr. Callcott. Again, it depends on a variety of 
circumstances.
    Senator Wyden. Take a couple of transactions and tell us 
the amount of time saved.
    Mr. Callcott. Well, let us take, for example, a wire 
transfer request. That is a transaction which we will not--you 
can trade securities online today without getting a manual 
signature, just as you can trade over the telephone, and have 
been able to for decades.
    A wire transfer request by contrast is something which 
every brokerage firm requires a signature to process. You do 
that online, your wire transfer can be sent within a matter of 
minutes. If you do not go in an online environment you will 
have to drive into a Schwab branch. If you drive into a Schwab 
branch we can process that wire transfer request probably same 
day but maybe not until the next day, depending upon on the 
West Coast you are probably not going to get in on time to meet 
that day's batch of wire transfer requests.
    If you are sending it in by mail, 3 to 4 days, maybe 5 
days, depending if you are in a part of the country that has 
slow mail delivery, so we are talking about the difference 
between days and minutes.
    Mr. Miller. Senator Wyden, I think there is a cost factor, 
too. Clearly, when I register with my online broker by mail, 
they have to have someone to open the envelope, sort it out, 
process it, review it, enter the data into a system, as opposed 
to being able to register online, where basically you're 
removing all those costs. That would enable the consumers to 
benefit, because then the online brokers could offer even 
better services.
    Mr. Callcott. Just to followup, that is exactly right, and 
that has allowed us in online trading to drop our commission 
from the several hundred dollars you would pay at a New York 
full commission firm to $29.95 for our firm, and there are 
other firms that charge even less.
    We would similarly view in the area of some of these other 
kinds of documents the kind of cost savings that we can pass on 
to our customers in the form of lower commissions and 
transaction charges.
    Senator Wyden. It would seem to me, as I listen to you 
particularly, and having watched Schwab and various advertising 
efforts you have made, this bill is going to change millions 
and millions of transactions all across the country, 
transactions that used to take days and mail and people can be 
accomplished, in effect, in minutes. I think, Mr. Chairman, 
that it would be helpful, and I think we have done this--you 
and I have done this on a number of occasions, to maybe just 
hold the record open, and if you all could give us a couple of 
examples from your own experience that we could cite as this 
discussion goes forward, I think that would be very helpful, 
and that would be the first question.
    The second question that I had is, you will recall with 
respect to the Internet tax freedom legislation we had quite a 
dust-up in our efforts to work with the various States and 
local jurisdictions around the country. I think Chairman 
Abraham has worked very responsibly in this kind of area to try 
to avoid that this time out.
    What we basically said--and I gather we have got 
Massachusetts, Michigan, New Jersey, New York, Pennsylvania, 
and South Dakota at this point without laws on the books. We 
have got a number of States that have inconsistent language. I 
am going to ask you about that in a second, but what the 
chairman and I have essentially said is, we are going to let 
the States do their thing where you have valid business 
contracts while there is this effort to come up with a uniform 
kind of approach.
    Is it your judgment that that kind of Federal-State effort 
to sort this out will help us to avoid some of the friction 
that we had on the Internet Tax Freedom bill, and in effect 
made it very hard to enact that legislation for months and 
months, and it was only at the end of the session that we 
finally got it together? Is it your view that this Federal-
State approach is going to avoid some of that?
    Mr. Callcott. Let me speak for Schwab on that. First, we 
would like to thank you for your efforts on behalf of the 
Internet Tax Freedom Act, and similarly for your bipartisan 
efforts on this bill here today.
    Our view is that this bill sets a sort of minimum standard 
but allows the States freedom first of all to work through the 
Uniform Electronic Transactions Act which a number of the 
panelists have mentioned here today, but also to set--where 
there are specific consumer protection issues that warrant 
different treatment, the States will be free to do those, to 
impose those, and similarly in the securities bill, S. 921, the 
SEC will be able to set specific consumer protection standards 
at the Federal level for securities investors. So we believe 
this bill does reflect the principles of federalism that will 
allow the States to do what they feel they need to while 
setting a minimum standard that gives all of us the level of 
certainty and uniformity we need to move forward with 
electronic authentication.
    Mr. Campbell. If I can jump in on that, because that 
addresses matters of State policy. First, I should point out 
that Massachusetts is one of the very few States that supported 
the Internet Tax Freedom Act. We are always in favor of pretty 
much any tax reduction or tax moratorium that you people can 
come up with. That is one area where we do not mind preemption.
    Also, you mentioned the States that do not have electronic 
signature legislation. Massachusetts is one of them, and really 
that was a conscious decision. We have been such champions of a 
minimalist approach to electronic signature legislation that we 
have taken it to its logical conclusion and simply not filed 
legislation.
    We have a court decision that has been handed down in 
Massachusetts that found that an E-mail message satisfied the 
legal requirement in a particular transaction that required a 
statement to be signed under the pains and penalties of 
perjury, and the court felt that an electronic E-mail message 
satisfied that requirement so we think in Massachusetts under 
the common law you get to where you need to be, and we do not 
need any legislation.
    But in terms of the preemption issue, I think that the 
Congress should tread very lightly when preempting the States 
in this particular area, and I say that not out of some turf or 
jurisdictional type of thing, but one of the fundamental 
principles I mentioned in my opening statement was that to the 
greatest extent possible you should leverage and build on and 
take advantage of the incredible strengths and stabilities 
provided by hundreds of years of common law development in the 
States in dealing with commercial transactions, and so it is 
not a territorial type of thing, but it is just, I think you 
get better law when you do not throw out tested bodies of law 
and introduce untested concepts.
    But having said that, this bill treads extremely lightly, 
and therefore we feel we can support it. It is limited both in 
terms of the time that the preemption will occur, because upon 
enactment of the Uniform Electronic Transactions Act the 
preemption goes away, but also it is very limited in scope. It 
only applies to interstate commercial transactions, not all 
bodies of law dealing with signing requirements and, 
furthermore, it only preempts State law to the extent that it 
is inconsistent with the principles articulated in the bill, so 
that is such a judicious use of preemption that we think it is 
entirely appropriate and it can be supported.
    Senator Wyden. How serious are some of these 
inconsistencies that we are seeing at the State level? I gather 
from some of the reports that in some States they use 
electronic and digital interchangeably.
    Now, I gather you can have something electronic that is not 
digital, but are these the kinds of terms that are really going 
to cause problems, or is this a more ministerial kind of 
exercise to try to get some agreement, and something we ought 
to be able to do fairly quickly?
    Mr. Parker. I have been involved in this effort, I guess 
starting back from the American Bar Association's uniform 
digital signature guidelines, I guess about 3 years ago now, 
and like I said, Utah was the first State to create a regime. 
Utah has what I call the extreme in terms of really trying to 
regulate almost every aspect of the digital certificate 
process, but there are inconsistencies all across the board. I 
mean, every place you look you can kind of find inconsistencies 
when you have 40-some approaches to unifying inconsistencies.
    Now, in fairness, a lot of these inconsistencies are not 
mandatory. What I mean by that is, a lot of the statutes are 
such that you do not have to apply them. You can take advantage 
of them on a voluntary basis, and then you get certain 
protections once you have opted into the regime, and so I think 
if you look at some of these statutes you would say, ``Yeah, 
they are inconsistent, but they are inconsistent only in a 
limited way.''
    So I think when I look at this, kind of the whole picture, 
I think there are places clearly on liability, for example, 
where they are inconsistent. This legislation does not deal 
with liability, nor should it. That is a place where the 
Electronic Transactions Act, the uniform State effort, probably 
will come in and play some role.
    But the more important place where you see inconsistency is 
kind of how the States look at this. Some States look at 
technology-specific solutions, digital certificates. That is a 
classic one, because a lot of States say, this is the 
technology that is around today, so this is the technology we 
are going to endorse. It does not mean that there are not other 
technologies, but they looked at the one that was around when 
they passed the legislation.
    So when you look at this you say, ``Well, you get certain 
protections if you use digital certificates,'' but you do not 
get certain protections if you use other forms of technology, 
then you can start to see that even though it is, ``voluntarily 
in some respects,'' that it creates this body of law that 
really makes it confusing for business to really play in this 
space.
    So I think that is where you really will find this, and as 
a result business, because of the fear--and there is a lot of 
uncertainty out there of what has happened here. When you look 
at 42 regimes, that means you have to think about this. Even if 
you conclude it is voluntary in many respects, and I am now a 
company, I want to do business out there, what do I have to do, 
I have to go hire law firms in 42 States to figure out what 
those inconsistencies are, how thy are going to apply to my 
specific business, what does this mean to me, and that is a 
chilling effect on electronic commerce.
    So when I listen to this voluntary argument, because I have 
heard it for the last few years, I think it really does not 
understand the concerns of business and why you need something 
like this, which sets a baseline, very baseline, this bill 
does, playing field.
    Mr. Callcott. Let me just followup on that to say, digital 
signatures has come to be understood by an awful lot of people 
in several of the State laws to refer to a specific kind of 
technology, the public-private key infrastructure technology, 
which I think all of the panelists today have said is one of 
many possible technologies, and we do not think legislation 
should choose one technology over another.
    Many of the State laws that exist today only deal with 
transactions with the Government itself, much as the Federal 
legislation that you pioneered last Congress, and the greater 
problem from our perspective is that in many States there are 
literally thousands of signature requirements in existing State 
laws.
    They are frequently phrased differently, but many of them 
can be interpreted as requiring a manual pen-and-ink signature, 
and it is a very difficult process for States to go through and 
amend hundreds or even thousands of different State laws to 
remove that bias toward pen and ink, and that is why we think 
this sort of uniform standard saying that you cannot 
discriminate against a signature solely because it is 
electronic is very valuable, because it frankly saves the 
States from having to go through that monumental process of 
reviewing State laws and repealing and amending them.
    Senator Wyden. Mr. Chairman, I have to go off and fight the 
crusade to get the Y2K liability reform legislation moving 
again.
    Senator Abraham. I am sure the panelists would prefer you 
to stay.
    [Laughter.]
    Senator Wyden. I am going to leave saying we very much 
appreciate the panelists, and though I am departing, I remain 
your lieutenant in this cause, and look forward to working with 
you and getting it passed.
    Senator Abraham. Thank you, Senator Wyden. We appreciate, 
as I said earlier, what you have been doing to help us on this 
and other legislation, and actually we will probably have to 
end this hearing fairly soon because I understand there are 
several rollcall votes that have been set for just a couple of 
minutes from now, and obviously, as I think Senator Wyden 
indicated, when a panel is as supportive of legislation as this 
one has been, it is probably wise to not open any additional 
opportunities for criticism.
    I do want to stress that we have tried to work with both 
the chairman's office here of this committee and the Ranking 
Member to offer opportunities to anyone that they might suggest 
as possible witnesses who might offer differing views, but I do 
think none have been forthcoming, and I think we have tried to 
work out with various people on this committee as well as 
elsewhere in the Senate as many of the issues that we did 
encounter that we raised when we initially began working on 
this.
    As I indicated in my opening statement, we want to continue 
that effort to the extent we hear of things that might pose 
potential impediments either to the passage of the legislation 
or because of the content of the legislation might be difficult 
in some fashion in terms of achieving our goals, and so I want 
to just limit myself right now to one or two things, and we 
will leave the record open for a while if you all would like to 
respond and followup to Senator Wyden's request.
    Because I think, as he indicated, the more anecdotal 
information and evidence that we can add to, obviously, the 
very substantial amount of objective, substantive information, 
it helps us to try to explain to people in a more specific way 
exactly why this is important.
    There are two things I just wanted to maybe have response 
on. One is the international issues, and Mr. Miller alluded to 
it a little in his comment, but when he did, I think several of 
you nodded your heads in agreement about the efforts within 
this bill to try to position the United States in the best 
possible fashion for any kind of international effort, and I 
would just throw it open.
    We will start with you, Mr. Miller, and just go down the 
table. If there is any comments anyone would like to add as to 
both: (1) how this bill will be helpful to that process, as 
well as any thoughts you might have on what we should be 
attempting to achieve, I would like to hear it for purposes not 
only of this legislation but potentially for dealing with 
future legislation.
    Mr. Miller. Well, the key is your bill, Senator, is a win-
win situation. If you look at the States versus the Federal 
Government, as Mr. Campbell and others have said, it is not a 
win-lose situation. Some people thought, incorrectly, that the 
Internet Tax Freedom Act, for example, was a win-lose: where 
they thought that somehow the Federal Government was taking 
something away from the State government. They thought if this 
law passed, they would lose the certain degrees of freedom that 
they had.
    This bill moves in the direction of saying, as long as 
there is consistency among the States, Federal preemption, can 
be removed. We have to try to achieve the same thing 
internationally.
    Obviously, we do not want to challenge the sovereignty of 
other Nation-States, or groups of Nation-States such as the 
European Union. But we have to convince them, through the 
arguments of persuasion, that we are a part of the global 
economy, and all of these companies who are doing business on 
the Internet globally, need consistent laws.
    That they can still maintain their national laws, or 
subnational laws in areas like consumer protection and, in 
particular, laws 
regarding signatures. But at the same time there has to be a 
consistent baseline, as Mr. Callcott said, across the global 
economy: an understanding that as long as there is consistency 
that these transactions done electronically, whether they are 
done from someone in Boston to someone in San Francisco, or 
someone in Boston to someone in London, they still have the 
same force of law.
    The enactment of your legislation we hope very quickly 
would send a very strong signal around the world, because the 
United States is the information technology leader and the 
electronic commerce leader. It would send a very strong 
positive signal to the international community that wants to be 
a part of this exciting global economy, that wants to emulate 
what we have done in the national environment.
    Mr. Callcott. I would agree with all of that. Schwab has 
the first and largest online brokerage firm in the United 
Kingdom. We recently established an online brokerage firm in 
Canada. We believe there is enormous potential international 
growth for online commerce, and it is very important for the 
United States to be a leader in this type of legislation and to 
establish standards which we think other countries will copy, 
because we are the leader, and we have remained the most 
successful.
    One of the points I think one of the earlier panelists made 
was that if we do not do this and we have conflicting laws in 
the United States, that could put us at a competitive 
disadvantage vis-a-vis the European Union, where they are 
moving toward uniformity on this issue.
    Mr. Parker. Let me give you an interesting approach to 
this, which is that we do business in 40 countries, 
approximately, on the Internet space, so I have traveled 
abroad, I have been in Japan, and Asia, and Europe, and this 
issue comes up, and it comes up in this context.
    We say, ``Look, we have global reach.'' That is where a lot 
of our business really is. American companies are trying to do 
business abroad, not so much companies that are sort of 
indigenous to other countries, and we go in there and we say, 
``Really we need international uniformity,'' so we should all 
sit in these groups and say, ``You know, we should have 
international uniformity.''
    The response you get back is one, well, ``how could you 
guys be pushing for international uniformity when you do not 
even have national uniformity, and it really takes away the 
credibility of our argument that we should have international 
uniformity'' when we cannot get our act together at home, 
essentially.
    That is one perspective, and I will tell you, it is an 
important one, because you really feel it when you go over and 
you are making these arguments, and so it is what I will call 
the loss of leadership in this area, and this is a space, by 
the way, that the United States basically invented, much like 
the Internet, and would be ashamed, because we cannot do this, 
because we cannot pass a bill like this, to lose that 
leadership position.
    The other thing is, there is a real practical problem for 
American companies, and that is, the Internet really does in 
very many respects transcend international boundaries, and so I 
think what we do is, we get this bill passed in terms of having 
this baseline national uniformity, then we go out there, as the 
bill suggests, and we negotiate from a position of strength for 
international uniformity, and I think we will find a lot of 
receptiveness around the world, having done this at home.
    Mr. Campbell. I think it is an excellent idea, sort of 
putting a stake in the ground essentially saying the U.S. 
Government, in pursuing international uniformity, is going to 
be abiding by certain principles, the principles are 
articulated in this bill, because I think it is the most 
sensible approach, the technological neutrality, nonregulatory 
approach.
    I would like to point out that the Commonwealth of 
Massachusetts, and actually the National Electronic Commerce 
Coordinating Council, which is a group of State organizations, 
have endorsed through formal resolution the proposed U.S. 
convention that is being pursued by our negotiators, and the 
principles set forth in Senate bill 761 are completely 
consistent with the position that our negotiators are taking in 
a variety of forums, whether it be UNCETRAL or OECD, or the 
European Union.
    So I think it is great to have a piece of legislation in 
place that puts a stake in the ground that says, ``This is the 
American position.''
    Senator Abraham. As I said, we have got votes coming pretty 
quickly, and we have appreciated very much everybody's 
contribution here. I will certainly leave the record open, as I 
said, for other members if they want to add questions, and 
hopefully given the support we have heard today, we can move 
this legislation forward here in the Commerce Committee.
    I am happy to report, as I did in the opening statement, 
that we have the support of both the chairman of the committee 
as well as the Communications Subcommittee chairman, Senators 
McCain and Burns, and the Majority Leader as well, so I think 
that, combined with Senator Wyden's strong efforts on our 
behalf and his cosponsorship gives us a good chance to move 
this quickly, and we will do our best to accomplish it.
    I want to thank the panel as well as our guests today for 
today's hearing. We have appreciated your participation.
    [Whereupon, at 11:20 a.m., the committee adjourned.]
                            A P P E N D I X

                                Charles Schwab & Co., Inc.,
                                  San Francisco, CA, June 21, 1999.
Hon. Spencer Abraham,
Committee on Commerce, Science and Transportation,
U.S. Senate,
Washington, DC.

Re: Millennium Digital Commerce Act (S. 761)

    Dear Senator Abraham: At the May 27, 1999 hearing on the Millennium 
Digital Commerce Act before the Senate Committee on Commerce, Science 
and Transportation, Senator Wyden requested that the record be held 
open so that Charles Schwab & Co., Inc. (``Schwab'') could provide 
supplemental information. Specifically, Senator Wyden asked us to 
provide an example of how the bill could result in time and cost 
savings for Schwab and its customers. This letter responds to Senator 
Wyden's request, and we ask that it be made part of the record as a 
supplement to my written testimony.
    The account opening process is the best example of how the ability 
to accept electronic signatures could save Schwab and its customers 
significant time and expense. Currently, in order to open a brokerage 
account, we require the handwritten signature of the customer on an 
account application. There are two main ways in which retail customers 
open accounts at Schwab.
    First, a customer can bring a completed account application into 
one of our branch offices or can come into the branch and fill out an 
application there. If the customer wants to deposit a check or make a 
trade immediately, a branch employee will open the account and the 
customer will have access to the account that day. Otherwise, the 
application will be accepted by the branch and mailed overnight to the 
nearest operations center where an account will be opened within one to 
3 days. In order to take advantage of this method, a customer must take 
the time personally to visit a Schwab branch.
    Second, a customer can fill out and manually sign an account 
application and mail it to one of our operations centers. Depending on 
the customer's location, it may take anywhere from two to 5 days for 
the application to reach us. Once received, the application must be 
reviewed by an employee in our operations center to make sure it is 
complete and has been signed by the customer. Depending on the volume 
of applications received, this can take as long as 48 hours. If the 
application is complete, an account is opened and the customer may 
begin trading or otherwise transacting business with us. However, if 
any information is missing, the account opening process will be further 
delayed.
    If the customer has forgotten to sign the application, it must be 
mailed back to the customer for signature and then remailed to us by 
the customer. Since the customer may take a day or two to sign and 
remail the application, this can add anywhere from four to 10 days to 
the process. In the case of other types of missing information, such as 
a social security number, Schwab makes three attempts to reach the 
customer by telephone over a 72-hour period. If these attempts are 
unsuccessful, the application must be mailed back to the customer with 
instructions to provide the missing information.
    Thus, under the best of circumstances, this manual process can take 
from two to 6 days to complete. If there are problems, it can take 
considerably longer. In our experience, between 15 percent and 20 
percent of all account applications require some form of followup to 
obtain missing signatures and information, thus delaying the process 
for the customer and requiring the commitment of employee resources by 
Schwab.
    Until the account opening process is complete, a customer cannot 
place a trade. Thus, for example, a customer who wishes to open an 
account so that he or she can sell a security will be at market risk 
until the account opening process is complete and Schwab can accept a 
trade. In a falling market, depending on the size of the customer's 
position, the customer's potential loss could be substantial.
    In contrast to these current means of opening an account, were we 
able to accept applications bearing an electronic signature, the 
account opening process could be reduced to a day or less. This would 
not only greatly benefit customers, but would result in considerable 
cost savings to Schwab, primarily in employee resources which could be 
redirected into areas of productive customer service.
    We appreciate the opportunity to provide this supplemental 
information to the Committee, and would be happy to provide any 
additional information you might require.
            Very truly yours,
                                         W. Hardy Callcott,
                                          Senior Vice President and
                                                   General Counsel.
                               __________

                   Prepared Statement of PenOp, Inc.

    PenOp, Inc. is pleased to submit this statement in support of S. 
761, the Millenium Digital Commerce Act (MDCA). S. 761 builds upon the 
foundation for electronic authentication that was put in place through 
the enactment of the Governrnent Paperwork Elimination Act (GPEA) 
during the last Congress. PenOp is proud of its role in supporting the 
GPEA in hearings before the Commerce Committee last July, and we 
appreciate being invited to participate in the working group that 
provided technical input during the drafting of the MDCA.
                                overview
    The GPEA established three basic policy principles for the 
utilization of electronic signatures by Federal executive branch 
agencies:
     A general rule mandating acceptance of electronic 
authentication by Federal agencies by a date certain.
     An explicit policy of Federal neutrality regarding 
acceptable authentication technologies.
     A clear sense of Congress that electronic contracts are 
the legal equivalent of physical contacts.
    The MDCA would buildupon that sound foundation by establishing key 
principles guiding the use and acceptance of electronic authentication 
in interstate commerce:
     A contract used in interstate commerce shall not be denied 
effect solely because an electronic signature or record was used in its 
formation.
     Parties to an interstate contract shall be free to 
determine the technologies and business methods utilized in the 
execution of electronic contracts.
     In international discussions, the U.S. Government shall 
continue to champion technology neutrality based upon freedom of 
contract.
    PenOp endorses these principles and urges expeditious favorable 
action on S. 761 by the Commerce Committee.
            penop's perspective on electronic authentication
    PenOp has spent the last several years assisting private and public 
sector organizations to employ electronic authentication in their 
business and official activities. PenOp has also been an active 
participant in a wide variety of public policy forums. These include 
various sections and committees of the American Bar Association; the 
National Conference of Commissioners on Uniform State Laws (NCCUSL) 
Drafting Committee on the Uniform Electronic Transaction Act (UETA); 
the United Nations Commission on International Trade Law (UNCITRAL) 
Working Group on Electronic Commerce; and various bodies within the 
European Union (EU). PenOp has provided its views on electronic 
authentication in testimony before this and other Congressional 
Committees, and to numerous state and Federal agencies. PenOp 
authentication software is now employed on a daily basis by 
pharmaceutical, financial services, and other private sector firms, as 
well as units of state and local government.
    PenOp's best-known product is its biometric authentication 
software. This software analyzes 90 separate biometric measurements of 
a handwritten signature applied to a digitizer pad. It then 
cryptographically binds that analysis to an electronic document to 
provide both authentication that a particular person has signed it with 
the legal intent necessary to be considered a signature, as well as 
non-repudiation protection against alterations of the document made 
subsequent to its signing.
    More recently, PenOp has developed and is now marketing software 
for its Uniform Document Authentication Component (UDAC). UDAC allows 
any type of authentication technology or combination of technologies--
biometrics, personal identification numbers (PINs), private 
cryptographic ``keys,'' or even credit card numbers--to be captured as 
legally effective signatures.
    PenOp's extensive legal research on the law of signatures has 
established that the creation of a binding electronic signature rests 
on four basic components, each of which is satisfied by our software:
    1. Symbol of intent. This is any symbol that the user intends to 
use as a signature.
    2. Link to signer. This is the gathering of evidence that links the 
symbol to a specific signer.
    3. Ceremony. This is a series of manual and visual steps that 
inform the signer of what is happening and thereby conveys the 
understanding that is essential to establishing requisite legal intent. 
It is critical to understand that normally a process which 
automatically affixes an electronic symbol to an electronic document is 
deficient as a legal signature because it lacks the element of intent--
the informed and conscious choice of an individual to be bound to a 
specific record or transaction.
    4. Transcript. This is a secure record of the signing event showing 
what occurred, when, and under what circumstances and that is available 
to any judge or jury if a signature is challenged in the future.
                           comments on s. 761
    The most important provision of S. 761 is its definition of 
``signature''. That is because it is broadly inclusive--encompassing 
any symbol, sound or process--so long as it is executed by a person 
with intent to authenticate or accept a record. Preserving the 
requirement for intent as commerce moves into cyberspace is a critical 
protection for both individuals and businesses. It protects individuals 
because it assures that they will not be bound to contractual 
obligations by automated or incomprehensible processes in which they 
did not knowingly intend to partake. It protects businesses because, 
once intent is present, they can be assured of a binding contract if a 
subsequent challenge occurs.
    While we applaud the incorporation of the requirement for intent 
within S. 761's definition of ``signature,'' we urge the Committee to 
strengthen this critical protection through appropriate legislative 
history. In particular, the report on S. 761 should clearly state that 
the utilization of an appropriate ceremonv in the signing process, 
regardless of the technology employed, is necessary to inform signers 
that they are binding themselves to specific legal duties subject to 
penalty for nonperformance and/or false statements. Such legislative 
history is consistent and explanative of Section 6(d) of the bill, 
which states that the intent of a person to execute or adopt an 
electronic signature shall be determined from its context and 
surrounding circumstances, including accepted commercial practices.
    We are also particularly supportive of provisions of S. 761 that:
     Permit the parties to an interstate transaction to 
establish by mutual contractual agreement the technologies and business 
models acceptable for their use and acceptance of electronic signatures 
and records.
     Preempts state law only to the minimal extent necessary to 
provide assurance of the validity of interstate electronic contracts.
     Reinforces the negotiating position of the U.S. in 
international forums in support of freedom of contract and technology 
neutrality.
     Mandate that Federal agencies identify all provisions of 
law and regulation that impose a barrier to electronic transactions, 
and report those findings to Congress where remedial legislation is 
required.
                               conclusion
    PenOp appreciates its inclusion in the development process for S. 
761. This narrowly drawn but nonetheless important proposal can 
accelerate the growth of electronic commerce by providing assurance of 
the validity of interstate electronic contracts. S. 761's perpetuation 
of traditional signature law's intent requirement into the realm of 
virtual contracts preserves a fundamental protection for individuals 
utilizing new electronic technologies.

                                
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