Peter Swire on Privacy, Pay Phones and Strong Crypto


[This interview appeared in the April 2001 issue of the Electronic Banking Law and Commerce Report (Volume 5, Number 10), published by Glasser LegalWorks. ]


The law of cyberspace is the domain of Peter P. Swire, Professor of Law at the Ohio State University College of Law.  From March 1999-January 2001 he served as the country’s first Chief Counselor for Privacy, responsible for coordinating Administration policy on public- and private-sector uses of personal information.  From his position in the Executive Office of the President, he advised the Clinton Administration on a broad range of issues, including financial services privacy, medical privacy, Internet privacy, transborder data flows, and encryption, and served as point of contact with privacy and data protection officials in other countries.  Professor Swire, along with Robert Litan, wrote None of Your Business: World Data Flows, Electronic Commerce, and the European Privacy Directive, published by Brookings Institution Press in 1998. He will be teaching at the George Washington University Law School for 2001-02.  The EBLCR spoke with Professor Swire in late March. 


EBLCR            Last year the American Bar Association issued an interesting Report by the Global Cyberspace Jurisdiction Project. How do you anticipate that issues of cyber-jurisdiction will ultimately be resolved?


Swire               There’s this big debate between [regulating by] country of origin and country of destination--neither answer is very satisfactory. … One promising way out of that is to create some new institutions that have a basic core of consumer protection built in, whether it’s through the payment system, such as credit cards, or intermediaries like eBay or Yahoo!, or new kinds of assurance institutions like BBBOnLine.  I think we should be looking for a practical, workable way for companies to know the rules of the road and for consumers to get a basic code of reasonable commercial practice.


EBLCR            Will the driver be market forces or government regulation?


Swire               In the U.S. a lot of it will happen from market forces.  But in other countries that are less used to letting the market create those institutions, the governments will probably play a greater role.


I think the United States has been and should continue to be cautious about government-centered approaches to the Internet.  The Europeans have more often thought that the government had to draft codes of conduct in advance in order to give consumers enough confidence to participate.  The U.S. tends to trust more in early adopters on the company-side and on the consumer-side to try things out until something starts to work.


EBLCR            It sounds like you’re saying we just have to be comfortable with the situation being  up in the air for a while.  Is that right?


Swire               When you’re talking about change—different providers, different business models, different delivery systems—all of this takes time.  In the book I wrote with Bob Litan for Brookings [None of Your Business: World Data Flows, Electronic Commerce, and the European Privacy Directive], we talked about the history of digital signatures.  There were some early laws that tried to set up elaborate legal structures for digital certificates—Germany and the State of Utah were prime examples.  Very capable people who tried to draft the law in advance turned out to draft laws that have hardly been used at all because they didn’t really know what would work in the market.  A better approach in many instances is to allow experimentation and address real harms, but don’t try to figure everything out in advance.  It won’t work.


                        As with other attempts to guide e-commerce, we should make sure that well intentioned regulations do not end up interfering with business models that provide value to consumers.


EBLCR            We hear regularly from financial institutions that data security is their greatest concern when it comes to online banking.


Swire               It better be.  Very important.


EBLCR            Do you think that the technical solutions exist to satisfy financial institutions, their regulators and their customers to allow for the full array of financial services over the Internet?


Swire               Yes, but we’ll have to learn by doing.  There’s a wonderful history of an earlier system for distributed payment and that’s the history of the pay telephone.  If you think about it, it’s a very risky thing to have a box containing money in remote places like next to roads in the countryside.  My understanding is that there was a lengthy history of learning how to make pay phones tamper-proof.  Originally, a bullet or an electric shock could open up a pay phone.  But over generations of effort, we got it so we can put money in pay phones and think that the crooks are not going to steal it.  We’ll probably have to go through similar iterations before we really have security for the Internet.  We’ll try things.  They’ll be pretty good.  There’ll be holes in the security.  We’ll patch them.  And we hope to make progress over time.  It will take a number of rounds of effort by companies to have systems in place that are as good as the systems they have for the offline world.


EBLCR            Would you apply this same model to the wireless environment?


Swire               Security is not a one-time fix.  Security is coming up with enough procedures so that you can match the security to the risk. Banks have learned how to handle very risky situations in the physical world.  I’m confident banks will find ways to handle risks in the online world, but it's probably going to take a number of rounds of effort.  The same goes for wireless. 


There’s a consensus now that banks can use strong encryption and that makes wireless much more achievable.  If you didn’t have strong encryption and you were trying to do financial transactions over wireless, it would be obviously and easily hackable. Wireless is another example of why you need strong crypto.


EBLCR            Given the federal government’s ACES program, should the financial services industry be thinking about a single digital certificate that can be used universally for communications in both the government and private sectors?


Swire               One of the great mysteries is why digital certificates have not spread yet.  I have pushed the National Academy of Sciences to do a study on how to do authentication and privacy in the electronic environment, and the first meeting of the blue chip panel was held [in mid-March].  I’m pleased to have that underway because we need to have both strong authentication and consumer confidence in privacy for electronic transactions.  Until that’s solved, I’m not sure we’re going to see digital certificates spread. 


Let me say some more about that.  There are some models of digital certificates--and ACES may be one of them--that have weak properties for privacy.  These models assume that the system administrators will know everything about all the users.  There are other alternatives, including work in a book by Stefan Brands, from MIT Press, and others that show ways to do digital certificates without giving so much power to the system owner. 


EBLCR            You critiqued the EU Privacy Directive in your book, “None of Your Business.”  Why have so few companies signed up for the U.S.-EU Safe Harbor?


Swire               In talking to industry, one important reason that we don’t have more companies signing up for Safe Harbor is that it turns out to be pretty strict.  And so far, companies don’t think that enforcement in Europe is very likely.  So they don’t see yet a strong incentive to sign up. If Europeans bring enforcement action then there will be more company interest in Safe Harbor.


EBLCR            Do you think the EU would actually use its sanctions to shut down data flows to the U.S. in the future?


Swire               I think that in the right fact situation they would find it easy to do so.  If there’s some intentional violation of the privacy rule.  But a general shut down of data flows will not happen.  It would be more of a case-by-case situation. 


EBLCR            In the event of a specific data flow shut down, what should the U.S. government do?


Swire               Well, the more it looks like the Europeans treating a European company and European data under European law, the stronger their case will be. If they’re doing it in a non-discriminatory way, then they’re basically enforcing domestic law. If they single out American companies, then it looks more like a case for the WTO.  In my book, we discuss in detail how the WTO would apply if the Europeans discriminated against U.S.-based companies.


EBLCR            What about the contract model as an alternative to the Safe Harbor?


Swire               Contracts work for some companies, but you have to get the approval of each national authority.  That will work better for the biggest companies that already have a presence in Europe.  They won’t work so well for small- and medium-sized enterprises.


EBLCR            How do you think the current debate over treatment of the financial services industry for purposes of the EU data protection directive will be resolved?


Swire               That’s hard to say.  Probably the new Administration, at some point, will give a signal about its view about Safe Harbor generally and financial services will be part of that.  The Bush Administration has not yet named any privacy officials and has not yet indicated what senior officials will work on privacy issues.  Until we know about Safe Harbor in general, it's hard to guess what will happen with financial services.


EBLCR            What is the likelihood that the EU would decide Gramm-Leach-Bliley is acceptable under the Directive once they’ve seen it in place for awhile?


Swire               Last year there was no way that I saw where they would say that Gramm-Leach-Bliley by itself was adequate.  But times change, new administrations come to power, and they make new decisions.


EBLCR            What do you do about the privacy of data sent to countries like China, which have very different systems of government?


Swire               That’s similar to asking about intellectual property in China.  There are countries with less developed legal regimes for foreign investment and intellectual property and other parts of modern commerce.  We wouldn’t expect those countries necessarily to take the lead on privacy.  Then you hope that global companies will hold themselves to the global standards and not use operations in a less developed country as a data haven.


EBLCR            Let’s get back to the U.S.  Based on your perspective as former Chief Privacy Counselor, can you offer any general comments on how the financial services industry has handled privacy issues to date?


Swire               I think the American Bankers Association and other trade groups have done some promising things, including education, in the privacy area.  And the industry has a very strong history of confidentiality. 


The hard thing for the banking industry is how to figure out ways to be state of the art marketers and also maintain their tradition of confidentiality.  And different parts of the financial services company have different instincts.  So, some of the go-go practices really violate people’s sense of what’s appropriate.  Sometimes when senior managers learn about the practices three or four levels down they’re surprised and maybe not that happy with what some of their own people are doing.  The U.S. Bank case was a big surprise to many industry people.  I think a lot of them didn’t realize what practices were actually happening—even in some of the large and well-run companies.


EBLCR            U.S. Bancorp is an example of a company that decided to respond by trying to tighten up their privacy regime and establishing a new position as chief privacy officer.  What do you think about that trend?


Swire               I think it’s a good trend.  I was basically the Chief Privacy Officer for the U.S. government for two years. I think I was able to help decision makers meet their legitimate goals and do it in a way that was consistent with privacy.  By anticipating problems and coming up with better data practices I think you’re helping the organization and still achieving the organization’s goals.


EBLCR            What about the benefits of information sharing?


Swire               In our book we talked at length about the benefits of information flow because we felt that some of the European regulators did not appreciate that enough.


To the extent that we live in a free society, how much will individuals have a say in how their data is used?  My preference is to make sure that customers have a choice.  One of my biggest concerns under Gramm-Leach-Bliley is that it allows a credit card company or a bank to use the checking account information and ship it directly to affiliates who are travel agents or health insurance underwriters.  That kind of affiliate transfer to operations that are very different from the basic business transaction I think is surprising to people, and I think people should have some say.  Whether that has to be in law I won’t even say, but I think good business practice would be to do what's reasonable and expected by people, but not to use information in ways that would really surprise the conscience of people.


EBLCR            Do you think that the industry could do a better job of letting people know how they do benefit from information sharing?


Swire               Well, I think the political debate is underway now.  There are major studies funded by industry that were recently released to highlight the benefits of information sharing. There are very valid reasons to share information—for law enforcement purposes, to prevent fraud, to make credit more freely available, for example.  The question for me is how do you do the legitimate sharing of information and stop the illegitimate sharing?  The debate should mature some more and not be between an absolute right of privacy and the slogan that information should be free under all circumstances.  The companies that say that information should be free in the privacy debate never say that when they're in the intellectual property debate.


EBLCR            What do you feel were the most important accomplishments of the Clinton Administration with regard to consumer privacy?


Swire               Until recently I clearly would have said the [HIPAA] medical privacy rule.  But now it may be in the process of being repealed and I think that's a political and a substantive mistake.  [Ed. note: After the interview was completed, the Bush Administration decided to permit the medical privacy rule, as issued last year, to go into effect.] I think there's a consensus in the United States that people's medical records deserve confidential treatment and we went to great lengths in the final rules to respond to industry and other comments so that good uses of medical information were permitted and information that should stay confidential would stay confidential.  To me, a disappointingly large fraction of the criticisms of the rule are simply inaccurate. The Web site ( has a myth and reality list about the medical privacy rule that quotes some of the criticisms and shows how they're not accurate.


EBLCR            Should the U.S. have a privacy office with regulatory powers, as they do in the EU and Canada?  If so, what powers should that office have?


Swire               I believe it is helpful to have a policy office, in OMB or the White House, that's expert in privacy.  That's important for the government's own use of data.  It's also important for what's called the clearance function, as agencies come up with proposals, to make sure that data is being handled in similar ways across different agencies.  What a White House office cannot do is be an enforcement agency.  For that you need some office that enforces the law.  To date there's been very modest funding for those offices.  The exception may turn out to be the banks where they already have a staff of supervisors, but in most other areas we don't have regulatory staff that already exists.


EBLCR            How about the FTC?


Swire               The FTC does a very high quality of work.  They also historically have very modest staffing.  The question is whether there can be enough of an enforcement structure to be credible, otherwise it could be a very hollow regime. 


That's one reason why I think that third party groups, like TRUSTe or BBBOnLine, are so important.  They have the potential to scale in ways that federal agencies do not.  That's basically what happened with financial accounting in the 1930s.  Consumers needed to have confidence in something that was hard to measure—the financial solvency of companies—and the accounting firms filled that gap…You trust CPAs; you trust CPA audits. In a data society it's not surprising that we're going to need good audits for data practices.  But we have to create those institutions, just like we have to create the business models.


EBLCR            State legislatures have been active on privacy issues and many fear a potential privacy law patchwork. Will there be federal privacy guidelines that preempt state law?


Swire               I think that the possibility of state laws is clearly the biggest reason to eventually expect federal privacy law.  Without the threat of state laws, industry would have no reason to ever tolerate federal privacy laws and so this dynamic between the states and the federal government is going to be really the key thing to watch to try to predict the next five years or so.


EBLCR            Is there anything else you’d like to address?


Swire               Let me talk just a little bit more about the medical privacy rule.  A lot of health organizations are part of holding companies, so what happens to HIPAA will matter a lot to the financial services industry.  If the medical rules go into effect, then even more than Gramm-Leach-Bliley, that will lead many organizations to institutionalize privacy inside their companies.  So it would be a very big deal if the HIPAA rules go into effect. 


If the HIPAA rules do not go into effect, then it provides privacy supporters with a very powerful argument for the need for change, because then we would have no medical protections and no Internet protections.  Then at both the state level and the federal level you'd have two hot button issues pushing privacy forward.  Because there's such a broad consensus that medical records should be protected, I think it's short-sighted of some industry actors to think that killing those regulations will help in the long-run.  There's a real chance that it would go the other direction and further show the political system that regulation has to be put in by legislators.  Let me just leave it at that.