Digital signatures take effect in U.S.

A new U.S. law that puts legal force behind contracts, purchase orders and other documents that are completed online took effect on Sunday, ushering in what many vendors and policy makers say will be a blossoming landscape on the e-commerce front.

The Electronic Signatures in Global and National Commerce (E-Sign) Act is hailed by supporters as a major step that will spur the growth of business-to-business and business-to-consumer e-commerce, and it also brought the U.S. into step with many of its individual states and several other countries that have already implemented digital signature legislation.

President Bill Clinton signed the Act after receiving the overwhelming approval of the U.S. House of Representatives and the U.S. Senate earlier this year.

U.S. consumers have been able to use the Internet to apply for a mortgage, open an online brokerage account or get a quote on a life insurance policy, but before E-Sign took effect, they could only close the deal by putting pen to paper. E-Sign removes that impediment by setting up a legal framework that recognizes electronically created signatures on a range of documents, including mortgage applications, brokerage accounts and insurance policies.

Similarly, the bill clears the way for businesses that want to convert paper-driven systems that control inventory, production and supply to an online environment.

While U.S. states that have implemented digital signature bills gave validity to intrastate online transactions, the new U.S. law updates federal statutes so that transactions with the federal government and interstate transactions are covered. Other countries also have updated their laws to make it easier to conduct business online.

In Asia, the move toward digital signatures is being spearheaded by the commercial sector, which is eager to cut out a lot of the paperwork that now dogs intraregional trade. Almost coinciding with the U.S., Taiwan's first legally binding digital contract was signed on Sept. 25 between a local company and one in Japan.

At the intergovernmental level, Asia Pacific Economic Cooperation is working on several initiatives to promote the use of digital signatures, but some of the leading economies in the region have either already given them force of law or are well on their way to adopting new laws.

Among the nations that already have digital signature laws in place are Malaysia, South Korea and Singapore. In Japan, where corporate seals, rather than signatures, are most commonly used, the government is expected to submit a bill to parliament during the current or next session aimed at giving digital signatures full legal force by the end of 2001.

The European Union's directive on electronic signatures went into force on Jan. 19, and the 15 member states have until July 19, 2001 to implement. Thus far, three states have implemented it, and most of the rest are expected to implement it by the end of this year.

The directive, like the U.S. law, ensures the legal recognition of electronic signatures. It is also "technologically neutral," as the U.S. law is, meaning the laws only specify certain requirements, but don't require that a certain technology must be used to complete the process. The Europeans also like the fact that the U.S. law is designed to preserve consumer protection laws already on the books covering such things as informing consumers about warrantees and sending out recall notices.

Under the new U.S. law, no one could be forced to accept a paperless transaction taking place entirely online. The bill provides for an "opt-in" system, and consumers who agree to carrying out a transaction online would have to affirm their intentions electronically.

Other safeguards are built in. For example, businesses are obliged to assure that consumers will be able to open a digital document on their computer, and if they ever replace its software, they must notify the consumer and give him or her an option to end the arrangement.

The law excludes a number of documents that still must exist in paper form, including wills, adoption papers, divorce documents, court orders, utility termination notices, foreclosures and eviction notices, insurance cancellation and warnings required for transportation of hazardous materials.

VeriSign, Baltimore Technologies, RSA Security and Pretty Good Privacy are some of the companies that offer digital signature technologies that could potentially be in greater demand as a result of the bill. But other lesser-known companies, including Arcot Systems and ECertain, are also promoting products and services.

Russ Gates, managing partner of risk consulting for Arthur Andersen LLP, said the new law sets up a framework for trust.

"The major change [in the new law] is this will provide a legal framework for doing things on the 'Net that heretofore didn't exist," Gates said. "As people try to deploy digital certificates as a way to provide more enforceability around things that happen over the Internet, you need a legal structure that still protects the same legal structure that protected them in the paper world."

Businesses are the bigger beneficiary of the new law because it will facilitate contracts, collaboration and supply chain management.

Chet Silvestri, president and CEO of Arcot Systems, agrees that businesses, especially online brokerages and other financial services, will be the first to take advantage of the new law, largely because it will help reduce fraud.

Citing a Gartner Group study, Silvestri said there's growing concern among U.S. online retailers about the growing percentage of transactions that are either fraudulent from the outset or that consumers deny ever making.

"The day is coming when all those transactions will have to be signed," Silvestri said.

The appeal of having an accepted and legally enforceable process for digitally signing a document will be a driving force for adopting the technology, he said.

Additional reporting by Martyn Williams in Tokyo and Rick Perera in Berlin