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98 Ruzic




Chapter VI



Electronic Signature:
The Core Legislation
Category in
Digital Economy
Fjodor Ruzic
Institute for Informatics, Croatia




Abstract
E-Business, as well as all of the active participants in the digital economy environment,
raises a host of new legal issues that must cope with the fact that the technical
expectations imposed by participation in digital economy will increase. Besides
technology implementation, it is evident that the biggest barriers to E-Business today
come from the notion that people don™t trust the security and authenticity of the E-
Business environment. Since the companies doing E-Business activities are not operating
in an unregulated world, the old rules still apply in the new digital environment.
Considering the functionality and applicability of such issues, this chapter is finding
one, generic shaped, key category that links all of the separate E-Business legal issues
in one regulated scene “ the answer is done by introducing the electronic signature
as the equivalent of a hand-written signature no matter what type of information
technology is in use. There are more legal environments, solutions and applications
of electronic signature from which several examples are described accompanied with
the E-Business view on electronic signature utilization.




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Electronic Signature 99


Background and Introduction to the
Digital Economy
Digital economy is the infrastructure development of modern society towards full
coverage of information society attributes. Information society is coming through three-
revolution convergences:
• digital revolution, that opens the ways for
• economic revolution, that in turn, strengthens
• social revolution.


In the scope of the information society development, the core categories should be
recognized, introduced and activated (Castells, 2000). The information society under-
lined with information-communications systems™ full utilization and knowledge-based
economy and social activities, functions just like any society. There is the community
of the people that communicate to exchange opinions, knowledge, etc., and act under
social rules agreed to by most of its members. Thus, we can acclaim three basic segments
of the information society, each of them consisting of one core category:
• infrastructure - telecommunications infrastructure (the members of the society
must communicate)
• services - the content (the goal of communications is to transfer the content)
• legislation - electronic signature (the goal is to compile rules of intercommunica-
tion processes in which the electronic content is interchanged).


E-Business, as well as all of the active participants in the digital economy environment,
raises a host of new legal issues which is being driven by four key factors:
• electronic medium “ doing activities, business in digital form, in real-time over
open digital networks without paper or traditional legal and security methods raises
new legal issues;
• geographical constraints “ although a digital economy is not constrained by
geographical borders, countries have different laws, languages, cultures;
• business models “ new ways of doing business electronically in a digital economy
environment may present unfamiliar and unknown legal constraints;
• legislation models “ legislators and courts alike are transforming laws as they
struggle to address the features and implications of the digital revolution and
digital economy, as well.


All of these facts are considering E-Business systems, too. What makes the positive
future scenario of the E-Business systems in the age of the information-communications



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100 Ruzic


systems development on which the digital economy is based? It is almost undoubtedly
the Web development process, which is on the road in recent days. This development
is correlating with the integration of the telecommunications development, content
integrity and legislation definition improvements. Most of the new services are Web-
based or Web-oriented that makes the clear future for E-Business development in order
to fulfill information needs in the modern society.
Information technology is reshaping today™s economy and transforming businesses and
consumers. This is about more than e-commerce, or e-mail, or e-trades, or e-content. It
is about the “e” in economic opportunity that makes the arena for new digital economy.
Technology and electronic commerce are changing the way that all industries and
companies are doing business. From the automotive industry to the healthcare industry,
from banking to retailing, virtually every company is moving quickly to take advantage
of the tremendous opportunities offered by doing business electronically.
The e-marketplaces are changing the way business is done, and as they do so the
technical demands are increasing. The marketplace would assume the role previously
exclusively held by the personal relationship, assessing the reliability and worthiness
of potential manufacturers. Products could be triple or quadruple sourced, as desired,
provided market liquidity is evident. The time from design to production and shipping
could be significantly reduced, thus providing greater agility to respond to changing
market conditions or fashion sense, and in an integrated environment could reach right
down to the fabric cutting room floor. Thus, ideally, communication is improved,
transaction costs reduced, time-to-market is significantly reduced, and the entire process
made more fluid and responsive.
Electronic commerce has changed the way business is conducted significantly. Busi-
nesses are focusing on conducting as much as possible through the Internet - be it
payments of bills or ordering an appliance. For all of these things to happen through the
Internet, there is a need for massive infrastructure comprising servers, operating
systems, applications, software and the information-communications systems (embed-
ded into Internet terminology). E-Business needs the support services of service
providers and communications providers who make things happen through the Internet.
Telecommunications technologies like WAP (Wireless Application Protocol), VoIP
(Voice over Internet Protocol), have emerged, and many more new technologies are in
the E-Business environment. All are occurring before the impact of the existing or
previous technology slowly sets in our minds.
Related technology issues for any E-Business environment are faced with:
• Convergence: all information appliances will be connected to some version of the
Internet. At the same time, the cost of moving people and goods around is going
to go up, and the cost of moving information around is going down. The result:
a massive restructuring not only of the economy but also of the human landscape.
• Standardization: E-Business will operate in a much more open standards world
than it has in the last decade. The tremendous private and public investments in
Internet technology over the past year also mean that it will be very difficult for any
single company to invest sufficiently in research, development and marketing to
promote large-scale proprietary standards.



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Electronic Signature 101


• Globalization: E-Business goes to the future of the Internet worldwide, and it™s
clear that some of greatest impact of information-communications systems will be
in developing global E-Business, marketplaces and alliances.


Currently and in nearly future, the critical technologies for E-Business environment are:
• Embedded computing,
• Wireless technology,
• Intelligent agents,
• Open and transparent communications infrastructure,
• Simulation and data visualization.


These constraints reshaped management challenges for most of the subjects acting
within the digital economy. New technologies of data visualization, simulation tech-
niques and broadband telecommunications platforms will become important E-Business
tools (Volti, 2001). E-mail, networked groupwork and intelligent agents will rise in use
among all organizations, improving communication and logistical coordination through
an e-logistic environment.
Under these terms exists a new generation of employees and customers who will use
information technology and the Internet as part of growing up. Their expectations about
media, about service, about communications, and about transactions will be vastly
different from a decade ago, and their behavior patterns will turn out to be the biggest
surprise that information technology delivers to business in the next century.
And, what are the defining characteristics of E-Business? This is partly defined by the
nature of the business activity. Typical features would include:
• A broad range of suppliers and products, with a strong representation of buyers,
thus providing a critical mass of participants to establish the market, and the
liquidity to buy or sell as needed;
• Well-established technical specifications and requirements for participation in the
market;
• Quality assurance for the market, with feedback loops regarding product quality,
fulfillment history, and financial transactions;
• Paperless transactions with enforceable legal agreements;
• Online contracts with digital signatures to associate authorized agents with
specific documents;
• Security of the market, with strong user authentication, high standards for docu-
ment integrity, transaction security, and preservation of the privacy of data of the
participants.




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102 Ruzic


It is evident that the technical expectations imposed by participation in the digital
economy will increase. Businesses with high levels of e-competence will have a competi-
tive advantage over those who do not. What are the requirements for successful
participation? The answer will change, from industry to industry, but the minimal
requirements would include a strong telecommunications infrastructure, with open
Internet connectivity, and routine telecommunications services, along with a commit-
ment to modern technical standards, system security, and transparent legislation and
regulation environment.
Businesses that offer services and have taken to the Internet seriously have a respon-
sibility to their customers to offer services in a secure manner (Ang, Dubelaar & Lee,
2001). With increasing networks across the globe for mission critical electronic com-
merce, securing the networks would be the primary focus. Various technologies and
concepts is in place such as Virtual Private Networks (VPN), Secure Sockets Layer (SSL),
Secure Electronic Transactions (SET) and many more to overcome and mitigate risks of
transacting over the Internet. While security of operating systems, applications, physi-
cal, logical security are addressed by the respective organizations, the areas that are
exposed are the networks and communication lines which leave the organization™s gates.
Security is a fundamental requirement for E-Business applications such as e-mail,
purchase orders, the transmission of credit card information and workflow automation
using signature-based forms




Secure and Trustworthy E-Business
The unprecedented global growth of the Internet, the promise of E-Business, and the
emergence of mobile business have a profound effect upon the way organizations
operate. The digital economy, that leverages the benefits of technological convergence
and new business models, offers unparalleled advantages for an immense variety of
service providers and their customers in the cyber marketplace. Providers see significant
economies in operating in an E-Business environment that has global reach, with the
prospects of cost reductions being passed on to the customer. Similarly, for online
consumers, the Internet offers infinitely expanded buyer information and a range of
choices that are daunting to comprehend. However, in spite of these apparent benefits
the transition to the digital economy has not been without problems. For many organi-
zations there is continuing uncertainty over which operating model to adopt, and the
rather intimidating lessons of some high profile failures. The global E-Business environ-
ment will continue to pose difficult and far-reaching management challenges to leaders
of online businesses. Some of these challenges are already evident and have a profound
effect upon the ways of doing business. Among them, and of paramount importance, is
the issue of how E-Business can maximize its value to consumers and simultaneously
retain their trust and confidence.
It is evident that the biggest barriers to E-Business today come from the notion that
people don™t trust the security and authenticity of E-Business environment. Building
consumer trust and confidence requires thoughtful analysis of the nature of the



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Electronic Signature 103


relationship between buyers and sellers. This notion is also about privacy in the E-
Business environment (E-Privacy). In the context of E-Business, E-Privacy has to be
established as a core value that connects organizational culture with the best interests
of the consumer. The value of E-Privacy can be viewed as an important indicator of
business success. Worldwide, many high profile business failures are attributable to the
lack of recognition accorded E-Privacy, and the lack of commitment to it as a consumer
issue. The consequences of this oversight can lead to an erosion of consumer loyalty,
negative publicity, and the loss of potential business.
When examining barriers to the implementation of E-Business, numerous studies have
singled out consumers™ lack of trust as a major factor. Some people reduce the trust
problem to one of security, arguing that if security issues are resolved, people will be
happy to transact online. However, when the trust problem is broken down into its
constituents, privacy, ease-of-use or the credibility of information on the Web is revealed
to be as important to consumers as security.
As far as the introduction of a new e-payment system is concerned, one should not
underestimate the power of the media and reputable institutions in approaching consum-
ers and assuring them of the system™s security. Since the average consumer is unlikely
to be able to assess the objective security of, say, an encryption algorithm, this issue
remains, to a large extent, one of trust “ namely trust in familiar information sources. Thus,
a well-orchestrated marketing effort would help give consumers enough pre-interac-
tional trust to understand, accept and use the new E-Business system. Thus, security
and trust mechanisms inhibit the free flow of business information required to achieve
the full potential of business benefits promised by E-Business investments.
Lack of trust is a significant problem for any E-Business “ the parties evolved in the E-
Business processes must feel trust in the people and companies doing business on the
Internet. In many traditional business relationships, trust is based on a combination of
judgement or opinion based on face-to-face meetings, or recommendations of col-
leagues, friends and business partners. However, the E-Business environment generally
does not involve human interaction and, therefore, this new context requires a new
understanding of trust. Trust must be established and managed continuously in a wide
range of E-Business activities.
The basis of trust is in ethics, and the topic is frequently discussed in the context of social
and democratic processes (Conte & Castelfranchi, 1995). It is also a fundamental
requirement of economic activity where the behavior of people and organizations takes
place in conditions of uncertainty (Jones & Wilikens, 2000). When one party is
dependent on the behavior of another party, the uncertainties give rise to risks. The
notion of trust within an E-Business environment involves having confidence in the
other parties, and hence having an expectation that the risks will not result in financial
or any other loss.
The specific application of trust in the E-Business environment involves several key
factors:
• Identity: the ability to identify party, good, service and to locate them in physical
space, including identification and location services such as digital certificates;




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104 Ruzic


• Reputation, and recommendations from parties who are themselves trusted or
experienced; and proxies for reputation, such as brand names and seals of
approval;
• Security of the E-Business environment including transaction data, integrity,
authentication and non-repudiability, secrecy and privacy with alternatives that
reduce the risk of data disclosure.


E-Business is generally considered to evidence many of the characteristics that render
trust very important. The parties commonly have little or no knowledge of one another.
They are also usually in different locations. They therefore cannot depend on physical
proximity, handshakes, body-signals, a common legal jurisdiction, or even necessarily
a definable jurisdiction.
The context of use and domain of application of the E-Business system being designed
should be taken into account. Context of use can be viewed as an important requirement
for the design. Different applications require diverse levels of security. Buying food can
be done with a credit card with basic cryptographic protection, while electronic banking
needs more sophisticated authentication and security mechanisms. Several techniques
help in establishing online e-trust:
• Electronic authentication,
• Electronic signature,
• Escrow payment services (online),
• Public Key Infrastructure (PKI).


Trust in E-Business systems is influenced by factors such as anonymity, security,
reliability, and the amount of control that parties have, as well as the reputation of the
entity that introduces the system. There are a number of guidelines that address the
different facets of security required for E-Business systems in the digital economy.
Issues of trust and security are connected to exchange, storage and management of
business and personal information. These techniques includes basic tasks to be done
in order to achieve a secure and trustworthy environment:
• Providing a clear and prominent policy on security with clear visibility of the
security techniques employed;
• Explaining security measures in management and storage of the data;
• Establishing a customer support line on security-related issues;
• Supplying regular information updates on changes and upgrades in security;
• Taking into consideration security issues specific to the type of E-Business
system;
• Giving users access to their data, allowing them to change it, and timely delete
outdated information (it can assist in building trust relations with customers);



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Electronic Signature 105


• Minimizing the security costs (both financial and temporal) imposed on users;
• Creating a security management culture (by educating employees and implement-
ing strict information handling policies within the company);
• Building a trust policy and trust recovery plan in the event of a security breach likely
to undermine trusted relationships with customers.


From the wealth of information that proliferates on the topics of the Internet, or e-commerce
specifically, there is a consensus on basic risks. Any transaction or message, financial
or otherwise, would be subject to the risks. In an ordinary commerce environment, plenty
of avenues are available to address these risks through formal signatures and other
mechanisms that would ensure secure transactions. The major risks facing E-Business
environment are considering key issues:
• Identity or authenticity of the person: Who sent the message? Does the sender
have the authority to bind the organization he or she represents?
• Data Integrity: Is the message complete or has it been altered? Is it true that the
copy of the message has not been altered?
• Denial of Service: Launch of an attack which would bring down the service.
• Non Repudiation: Proving up the message in court, ensuring that the sender
cannot falsely deny sending the message, ensuring that the sender cannot falsely
deny the contents of the message.
• Confidentiality: Ensuring that information is not disclosed to unauthorized
parties.


While E-Business flourishes through the Internet, in the digital world, laws and statutes
must be drafted and enacted to resolve disputes amongst parties. Issues will arise in the
courts of law whether documents with electronic signatures are valid or otherwise and
the extent of reliance that can be placed on the third parties. Any secure transaction is

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