ENCRYPTION CHIP SIDESTEPS U.S. EXPORT CONTROLS.

Byline: John Markoff The New York Times

Nippon Telegraph and Telephone Corp. has quietly begun selling a powerful data-scrambling chip set that is likely to undermine the Clinton administration's efforts to restrict the export of the fundamental technology for protecting secrets and commerce in the information age.

The existence of the two-chip set, which will have broad potential application for local computer networks, the Internet and telephone switching networks, was disclosed in Washington in a speech Monday at a public policy workshop by the chief executive of RSA Data Security, a Silicon Valley-based company that has frequently dueled with the administration over its export-control policies.

The executive, Jim Bidzos, said that his company was negotiating with NTT, the giant telecommunications concern, to resell the chips in the United States. Bidzos also said that NTT had already made sales in 15 countries, including in the United States to IBM.

``NTT has done a lot of research and development work on this product,'' he said. ``There is clearly going to be a lot of demand for their chips.''

Bidzos has been a vocal and longtime opponent of U.S. export laws that prohibit the sale, without a special license, of products that have powerful data-scrambling capabilities. The government's policy is directed at limiting the spread of systems that could make it more difficult for American intelligence and law enforcement agencies to conduct electronic surveillance.

Such restrictions have been bitterly opposed in recent years by American computer and telecommunications companies; they have argued that the technology is already widely available internationally and that manufacturers and software developers in the United States are in danger of losing markets to foreign competitors. The NTT technology would seem to support those contentions.

``The United States export controls are at risk from Japanese competition,'' said Stewart Baker, a Washington lawyer who is the former general counsel for the National Security Agency.

The NTT device also underscores fundamental differences that exist between Japan and the United States on the issue of privacy in the Information Age.

While U.S. officials have struggled to maintain their ability to conduct electronic surveillance, Article 21 of Japan's Constitution specifically forbids wiretapping.

``It's very interesting that the Japanese regard for privacy in their constitution translates into better cryptographic technology,'' said Marc Rotenberg, director of the Electronic Privacy Information Center, a Washington public policy group and an organizer of Monday's workshop on data scrambling.

Bidzos said that NTT's chips, which have been developed and manufactured by a subsidiary, NTT Electronic Labs, were far more powerful than the so-called Clipper chip, a data-scrambling system that the Clinton administration proposed for the nation's telephone system.

While the Clipper system has a built-in ``back door'' intended to permit the FBI to gain wiretap information, the NTT system has no such surveillance feature. It also uses much stronger data-encryption algorithms than U.S. export laws permit.

Those laws restrict the export of encryption systems which employ digital ``keys'' of more than 40 bits in length. The new NTT chips, however, are based on the U.S. Data Encryption Standard, which has a 56-bit key, and actually triples the strength of that standard. Such a scrambling system is believed to be beyond the capability of the most powerful code-breaking system.

In addition to the ``private'' key system for scrambling data, NTT uses RSA Data's ``public'' key method to permit computer users who have not previously exchanged information to swap private key information safely. The NTT system uses the RSA Data key which is 1,024 bits in length, also far stronger than the U.S. export regulations permit.

``If there is anyone in the government who hasn't already seen the writing on the wall, here it is,'' Bidzos said.

He said that RSA Data had set up a small subsidiary in Japan last year and that he is now negotiating with NTT to make a minority investment in that subsidiary in exchange for NTT's gaining access to the RSA Data public key technology.

The NTT technology is at least partly the result of an initiative by Japan's Ministry of International Trade and Industry, which 18 months ago made a $120 million national commitment to develop products to facilitate electronic commerce.