They will if they get their hands on the most powerful encryption technology, says the FBI. The nerds who write the stuff beg to differ Picture this scene from the near future: organized crime gets hold of encryption technology so powerful even IRS supercomputers can't crack it. An underground electronic economy emerges, invisible to U.S. tax code. The Federal Government, unable to replenish its coffers, let alone fund a standing army, shrinks until it wields about as much power as a local zoning board. Militias and gangs take over, setting up checkpoints at state borders and demanding tribute of all who pass.

This scenario, in which crypto-wielding cybercriminals take over the world, has become a standard plot device in turn-of-the-century science fiction. I've even used it once or twice. But there is good news on this front. Running the world turns out to be surprisingly challenging. It isn't something an evil mastermind can do just by hitting return on his keyboard.

Encryption algorithms—the mathematical rules by which secret codes are made and broken—have been at the center of a simmering spy-vs.-nerd war since the early 1990s. The anti-encryption forces, which control the technology through laws originally passed to regulate munitions, are led by a handful of spooky U.S. government agencies (such as the FBI and the National Security Agency) with support from the White House that rises and falls from one election cycle to the next—more on that faction later.

The pro-encryption forces are the nerds; with a nod to the cyberpunk school of science-fiction writers, they call themselves "cypherpunks." Though their numbers have always been small, cypherpunks are brave, bold and highly motivated. And they have some programming talent.

Being nerds, however, they are rather unworldly. They are similar in dress, zip code, outlook and philosophy to the Berkeley free-speech activists of the early 1960s, except that the cypherpunks have a bigger megaphone: the Internet. They can encrypt free speech and software as well, so various uptight authority figures cannot stop their heroic data.

The cypherpunks, like the hippies, love to tilt against windmills. Their most glamorous imaginary weapon is not free speech or free software or even free music. It is free money, anonymous electronic cash and untraceable digital funds, free of all government oversight and laundered over the Internet. Dotcom stocks have turned out to be surprisingly close to this utopian vision. They are rather destabilizing.

Luckily for taxmen worldwide, however, money isn't "money" just because some hacker says it is. We don't secretly print our own personal currency on pink paper at Kinko's—not because it's impossible but because nobody would want it. If Alan Greenspan were a masked Kleagle in a big white crypto hood, nobody would use dollars either.

Offshore "data havens" are another piece of classic cypherpunk vaporware. Here's the pitch: just subvert one little Internet-hooked island country, say Tuvalu (.tv) or Tonga (.to), let it pass a bunch of pirate-friendly laws, and you can store anything there that American computer cops disapprove of. This might yet become a real business opportunity if the Internet gets better policed.

But piracy only looks like the free-and-easy island life. It's actually hard work, because it lacks efficient economies of scale. Once you start seriously churning out the product, you quickly become very visible: warehouses, trucks, employee payrolls—it all adds up. The sweet charm of piracy is free, daring little "us" vs. big nasty "them." But any "us" that gets large enough is automatically a "them." Bill Gates was once a hippie programmer, a college dropout from Seattle. But a hippie with a billion dollars is no longer a hippie; he's a billionaire. A hippie with $50 billion is considered a trust.

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