The government's plans to make the UK the best environment in the world for e-commerce have been heavily criticised by MPs.

The Trade and Industry Select Committee said in a report that the government's justification for an electronic commerce bill was open to question. The proposed legislation had been needlessly entangled with efforts to control computer crime, it said.

Ctte chairman Martin O'Neill on the report

The committee also said the government must come up with a cryptography policy for the UK as a whole, "rather than one which is geared towards satisfying law enforcement concerns at the expense of Britain's economic competitiveness."

A stripped-down e-commerce bill is now expected to be published next month.

The select committee chairman, Martin O'Neill, told a news conference it may now be a case of "an elephant giving birth to a mouse".

"We want to see a lighter hand of legislation," he added,"So there is the minimum degree of obstruction to something of advantage to Britain."

In a preliminary response to the report, Trade minister Michael Wills welcomed it and said the recommendations would be studied carefully.

"The Government, like the Committee, is committed to making the UK the best place to do business electronically", he said.

The report received a mixed response from industry experts. Some welcomed the highlighting of "squandered opportunities", others thought the criticism "rather unfair".

Government's encryption policy was scrambled

Last autumn, Peter Mandelson, then Trade and Industry Secretary, promised legislation to make Britain the most conducive country in the world for electronic trade.

On Wednesday, MPs said the whole rationale for such legislation was questionable. This stemmed from inadequate political control being exercised over the development and determination of cryptography policy, they said.

At the heart of the proposed legislation was the controversial concept of "key escrow". This involves licensed bodies being set up to hold the keys which unlock data sent over the Net in a scrambled encoded form. The bodies are known as Trusted Third Parties (TTPs).

If law enforcement agencies suspected a crime was being committed they could apply for the keys to the encrypted data.

But industry and civil liberties groups successfully argued the move would destroy business confidence in conducting trade over the Internet through the UK as well as infringe on privacy rights of individuals.

Key escrow now dropped

"Now that key escrow has been dropped by the government, the committee believes that the rationale for an electronic commerce bill is open to question," the report states.

"It recommends that the government think twice about the content of the forthcoming bill and only include in the bill measures which will promote electronic commerce rather than measures discarded from the previous key escrow policy."

In other comments, the report says:

• "UK electronic commerce policy was for so long entrapped in the blind alley of key escrow that fears have been expressed that UK's reputation as a competitive environment for electronic commerce is now severely damaged."

• "The Committee is disappointed that the government should still hold a candle for key escrow and key recovery and can foresee no benefits arising from government promotion of either technology."

• "The Committee considers it entirely unacceptable that the government should announce the review of the Interception of Communications Act 1985 and then fail to publish any further details of the review for over eight months."

• [The committee] recommends that consideration be given to the establishment of a law enforcement resource unit for dealing with computer crime."

• [The committee] considers that the licensing criteria [for Trusted Service Providers] recently set out by the Department of Trade and Industry are not fit to be written into law and that, unless they were improved, the licensing system would be a damaging and embarrassing failure."

The committee held six hearings between January and March, hearing evidence from industry experts, civil liberties groups and law enforcement agencies. It then produced a report of nearly 400 pages.

"Squandered opportunities"

Reacting to the report, Caspar Bowden, director of the Foundation for Information Policy Research, said it was "a relentless castigation of squandered opportunities, loss of political control, and unaccountable policy failures in the face of near unanimous public and industry opposition."

He said the government should "extend the remit of the Cabinet Office e-commerce unit beyond July, and create a high-level technically trained staff to co-ordinate implementation of e-commerce policy across departments."

Alan Boxer, managing director of e centre UK, the authority on standards and practices in electronic trade, warmly welcomed the report.

Reaction from Graham Avory of e centre UK

"This offers further encouragement for the government to publish rapidly an electronic commerce bill promising crisp, light regulation. At the top of our wish list is the simple statement that we want to be able to work in a UK that engenders trust and confidence in doing business electronically," he said.

Andrew Boswell, Chief Technology Officer at ICL and chairman of the InterForum Lobby Group was less damning: "The report is very critical of the Government, but I think this is rather unfair.

"The DTI has been working closely with industry, trying to put in place a workable legal framework. Without such a framework, the public will not have the protection of the law in their electronic transactions, and industry's huge investments in new e-commerce services will be built on insecure foundations," he said.

Mr Boswell agreed, however, that the key escrow proposals should be abandoned and that e-commerce and e-crime needed to be dealt with separately.

Yaman Akdeniz, director of Cyber-Rights & Cyber-Liberties (UK) said: