Though lots of people use the term "digital signature" for any of these methods, it's becoming standard to reserve the term "digital signature" for cryptographic signature methods and to use "electronic signature" for other paperless signature methods.

Cryptographic Signatures (PKI)

Cryptography is the science of securing information. It is most commonly associated with systems that scramble information and then unscramble it. Security experts currently favor the cryptographic signature method known as Public Key Infrastructure (PKI) as the most secure and reliable method of signing contracts online.

PKI uses an algorithm to encrypt online documents so that they will be accessible only to authorized parties. The parties have "keys" to read and sign the document, thus ensuring that no one else will be able to sign fraudulently. Since the passage of the e-signature law in 2000, the use of PKI technology has become more widely accepted. Many online services offer PKI encrypted digital signature systems that function much like we use PINs for our bank cards.

XML-Based Signatures

Other e-signature systems have been developed, including a method for digitally recording a fingerprint, and hardware that electronically records your signature. In addition, the organization that sets Web standards for the Internet, the Worldwide Web Consortium (W3C), developed XML-compliant guidelines for digital signatures. The results of their working group are discussed at the W3C website at www.w3.org/Signature.

Opting Out of Electronic Contracts

While the federal e-signature law makes paper unnecessary in many situations, it also gives consumers and businesses the right to continue to use paper where desired. The law provides a means for consumers who prefer paper to opt out of using electronic contracts.

Prior to obtaining a consumer's consent for electronic contracts, a business must provide a notice indicating whether paper contracts are available and informing consumers that if they give their consent to use electronic documents, they can later change their mind and request a paper agreement instead. The notice must also explain what fees or penalties might apply if the company must use paper agreements for the transaction. And the notice must indicate whether the consumer's consent applies only to the particular transaction at hand, or to a larger category of transactions between the business and the consumer -- in other words, whether the business has to get consent to use e-contracts/signatures for each transaction.