begin  quoting Tracy R Reed as of Fri, Mar 17, 2006 at 09:16:24AM -0800:
[snip]
> don't see how. There would be a write-only file that you write your
> encrypted private key to and then all of the processing is handled
> inside the chip with the response to the challenge appearing in a file
> to be read by the host.

Why bother with challenge-response?  Why not just stream the data
through the card?

If you're going to bother doing encryption *anyway*, put a dedicated
cryptographic processor on the card, and open a pair of two-way streams.
(Presumably the simplest way would be four files... LOCAL-IN, LOCAL-OUT,
REMOTE-IN, REMOTE-OUT, or somesuch.)

That way, if you remove the card, you *know* the link is dead. Using
an untrusted end-node is still disquieting, but not nearly as much as
it would be otherwise.

>                         Basically a smart card but in a usb form factor
> that every machine can read since everyone has usb ports now.

USB card readers are (well, can be) quite small.

USB sticks aren't really that nice of a form-factor.  Use a USB card
reader to add functionality to systems that lack it, and more and more
systems might well start shipping with readers built-in.

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