Tests of Commercenet's encryption system, which is based on algorithms -- mathematical formulas -- developed by RSA Data Security Inc. of Redwood City, Calif., are expected to begin this fall.

Commercenet hopes to create an easy-to-use industry standard for protecting Internet transactions.

For now, Net Market's approach is available to the limited number of computer users who have work stations running the Unix software operating system and a sophisticated Internet navigational program called X-Mosaic. The data encryption program is called PGP, for Pretty Good Privacy, which is based on the same RSA algorithms used by Commercenet.

PGP is available free, but it requires technical expertise to download it from the Internet. But within a few months commercial versions of PGP are expected to be available for personal computers using the Windows and Macintosh operating systems, which comprise the vast majority of computers in North America. Security Breaches Reported

The widespread adoption of standard data encryption tools cannot come too quickly for many Internet entrepreneurs, who hope to foster new levels of commerce on the rapidly growing network.

Alarmed by increasing reports of security breaches on the Internet, many people and businesses are reluctant to transmit sensitive information, including credit cards numbers, sales information or private electronic mail messages, on the network.

But the use of standard data encryption software, which scrambles messages so they can be read only by someone with the proper software "key," has been hindered by a combination of Government regulations and software patent disputes.

Experts say the PGP encryption software used by Net Market is at least as robust as the so-called Clipper encryption technology that the Clinton Administration has been pushing as a national standard. But unlike the Clipper system, the software keys for opening and reading PGP-encrypted documents is not controlled by the Government.