Speaking at the Microsoft IT Forum in Copenhagen, the Microsoft chairman said that users will soon rely on alternative means of securing their identities.
"A major problem for identity systems is the weakness of passwords," said Gates.
"Unfortunately with the type of critical information on these systems, we aren't going to be able to rely on passwords. Moving to biometric and smart cards is a wave that is coming and we see our leading customers doing this."
Gates added that Microsoft plans to issue its employees with smart cards for accessing the company building and their computers. The system will be based on the company's .Net technology.
"In time we will completely replace passwords," Gates said. "Having the .Net capability, we are very excited to see smart cards moving into this framework."
There is growing acceptance in the IT industry that users need to supply greater proof of identity before being allowed onto corporate systems.
Last week, Howard Schmidt, the chief security officer for eBay and former White House adviser for cyberspace, called for greater use of two-factor authentication -- where users must supply two forms of identification.
"We're doing better security now, but we still depend on usernames and passwords as a way of getting online. We now have the technology for the end-user to have two-factor authentication. We expect to see security grow and be federated," said Schmidt, adding that people had to accept the need to supply more credentials.
Schmidt gave the example of how AOL was issuing two-factor Secure-ID tokens to many of its users. He said that bank cards were also a good example of authentication: "They are something you have -- the card -- and something you know -- the PIN."
The Microsoft IT Forum continues until Friday.