TikTok’s potential U.S. ban presents host of questions for app stores, internet companies and the government
Patrick T. Fallon | AFP | Getty Images
Some fans of the service may turn to virtual private networks (VPNs) to try and connect to TikTok should a ban take place, a workaround that can make it seem like their internet connection is coming from a different country. But that loophole may not be so easy to exploit.
It’s not an issue yet, as there are still some ways a TikTok ban could be avoided or accessed legally in the U.S. Here are the key things under consideration.
What a ban or forced sale could look like
The Committee on Foreign Investment in the U.S. (CFIUS) is the interagency body evaluating national security concerns around the app to determine how to minimize risk if it continues to operate domestically. The group can recommend to President Joe Biden that ByteDance’s 2017 acquisition of Musical.ly, a TikTok precursor, be unwound, forcing a sale of those assets.
TikTok has recommended a mitigation plan as an alternative to a forced sale. But that’s a longshot solution as CFIUS already threatened a ban if ByteDance won’t sell its stake.
A forced sale would be a complex step, requiring a years-old transaction to be unwound. The Trump administration pursued that route once before to no avail. The Chinese government would likely oppose it again, but it would need to be careful in its protests because the heart of its argument to the U.S. is that TikTok operates independently.
“That would be part of the calculus and how aggressively China would want to respond,” said Lindsay Gorman, a senior fellow for emerging technologies at the German Marshall Fund’s Alliance for Securing Democracy. Gormany previously served as a senior advisor at the Biden White House.
Should the U.S. ban TikTok, the mechanics on what happens from there get murky. Oracle is the cloud hosting service for all of TikTok usage in the U.S. Internet service providers like Comcast (NBC Universal’s parent company) and Verizon direct traffic to end users. And the app stores controlled by Apple and Google are the primary places for consumers to download the TikTok app.
Shannon Reaves, a partner in Stroock’s CFIUS compliance group, said any requirement on a third party would not come from CFIUS, which is tasked with evaluating foreign investments alone.
“There won’t be action from CFIUS as a result of this review that will be taken against third parties that are not a part of this transaction,” Reaves said. “So your Apples and your Googles and so forth, that that will not happen.”
The government may have to turn to legislation or executive orders to get app distributors, ISPs and cloud services to block access to TikTok.
While there will likely always be cracks that can be exploited by a subset of computer literate users, the typical consumer would find it difficult to access a government banned service, said Douglas Schmidt, an engineering professor at Vanderbilt.
“There will almost always be ways around this,” Schmidt said. “It would just be a lot more difficult for the average person to do it without getting an advanced degree in computer security or something.”
In other words, a VPN won’t be enough, in part because going that route would still likely require app store credentials, which will indicate a user’s location. Gerald Kasulis, a vice president at NordVPN, said there’s also technology available to detect when a user is trying to access an app with a VPN.
The security concerns
Concerns around TikTok’s security risk come down to two main issues. The first is who can access U.S. consumer information and the second is who has the ability to determine what information reaches U.S. users. Under Chinese law, companies can be required to hand over internal information to the government for supposed national security purposes.
TikTok has sought to reassure the U.S. government that U.S. user data is stored outside of China. The company has developed an elaborate plan known as Project Texas that includes the vetting of its code in the U.S. and a separate board of directors for a domestic subsidiary, with members reviewed by the U.S. government.
TikTok CEO Shou Zi Chew, who’s set to testify before a U.S. House panel next week, told The Wall Street Journal that Project Texas would do just as much as divestment to resolve any security concerns.
But the mood in Washington isn’t moving in TikTok’s favor, and legislators have lost whatever trust they once may have had in China and its motives. That issue resurfaced earlier this year, when a suspected Chinese spy balloon was spotted flying across a large swath of the U.S. Biden ordered the military to shoot down the balloon last month.
When it comes to consumer technology, users have no idea what information is making its way to the Chinese government. And the U.S. government has a lot of work to do to provide clarity on what would happen if the app was to be banned.
“Even for someone who studies this stuff, it’s not easy to detach and detangle all these apps,” said Gorman. “As a society, we have not made the decision that the app stores, the Apple App Store or the Google Play Store, should be restricting apps based on the amount of information they collect. It can’t be put on any individual and it really does need to be addressed by governments.”
While many users may think their casual social media use would be of little interest to a foreign government, Schmidt said that data can have a surprising amount of value to bad actors.
“Having information about your habits and your interests and your interactions and where you go and what you do could be used for things like either phishing attacks to get access to more information, or for things like blackmail, if you’re doing things that you might not want other people to know about,” Schmidt said.
It’s unfamiliar territory for U.S. companies, in contrast to China, which blocks access to all sorts of content, including most major U.S. internet services.
“Trying to police data access is very, very difficult, especially when there’s suspicion that the folks who are doing this have a reason to do it,” Schmidt said. “And they’re heavily incentivized to collect this information and use it for all kinds of purposes.”
WATCH: Uncertainty about the fate of TikTok sends competitor stocks soaring
British regulator softens stance on Microsoft-Activision deal competition concerns
Michael Ciaglo | Bloomberg | Getty Images
In February, the CMA published provisional findings from its probe into the takeover, stating at the time that the transaction may result in higher prices, fewer choices and less innovation. Among its concerns, the regulator flagged that the deal would cause a substantial lessening of competition in the console gaming market.
Since then, the regulator has received a “significant amount” of feedback from various industry participants on the deal. With this new evidence, the CMA now says it no longer believes the transaction will hamper competition in console games.
“Having considered the additional evidence provided, we have now provisionally concluded that the merger will not result in a substantial lessening of competition in console gaming services because the cost to Microsoft of withholding Call of Duty from PlayStation would outweigh any gains from taking such action,” Martin Coleman, chair of the independent panel of experts conducting the CMA investigation, said in a statement Friday.
“Our provisional view that this deal raises concerns in the cloud gaming market is not affected by today’s announcement. Our investigation remains on course for completion by the end of April.”
Shares of Activision Blizzard surged more than 6% in U.S. premarket trading. Microsoft shares were slightly lower amid a broad market slump.
The CMA announcement comes after the U.S. technology giant has also won support from some companies that were against the deal, or sitting on the fence.
One of the major concerns from Microsoft’s competitors was that the transaction would block distribution access to Activision’s crown jewel franchise — “Call of Duty.” Last month, Microsoft said it signed a “binding 10-year legal agreement” to bring Call of Duty to Nintendo players on the same day as Microsoft’s Xbox, “with full feature and content parity.”
Additionally, Microsoft signed a deal with Nvidia to bring its Xbox games to Nvidia’s GeForce Now cloud gaming service. Microsoft said it would also bring the Activision games library to Nvidia’s service, if the acquisition closes. Nvidia was reportedly against Microsoft’s Activision takeover.
But Microsoft has yet to bring onside its biggest rival, Sony, which owns the PlayStation console. Microsoft President Brad Smith told CNBC last month that the company is offering Sony the same agreement as it did Nintendo — to make Call of Duty available on PlayStation at the same time as on Xbox, with the same features. Sony still opposes the deal.
“We appreciate the CMA’s rigorous and thorough evaluation of the evidence and welcome its updated provisional findings,” a Microsoft spokesperson told CNBC via email.
“This deal will provide more players with more choice in how they play Call of Duty and their favorite games. We look forward to working with the CMA to resolve any outstanding concerns.”
An Activision spokesperson told CNBC that the CMA’s updated provisional findings “show an improved understanding of the console gaming market and demonstrate a commitment to supporting players and competition.”
“Sony’s campaign to protect its dominance by blocking our merger can’t overcome the facts, and Microsoft has already presented effective and enforceable remedies to address each of the CMA’s remaining concerns. We know this deal will benefit competition, innovation, and consumers in the UK.”
Microsoft still faces uncertainty from regulators in the U.S. and European Union. Smith travelled to Brussels last month to meet with EU regulators.
In the U.S., the Federal Trade Commission filed an antitrust case against Microsoft attempting to block the Activision deal.
Some major companies retain reservations about the acquisition, which includes Google parent Alphabet, according to Bloomberg.
– CNBC’s Steve Kovach contributed to this report
TikTok wants to distance itself from China — but Beijing is getting involved
Florence Lo | Reuters
The Ministry of Commerce said Thursday that a sale or spinoff of TikTok from its Beijing-based parent ByteDance is subject to Chinese law on tech exports — which requires licenses for the export of certain technology based on national security concerns. ByteDance also owns Douyin, the Chinese version of TikTok that’s popular in the country.
“The Chinese government would make a decision in accordance with law,” said spokesperson Shu Jueting in Chinese, translated by CNBC.
Shu was speaking at the ministry’s weekly press conference, hours ahead of TikTok CEO Shou Zi Chew’s testimony before a U.S. House of Representatives committee.
Lawmakers questioned Chew for more than five hours, and wanted clarity on TikTok’s ability to operate independently of Chinese influences on its parent.
ByteDance did not immediately respond to a request for comment on the Chinese Commerce Ministry’s remarks.
The questioning did not appear to relieve U.S. lawmakers.
“At the end of the day, it was clear from the testimony that Mr. Chew reports to the CEO of ByteDance. ByteDance controls TikTok,” Cameron Kelly, visiting fellow at Brookings Institution, told CNBC’s “Squawk Box Asia” Friday. Kelly used to be a general counsel at the U.S. Department of Commerce from 2009 to 2013.
Kelly said the evidence that ByteDance has legal control of TikTok increases U.S. lawmakers’ doubts over how well the app can demonstrate its independence through restructuring.
TikTok has a “Project Texas” plan to store American user data on U.S. soil — in a bid to show the company’s claims that mainland Chinese authorities have no access to them.
Beijing … is now double-daring Congress and the Administration to ‘make my day.’
Asia Society Policy Institute
“I don’t think a shutdown a ban or a complete divestiture [of TikTok] is needed. But I do think you have to separate that legal control,” said Kelly, noting that could be done through a trust structure.
But the commerce ministry’s claim of control over a TikTok sale or spinoff indicates Beijing wants to be involved.
“The Chinese government’s public declaration that it would block the sale of TikTok in the U.S. has little to do with protection of Chinese algorithms and technology and a lot to do with giving Washington a taste of its own medicine,” Daniel Russel, vice president for international security and diplomacy, Asia Society Policy Institute, said in a statement.
“Beijing, having heard [U.S. Commerce] Secretary Raymond’s lament that banning TikTok would infuriate voters under 35, is now double-daring Congress and the Administration to ‘make my day,’” Russel said.
The U.S. has increased restrictions on the ability of American businesses and individuals to work with Chinese businesses on critical tech for high-end semiconductors.
When asked about the commerce ministry’s remarks Thursday, TikTok’s CEO said the app isn’t available in mainland China and is based in Los Angeles. But he said the company did use some of ByteDance’s Chinese employees’ expertise on “engineering projects.”
TikTok CEO Shou Zi Chew testifies before the House Energy and Commerce Committee in the Rayburn House Office Building on Capitol Hill on March 23, 2023 in Washington, DC.
Chip Somodevilla | Getty Images
Chew also told U.S. lawmakers that China-based employees at its parent company ByteDance may still have access to some U.S. data, but that new data will stop flowing once the firm completes its Project Texas plan.
Official Chinese comments have previously emphasized that China-based companies should comply with local laws and regulations when operating overseas.
It’s not immediately clear how China’s export control law, enacted in December 2020, might apply to TikTok.
Different types of exports are managed by different government organizations, “each of which has a separate regulatory system,” the EU Chamber of Commerce in China said in its latest position paper. It called for greater clarity on the roles of the different bodies involved with implementing the export control law.
What’s next for TikTok?
The U.S. and China have increasingly invoked national security as a reason to control tech.
“To be fair, there really are indeed genuine national security risks associated with [TikTok] — and that is one reason why a ban of the app from government phones and military phones makes sense,” said Glenn Gerstell, senior advisor at Center for Strategic and International Studies on CNBC’s “Street Signs Asia” Friday. Gerstell was general counsel of the National Security Agency from 2015 to 2020.
“As to the general public, I don’t see the strategic value in China understanding what the dance moves of a teenager in Minneapolis are. So the general public ban doesn’t make sense to me,” he said.
TikTok has more than 150 million users in the U.S. — or about half of the country’s population.
It’s unclear whether the U.S. will ultimately force ByteDance to sell TikTok or prohibit use of the app in the country. The wildly popular app is already banned from federal government devices.
“We see a 3-6 month period ahead for ByteDance and TikTok to work out a sale to a US tech player with a spin-off less likely and extremely complex to pull off,” Dan Ives, analyst at Wedbush Securities, said in a note.
“If ByteDance fights against this forced sale, TikTok will likely be banned in the US by late 2023.”
— CNBC’s Lauren Feiner contributed to this report.
Crypto firm Tether says it has around $1.6 billion in excess reserves to back its USDT stablecoin
Justin Tallis | Afp | Getty Images
Tether issues the USDT stablecoin, which is pegged one to one with the U.S. dollar. USDT is backed by real-world assets such as fiat currency and U.S. Treasurys so that it is always one to one redeemable with the U.S. dollar.
Stablecoins are used by traders to move in and out of different cryptocurrencies without the need to convert money back into fiat currencies.
Over the years, stablecoin issuers have been criticized for not being transparent enough with the type of assets they hold in their reserve to back their digital currency. Tether held commercial paper, or short-term, unsecured debt that is issued by companies. But Tether didn’t reveal the type of firms or geographical location of companies it had brought the debt from.
Tether eventually sold all of its commercial holdings and moved into U.S. Treasurys, which are considered a more stable and reliable asset. The company produces so-called attestations, which are reports produced by an auditor to attest to the company’s reserves and the assets it holds.
The last report Tether released covering the December quarter showed it had more assets than liabilities.
Tether then revealed in February that it made $700 million in profit in the December quarter. The company’s total assets once liabilities are substracted amount to $960.6 million.
Paolo Ardoino, Tether’s chief technology officer, said the company estimates that the excess reserves will increase by $700 million in the current quarter, which is not yet over. That would take Tether’s excess reserves to $1.66 billion. And it would be the first time Tether crosses the $1 billion mark.
“So this money stays in Tether in the main company in order to further capitalize the stablecoin,” Ardoino said.
Tether makes money from various fees, such as a $1,000 withdrawal fee (with a minimum withdrawal requirement amount of $100,000); from investments in digital tokens and precious metals; and from issuing loans to other institutions.
Circle’s wobbles help Tether
The value of all the USDT in circulation has grown substantially this month from $70.98 billion on March 1 to $78.14 billion on Thursday, according to CoinMarketCap.
That’s thanks in part to the collapse of Silicon Valley Bank this month. Circle, which issues a rival stablecoin called USD Coin, revealed it had $3.3 billion exposure to SVB. USDC lost its dollar peg as investors got concerned about the coin’s stability. Investors flocked to tether. After the U.S. government stepped in to guarantee depositors, USDC regained its peg after it said the $3.3 billion USDC reserve deposit held at SVB will be fully available to people.
Ardoino revealed Tether’s estimated profit for the current quarter while defending the company’s record. When asked if Tether would be able to withstand an event like the SVB crisis, Ardoino asked why people are still questioning its reserves even after traditional lenders collapsed.
“First of all, seriously after Credit Suisse and all the others, all the banks that are failing you are looking again at Tether?” Ardoino said in reference to the instability at Credit Suisse, which eventually led to a regulator-brokered $3.2 billion deal for UBS to buy the Swiss lender.
“Tether is making money and banks are failing. So if you have to put money somewhere, I guess that Tether is the most safe among all the choices,” Ardoino said.
— CNBC’s Ryan Browne contributed to this report.
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