Tech Brew Ride Home - Fri. 01/13 – Is The Government Crackdown On Crypto Starting?

Episode Date: January 13, 2023

The SEC just officially labeled two crypto lending programs as unregistered securities? Is the regulatory tsunami beginning? Did Tim Cook actually ask Apple to cut his pay? Did the nascent industry of carbon capture just take its first steps? And in the longreads, I go in depth to explain that weird OpenAI/Microsoft deal. It’s complicated. Links: SEC charges Gemini and Genesis with unregistered securities offering (The Block) Apple’s Tim Cook Takes Rare CEO Pay Cut After Pushback (Bloomberg) Climate Startup Removes Carbon From Open Air in Industry First (WSJ) Weekend Longreads Suggestions: Microsoft + OpenAI: Inside Tech’s Hottest Romance (The Information) Is Microsoft about to get the deal of the century? Or is Sam Altman unloading OpenAI at just the right time? (Gary Marcus) Robert Tinney’s Visions Of The Future (DocPop) Dungeons & Dragons content creators are fighting to protect their livelihoods (TechCrunch) Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to the Tech meme right home for Friday, January 13th, 2020. I'm Brian McCullough today. The SEC just officially labeled two crypto lending programs as unregistered securities is the regulatory tsunami beginning.

Did Tim Cook actually ask Apple to cut his pay? Did the nascent industry of carbon capture just take its first steps? And in the long reads, I go in depth to explain that weird open AI Microsoft deal. It's complicated. Here's what you miss today in the world of tech. The Securities and Exchange Commission has charged Genesis and Gemini with offering and selling unregistered securities to retail investors via a crypto lending program promising to pay interest. Quoting the block.

The program has been the subject of a public fight between the two Earthswell corporate partners. The U.S. regulator said Genesis, which is part of Digital Currency Group, entered into an agreement in December 2020 with Cameron Winklevostled Gemini to offer Gemini customers an opportunity to loan their crypto to Genesis. in exchange for Genesis's promise to pay interest. In February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, whereby Gemini Earned investors tendered their crypto to Genesis, with Gemini acting as the agent to facilitate the transaction, the SEC alleged. Gemini also deducted an agent fee, sometimes as high as 4.29%. From the returns, Genesis paid to Gemini Earned investors. As alleged in the complaint, Genesis then exercised its discretion in how to use the investor's crypto assets to generate revenue and pay interest to

Gemini Earn investors. In November 2022, Genesis said it would not allow its Gemini Earned investors to withdraw their crypto because Genesis lacked sufficient liquid assets to make withdrawal requests. At that time, Genesis held about $900 million in investor assets. Gemini ended the Gemini Erne program earlier this month. Retail investors in Gemini Earn have not been able to withdraw their crypto, the SEC said. When the Gemini Earn program shut down, Gemini President Cameron Winklevoss blasted Genesis parent company Digital Currency Group, accusing Gemini's former lending partner of defrauding thousands of earned users and misleading them regarding DCG's solvency. Winklevoss also called for the

ouster of DCG CEO Barry Silbert. Silbert denied that funds were commingled among DCG subsidiaries, as Winklevoss claimed. An SEC official said Genesis and Gemini were partners engaged in activity that constituted the offer and sale of securities without registering. Apart from the fact that Genesis was the issuer, both are liable. The officials said, quote, today's charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws, said SEC Chair, Gary Gensler, in a statement. Doing so best protects investors. It promotes trust in markets. It's not optional. It's the law, end quote. Tyler Winklevoss, co-founder of Gemini, said he was disliked.

appointed in the SEC's action, since Gemini and other creditors are working to recover funds. This action does nothing to further our efforts to help earn users get their assets back. Tyler Winklevoss tweeted, their behavior is totally counterproductive. And quote, he added that the earn program was regulated by New York State and had been in discussions with the SEC about the earn program for more than 17 months. Quote, despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us, super lame. Tyler Winklevoss said.

Quoting John Reed Stark on Twitter. The SEC hit Block 5 for failing to register its crypto lending program, stopped Coinbase from launching its crypto lending program, and just hit Gemini slash Genesis for its Earned Cryptolending Grift. Buckle up, an SEC regulatory onslaught is just beginning, end quote. According to an SEC filing, Apple plans to cut Tim Cook's target compensation by more than 40% to just $49 million in 2023, citing investor guidance and a request from Cook himself. Cook was paid $99.4 million in all of 2022, quoting who else but Mark German in Bloomberg.

As part of the changes, the percentage of stock units awarded to Cook and tied to Apple's performance will increase to 75% in 2023 from 50% as well as in future years, the company said in a regulatory filing Thursday. Cook's latest pay was, based on, quote, balanced shareholder feedback, Apple's exceptional performance, and a recommendation from Mr. Cook, end quote. The iPhone maker said in the filing, the company also plans to, quote, position Mr. Cook's annual target compensation between the 80th and 90th percentiles relative to our primary peer group for future years, Apple said. Apple has drawn criticism from groups such as institutional shareholder services about Cook's previous compensation package, but a majority of shareholders voted to approve it last year.

ISS, a top advisory firm, complained that Cook's stock would continue to vest post-retirement and that half of the rewards didn't depend on performance criteria like the company's share price. The $49 million in target compensation includes the same $3 million salary and $6 million bonus, as in 2022, as well as an equity award value of $40 million. His equity award value in 2022 was $75 million. Cook's actual total compensation for 2023 could fluctuate based on the company stock performance, end quote. Carbon capture is a nascent industry that has been long on hype and attracted quite a bit of VC investment, but until now, it hasn't, well, done much. Until now, though, quoting the Wall Street Journal, one of the most important technologies to

address climate change got a boost Thursday when a startup said it pulled carbon dioxide from the open air and stored it underground. The company has cashed in on the effort, potentially creating a viable business model that could kickstart a new industry. ClimWorks AG is a leader in the race to remove carbon dioxide from the atmosphere using a process known as direct air capture. Customers including Microsoft paid a significant premium to buy carbon credits generated by Climworks, allowing them to effectively offset their own emissions. Climworks and others have long promised that using vacuum-like devices to pull in air, filter it, and bury carbon underground can help mitigate environmental damage caused by human

activities. This is the first time a company has actually done it at a meaningful scale using a third-party verified process. We hope we are growing from a teenager to a grown-up in this industry. Christoph Gubald, co-chief executive of ClimWorks said in an interview, founded in 2009, ClimWorks is effectively carrying out what trees do by taking carbon dioxide out of the atmosphere. The process promises to store the carbon in the earth for thousands of. of years. The company makes money by removing the carbon on behalf of businesses that can claim they are becoming carbon neutral. Microsoft, e-commerce company Shopify and payments firm Stripe, have prepaid or agreed to pay hundreds of dollars per credit, each of which represents one metric ton of carbon

removed. Other carbon credits tied to projects such as keeping trees standing have often been criticized because the projects often don't reduce emissions as much as promised. Companies pay a premium, sometimes paying hundreds of times as much as they do for basic credits for the credits from Climbworks because there is more certainty they actually remove carbon from the atmosphere. The companies are also willing to pay more to help jumpstart the industry, hoping that costs decline rapidly. This is an important inflection point in the development of direct air capture, said Stacey Kalk, Shopify's head of sustainability. It isn't just science fiction, it's reality, end quote. The promise of the technology has prompted established businesses such as Occidental Petroleum

to develop their own direct-air capture strategies. ClimWorks operates one of the world's only operational direct-air capture plants in Iceland, which is capable of removing about 4,000 metric tons of carbon dioxide a year, roughly the equivalent to the annual emissions of about 800 passenger cars. Other removals to this point have been done using methods such as burying carbon-rich plant material underground. Climworks declined to say how much carbon it removed in this case. Businesses globally have agreed to purchase credits equivalent to more than 700,000 metric tons of carbon removal from it and other companies, according to data provided by

CDR.FYI. Scientists estimate billions of metric tons a year need to be removed annually by mid-century to avoid the worst effects of global warming. Bigger companies and investors are flocking to this nascent industry. Occidental recently said it aims to increase the number of planned direct air capture facilities it operates to 100 from 70 by 2035, aided by bolstered tax credits that are part of the climate health and spending legislation known as the Inflation Reduction Act, end quote. Time for the weekend long read suggestions. Usually with these, I try not to share long reads that are behind a paywall because you wouldn't be able to actually read them unless you subscribe. But in this case, I think that this piece that I'm about to share from the information does such

a good job of unpacking the whole OpenAI Microsoft relationship that we've been talking about this week, how that is weird and sort of how it works. So I'm going to summarize the key points from this piece more than usual. You might recall that Open AI was founded as a nonprofit. The idea was explicitly to keep the theoretically society-changing technology advancements of AI from being the monopolistic property of one of the big tech platforms. The idea was to keep AI tech independent. Problem was, open AI realized that a nonprofit structure made it difficult to raise the money it would need to train. machine learning models. We actually get into how training the models is the most expensive part of

the equation in our bonus episode discussion this weekend. But anyway, thus, enter Microsoft with its deep pockets. And thus, we've got the weird sort of pretzel logic of Microsoft potentially investing more in OpenAI for just short of half of the company. Quote, OpenAI CEO Sam Altman wanted more resources to keep up with the industry. So he turned to two close friends, investor and entrepreneur Reid Hoffman and venture capitalist Vinod Kosla, asking for tens of millions of dollars. In return, Altman agreed to create a for-profit arm of Open AI that could yield big returns. After much back and forth about whether they could ever make money off such a long-term and ambitious idea, Hoffman and Kosla's venture capital firm Kosla Ventures cut checks.

Himself, already wealthy, Altman chose not to take any equity in the new venture, preferring to remain tied to the nonprofit, a position several people close to him say he has maintained to this day. That may reflect the founding principles of the new venture, which dictated that only board members without financial stakes in the partnership could vote on decisions where the interests of limited partners and open AI non-profits missions may conflict. OpenAI updated its charter in 2018 to clarify that while its, quote, primary fiduciary duty is to humanity, it anticipated needing to marshal substantial resources to fulfill our mission, but will always diligently act to minimize conflicts

of interests among our employees and stakeholders that could compromise broad benefit, end quote. Early investor Elon Musk soon stepped away from the company, saying later in a tweet that Tesla was competing with Open AI, and he, quote, didn't agree with some of what Open AI's team wanted to do without elaborating. And it wasn't long before Altman was turning to another, albeit far more complex friend, Microsoft and its CEO Sacha Nadella. Microsoft was years deep into a costly company-wide bet on AI, which it saw as a way to improve its productivity software and gain an edge against competitors. Microsoft researchers were training a large-scale AI designed to parse millions of documents scraped from the internet, which became known as Turing. Nadela had instructed teams across Microsoft to use

AI models like Turing to enhance their products, someone familiar with the matter said. The strategy now called AI at scale hinged on the idea that Microsoft needed to find a variety of ways to make money from Turing because of how costly it was to develop, training the models required far more computing power than Microsoft systems had ever handled before. To make it happen, Microsoft Chief Technology Officer Kevin Scott struck a deal with chipmaker Nvidia to develop high-powered graphics processing units, AI practitioners' preferred type of chip, and cables that could handle the heavy workloads needed to train the AI. Microsoft developed new software dubbed DeepSpeed to Help.

All of this made Microsoft an appealing partner to Open AI, whose models relied heavily on costly cloud computing. Altman corded the software giant aggressively. making numerous trips to Seattle to seal a deal. Nadella also saw an opportunity to boost Microsoft's cloud business. He knew his legacy would be measured by Microsoft's ability to rent servers and computing power to customers, and with Amazon winning that business and Google trying to, he needed a way to grow that business fast. OpenAI's models currently rely so much on Microsoft software and hardware to operate that it would be difficult for the startup to easily port its

models to a different cloud provider, according to a person familiar. And OpenAI's models currently take up more space and compute in Azure than Turing does, this person said, end quote. And then I'm going to skip around to the end here, which explains how that all leads to the weird symbiosis, which makes the potential Microsoft deal so unusual. Quoting again, Open AI needs more money to keep improving its software, and so it is now willing to pay a large share of future profits to Microsoft and other investors, a necessary step given the low likelihood it will try to go public. But the startup, whose ChatGPT chatbot has taken the industry by storm is proposing that it transitioned to non-profit status again after it pays a certain amount of profit to the

investors. After OpenAI pays back its first investors, Microsoft will get 75% of profits until its principal investment is paid back, and 49% of profits after that, until it hits a theoretical cap, according to a person briefed on the terms. Other investors and OpenAI employees would have similar caps on profits they share. The idea of capping returns stems from OpenAI's original non-profit origins. This structure would be highly unusual. I have never seen it in venture, said Louis Leho, a partner at law firm Fully and Lardner, who works on VC deals. He said the deal structure implies that OpenAI's investors think the company may never go public and hence need to recoup their investments by taking a portion of future cash flows. OpenAI has proposed a key concession

as part of the discussions with potential new investors. Instead of putting a hard cap on the profit sharing, essentially their return on investment, it could increase the cap 20% per year, starting around 2025, said a person briefed on the change. Investors say this compromise if it goes through would make the deal more attractive because it would allow shareholders to obtain venture-level returns if the company becomes a moneymaker, end quote. Now, at the same time, and the next link in the long reads, AI guru Gary Marcus wrote a piece this week titled, is Microsoft about to get the deal of the century, or is Sam Altman unloading OpenAI at just the right time? This piece is not behind a pay well, so you can read his whole attempt to suss out the particulars of this deal.

Quote, on the one hand, being valued at $29 billion is really a lot for an AI company, historically speaking. On the other, Altman has often publicly hinted that the company is close to artificial general intelligence, which ought to be worth a ton of money if it were true. On that theory, on the bullish theory that OpenAI is close to AGI, Microsoft is getting the deal of the century. If it all works out, Altman risks looking like the fool that sold the Louisiana purchase for a measly $15 million. How much would AGI actually be worth? A few years back, Pricewaterhouse Cooper's estimated that the overall AI market might be worth over $15 trillion a year by the year 2030. McKinsey published a similar study coming in at $13 trillion a year. I cited a much lower number on

Ezra Klein's podcast about $1 trillion a year, which I got from an email in 2014 from Peter Norvig. There is a huge gap between $15 trillion and $1 trillion a year about the difference between the economies of China and Indonesia. But on either story, if you really were close to being the first to actual artificial, general intelligence, wouldn't you want to stick around and take a big slice of that with as much control as possible? My best guess is Altman doesn't really know how to make Open AI into the juggernaut that everybody else seems to think he's got. ChatGPT is super expensive to operate. Rumors are about $3 million a day. Their revenue so far is modest, perhaps in the low tens of millions, so too unreliable to be doing anything anytime soon. Meanwhile, large language models

themselves are quickly becoming commodities. It's not clear that there is any unique, protectable intellectual property here. What can Open AI do that Google couldn't quickly replicate, and perhaps price even cheaper, end quote. Read the whole thing, but then note this update from the end of his piece, quote, Update, turns out semaphore was wrong about the deal terms. If things get really, really good, Open AI gets back control. I am told by a source who has seen the documents, quote, once 92 billion in profit plus 13 billion in initial investment are repaid to Microsoft,

and once the other venture investors earn 150 billion, all of the equity reverts back to OpenA, AI, end quote. In that light, Altman's play seems more like a hedge than a fire sale, some cash now and a lot later, if they are hugely successful, end quote. So there you go. One big long explainer, if you want to figure out what the actual plan is for Open AI and for Microsoft, I guess. But to give you your money's worth for the long reads this weekend, I've also linked to a doc pop piece singing the praises with lots of pictures of Robert Tinney. who painted the famous covers for Byte magazine in the late 70s and early 80s and sort of set the sci-fi futurist sort of aesthetic of the early PC era. And TechCrunch has a long piece looking at how Dungeons and Dragons content creators, all of those podcasts and Twitch streamers and YouTube channels who publish their own D&D sessions to, quite frankly, amazing success online, are suddenly worried about a new gaming license from Wizards of the Coast, the makers of

Dungeons and Dragons quote. Though Dungeons and Dragons was first published in 1974, a new generation of fans has found an entry point through independent actual play shows like Dropouts Dimension 20, or the McElroy Brothers, The Adventure Zone. In 2021, a Twitch leak revealed that the platform's highest paid channel was critical role, a highly produced stream in which a crew of professional voice actors play Dungeons and Dragons live. The show made over $9.6 million that year. These hugely popular shows are only the tip of the iceberg when it comes to the Dungeons and Dragons fan community. Thanks to the longstanding Open Gaming License, which has been in effect since 2000, a slew of internet creators are making a modest living off the game, whether they're performing on live streams,

writing original spellbooks, or coding online platforms for remote gameplay. Now, proposed changes to the OGL threaten an entire cohort of Dungeons and Dragons content creators, end quote. a whole bunch of show news for you. First up, no official or regular show on Monday, I guess. It's a bank holiday here in the U.S. And I've learned in recent years to take this weekend every year as the opportunity to get my taxes in order, not my personal taxes, but my business taxes. I now have to do tax reporting for four different companies, including this podcasting company, including Ride Home Media, including the Ride Home Fund, including the first company I ever started, 25 years ago, which some of you know I still own in the background of everything that I do. I have literally 76, 1099s to double check and send out just for that by the end of the month. So, no regular show on Monday.

I'm taking the day off, but at around noon on Monday, I will release the Twitter space we did last night. All about those AI tools. Are they ready for prime time? Are they tools you can use now? Could you build a real business with them? We talk to actual people using these tools with real businesses, and we talk about my own AI experiments that you heard about this week, the good and the bad. I know I am probably guilty of recency bias half the time when I tell you,

oh, you know, this is my favorite show we've done in a while, but I really mean it. The conversation last night got really deep. Enjoy that on Monday. Back to regularly scheduled programming on Tuesday.