Tech Brew Ride Home - Mon. 07/26 – What The Heck Is Happening In China?

Episode Date: July 26, 2021

Is the DOJ probing Tether for bank fraud? When might FaceID come to the Mac? What do leaked photos tell us about the next Surface Duo? And I will spend the entire second half of the show trying my best to explain the seeming tech apocalypse happening in China right now. Sponsors: KiwiCo.com/ride for first month free SetApp.com Links: Tether Executives Said to Face Criminal Probe Into Bank Fraud (Bloomberg) Leaders in Cryptocurrency Industry Move to Curb the Highest-Risk Trades (NYTimes) Gurman: Face ID on the Mac Coming Within a 'Couple of Years' (MacRumors) Leaked Surface Duo 2 photos reveal new triple camera system (The Verge) China Bans For-Profit School Tutoring in Sweeping Overhaul (Bloomberg) China’s education sector crackdown hits foreign investors (Financial Times) Why is China smashing its tech industry? (Noahpinion.substack.com) 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 Monday, July 26, 2021. I'm Brian McCullough. Today is the DOJ probing tether for bank fraud. When might face ID come to the Mac? What do leaked photos tell us about the next Surface duo? And I will spend the entire second half of the show trying my best

to explain the seeming tech apocalypse happening right now in China. Here's what you miss today in the world of tech. Crypto is having a bit of a rebound morning this morning. in spite of, at least thus far, this news. According to sources, the U.S. Department of Justice is probing whether executives at Tether committed bank fraud in the early stages of that product. This is a big deal, not just because tethers in circulation are worth around $62 billion, but also because, and you read this right, for various reasons, Tether underpins around 50% of all existing Bitcoin trades at the moment. Quoting Bloomberg, Tether's pivotal role in the crypto ecosystem is now well known because the token is widely used to trade Bitcoin,

but the Justice Department investigation is focused on conduct that occurred years ago when Tether was in its more nascent stages. Specifically, federal prosecutors are scrutinizing whether Tether concealed from banks that transactions were linked to crypto, said three people with direct knowledge of the matter who asked not to be named because the probe is confidential. Criminal charges would mark one of the most significant developments in the U.S. government's crackdown on virtual currencies. That's because Tether is by far the most popular stable coin, tokens designed to be immune to wild price swings, making them ideal for buying and selling more volatile coins. Federal prosecutors have been circling Tether since at least 2018. In recent months, they sent letters to individuals alerting them that their targets of the investigation,

one of the people said. The notices signal that a decision on whether to bring a case could be made soon, with senior Justice Department officials ultimately determining whether charges are warranted. The probe is reaching a tipping point as stable coins attract in intense scrutiny from regulators. The U.S. Treasury Department and Federal Reserve are among agencies concerned that the tokens could threaten financial stability and are obscuring transactions tied to money laundering and other misconduct because they allow criminals to make payments without going through the regulated banking system. Treasury Secretary Janet Yellen said last week that watchdogs must, quote, act quickly in considering new rules for stable coins. A hallmark of tether is that

its creators have said each token is backed by one U.S. dollar, either through actual money or holding that include commercial paper, corporate bonds, and precious metals. That has triggered concerns that if lots of traders sold stable coins all at once, there could be a run on assets backstopping the tokens. Fitch Ratings has warned that such a scenario could destabilize short-term credit markets. Tether was first issued in 2014 as a solution to a problem plaguing the crypto market. Banks didn't want to open accounts for virtual currency exchanges because they feared touching funds tied to drug trafficking, cyber attacks, and terrorism. By accepting Tether, exchanges could give traders a way to park their balances without being exposed to Bitcoin's price gyrations,

and funds could be transferred instantaneously from exchange to exchange, end quote. There has been a prominent bear case for a while now that argues that if Tether was actually not backed by quite as much dollar reserves as Tether claims, that would suggest that Bitcoin and other prominent crypto markets were sitting on a house of sand because people were basically using funny money to trade actual crypto. Funny money, trading funny money, I guess is some people's opinion of this, though the argument could be made that there are plenty of other stable coins in existence now so that if Tether were to somehow lose favor among traders, other coins could step in to take their place. Unrelated, but maybe not that unrelated,

also this morning came news that FTX and Binance will curb highly leveraged cryptocurrency trading, a practice that can vastly multiply losses. FTCX, for example, offers 101x leverage, which they are now taking down to a mere 20x leverage, quoting the New York Times. Global platforms like FTCNs and finance allow traders to borrow big when betting on price fluctuations. Traders do not buy and sell cryptocurrencies, but instead predict where prices in the underlying assets will head. These bets, known as derivatives, allow investors to make a bet on the future price of a cryptocurrency rather than buying and selling the actual underlying cryptocurrency. They bet on Bitcoin price moves without actually purchasing it.

This type of transaction is not supposed to be available to non-professional investors in the United States, but in the past, some amateur investors have found workarounds to trade on the sites. Leverage leaves investors much more vulnerable to having their accounts liquidated as a result of an automated margin call of the price of cryptocurrency moves against their prediction, and they do not have enough collateral in their account to back up their bets. That is what happened in May. Once prices of cryptocurrency began dropping based on market-moving events, like China's

announcement of a regulatory crackdown or the decision by Tesla to halt Bitcoin payments, it automatically prompted the exchanges to liquidate the accounts of the most highly leveraged investors before their collateral became insufficient to cover their positions. These liquidations are obviously a huge factor in the price crash. Clara Medali, the research lead at Kiko, a cryptocurrency market data provider in Paris said, recalling the sudden decline in cryptocurrency value in mid-May. It's a vicious cycle, she said, end quote. You know, you would think that face ID would be the most natural of fits for Macs, wouldn't you?

When might we see Face ID coming to Max? Something that would seem to be inevitable. Mark German thinks that it's still actually a couple years away, but expect all iPhones and iPads to transition fully to Face ID by the time the Macs get them to, quoting Mac rumors. German says touch ID remains an important part of Apple's product lineup, especially for lower-end models, thanks to it being a cheaper alternative to face ID while continuing to provide security to users.

But I expect that to eventually change. It won't happen this year, but I bet Face ID on the Mac is coming within a couple of years. I expect all iPhones and iPads to transition to Face ID within that time frame, too. Eventually, a camera embedded in the screen would help differentiate Apple's price your devices by eliminating the notch at the top. The facial recognition sensor gives Apple two central features, security, and augmented reality. Touch ID, more convenient or not, only provides the former, end quote. German had previously reported that as Apple was planning its recently launched redesigned 24-inch

iMac. It had initially planned to include face ID, but that face ID implementation has been delayed to an upcoming iMac redesign instead. Unlike iPhones and iPads, Mac laptop screens are significantly thinner, making it harder to fit the necessary depth sensors for face ID, German notes. Further down the line, German says Apple will eventually embed face ID into screen themselves abandoning the need for a notch on the iPhone. Apple analyst Ming Chi Quo believes such an iPhone may debut as early as 2023, end quote. Alleged photos of a new Surface Duo 2 have leaked, quoting the verge. The camera system on the Surface Duo 2 appears to be the main significant hardware change on this device. It's rumored to include three lenses, a telephoto, ultra-wide angle, and standard lens.

The leaked photos show a bump at the rear of the device, just like many existing. flagship Android phones. It also appears that Microsoft has moved its fingerprint reader into the power button on the Duo 2 and centered the USBC port on the right-hand side. The Surface Duo 2 is expected to have relatively minor design tweaks overall, with most of the significant changes appearing in the camera system and internal specs. Rumors suggest the Surface Duo 2 will include Qualcomm's Snapdragon 888 processor, 5G support, and an NFC chip for contactless payments. Microsoft may even slightly increase the size of each display on the Surface Duo 2 with slightly thinner bezels and options for both black and white color variants. Microsoft appears to be sticking with

separate screens on the Surface Duo 2 instead of opting for a truly foldable screen, like Samsung's upcoming Galaxy Z Fold 3. That means all eyes will be on how well Microsoft improves the software side of the Surface Duo 2. The original device has had a variety of software updates, but Android 11 still hasn't appeared yet. That's left the Surface Duo as a buggy device with regular issues with multitasking and gestures, a screen turning off during book mode, and lockups using the fingerprint reader, end quote. Finally today, this is probably today's lead story, if I'm being honest, but I wanted to put it in the second half of the show so I can fit the whole thing in. Well, all the shoes have been dropping over in China Techland over the weekend.

The country this morning issued new regulations for food delivery. platforms mandating a minimum wage, respect for worker rights, and more, leading, for example, to Maytuan shares, among others, dropping by more than 14% in early morning trading. But that news actually came after bigger news over the weekend when, in a blow to the ed tech sector, China ordered tutoring companies teaching the school curriculum to go non-profit, banned them from IPOs, and also from raising any foreign capital. Quoting Bloomberg, Beijing on Saturday published a plethora of regulations that together threatened to upend the sector and jeopardize billions of dollars in foreign investment. Companies that teach school subjects can no longer accept overseas investment,

which could include capital from offshore registered entities of Chinese firms, according to a notice released by the State Council. Those now in violation of that rule must take steps to rectify the situation, the country's most powerful administrative authorities said, without elaborating. In addition, listed firms will no longer be allowed to raise capital, via stock markets to invest in businesses that teach classroom subjects. Outright acquisitions are forbidden. And all vacation and weekend tutoring related to the school syllabus is now off limits. The regulations threaten to obliterate the outsized growth that made stock market darlings of

TAL Education Group, New Oriental Education and Technology Group, and Gautu Tech Edu, Inc. They could also put the market largely out of reach of global investors. Education technology had emerged as one of the hottest investment plays in China in recent years, attracting billions from the likes of Tiger Global, Tamasek Holdings, and SoftBank Group, end quote. Now, you might be thinking, tutoring companies, that's not a big deal, right? Well, if you've been listening to especially the bonus episodes over the last year, it is actually a huge deal. Edgutek is a huge market in China, one that Western investors have been eager to get a part of

and or emulate, by which I mean some of the philosophical energy behind the whole creator economy thing comes from folks wanting to replicate what has been going on in education and tutoring tech and just learning tech over in China in general. This ed tech overhaul could wipe out billions invested by Sequoia, Tiger, Tencent, and Vision Fund if indeed it eliminates foreign investors from the sector, quoting the Financial Times. The clampdown is a sign of China's increasing willingness to restrict foreign investment in its companies. Shares of New Oriental education have fallen 60% in New York since Friday. When a leaked memo suggested Beijing was planning to clamp down on the sector and dropped 37% on Monday in Hong Kong. The New York listed TAL

education's market value has collapsed from 59 billion in February to less than 4 billion. Gautau Tech Edu, formerly named GSX, has shrunk from a $38 billion market cap in January to $900 million. Analysts at Goldman Sachs forecast that the size of China's tutoring market would collapse 76% to $24 billion, end quote. Again, big names worrying about their investments right now. Yikes. I know I'm looking at this through the lens of a Western investor, because that's the angle of this that I understand. But for example, SoftBanks Vision Fund has lost $4 billion on its DD investment alone, as its 20.1% stake bought for $11.8 billion in 2019 is now worth a mere $7.8 billion. But is there anyone that can explain why the Chinese government is doing this? Is there anyone that can explain what's happening on that side of the story? Well, our friend Noah Smith has some thoughts, quoting his recent newsletter.

For whatever reason, China is suddenly not a fan of the industry that we call tech. This is strange, because for years, it was conventional wisdom in the Western media that having a tech sector was crucial to innovation and growth. In fact, for many years, American pundits argued that China's economy would be held back by the government's insistence on control of information because it would make it impossible for China to build a world-class tech sector. Then China did build a world-class tech sector anyway, and now it's willfully smashing the world-class tech sector it built. So much for U.S. style innovation. But notice that China isn't cracking down on all of its technology companies. Huawei, for example, still seems to enjoy the government's full backing. The government is going

hell-bent for leather to try to create a world-class domestic semiconductor industry, throwing huge amounts of money at even the most speculative startups. And it's still spending heavily on AI. It's not technology that China is smashing. It's the consumer-facing internet software companies that Americans tend to label as tech. Why do Americans equate tech with companies like Google, Amazon, and Facebook anyway? One reason is that the consumer internet industry is something America is really good at. Unlike our electronics hardware industries, consumer software is something that hard-driving Asian competitors haven't yet been able to beat us at. Another reason is that software companies make a lot of profit. Facebook made over $18 billion.

in 2020, three times Micron or Honeywell and six times Cisco. With their low overhead, network effects, troves of intellectual property, strong brand value, and differentiated products, successful software companies naturally tend to generate high margins. That's true for smaller software companies, as well as big ones. And since in America, we often tend to equate profit with value, this means we think of the consumer-facing software industry as being our industrial champion, generating a huge amount of economic value for our nation. China may simply see things differently. It's possible that the Chinese government has decided that the profits of companies like

Alibaba and Tencent come more from rents than from actual value added, that they're simply squatting on unproductive digital land by exploiting first mover advantage to capture strong network effects or that the IP system is biased to favor these companies or something like that. There are certainly those in America who believe that Facebook and Google produce little of value relative to the profit they rake in, maybe China's leaders, for reasons that will remain forever opaque to us, have simply reached the same conclusion, end quote. But Noah thinks there's something even deeper going on here. And if you'll recall, some of China's recent crackdowns on things like hours spent playing video games might lend credence to what you're about to hear. He's quoting from the Dragonomics newsletter from Dan Wang here in a second

quote. It's become apparent in the last few months that the Chinese leadership has moved toward the view that hard tech is more valuable than products that take us more deeply into the digital world. Xi declared this year that while digitization is important, quote, we must recognize the fundamental importance of the real economy and never deindustrialize, end quote. This expression preceded the passage of securities and antitrust regulations, thus also pummeling finance, which, along with tech, make up the most glamorous sectors today, end quote. In other words, the crackdown on China's Internet industry seems to be part of the country's emerging national industrial policy.

Instead of simply letting local governments throw resources at whatever they think will produce rapid growth, the strategy in the 90s and early aughts, China's top leaders are now trying to direct the country's industrial mix towards what they think will serve the nation as a whole. And what do they think will serve the nation as a whole? My guess is power. geopolitical and military power for the People's Republic of China relative to its rival nations. If you're going to fight a Cold War or a hot war against the U.S. or Japan or India or whoever, you need a bunch of military hardware. That means you need materials, engines, fuel, engineering, and design, and so on. You also need chips to run that hardware because military tech is increasingly

software-driven. And of course, you need firmware as well. You'll also need surveillance capability for keeping an eye on your opponents, for any attempts you make to destabilize them, for maintaining social control in case they try to destabilize you. It's easy for Americans to forget this now, but there was a time when ability to win wars was the driving goal of technological innovation. The NDRC and the OSRD were the driving force behind government sponsorship of research and technology in World War II, and the NSF and DARPA grew out of this tradition. Defense spending has traditionally been a huge component of government research spending in the U.S. and many of America's most successful private sector tech industries are in some ways spin-offs of those

defense-related efforts. After the Cold War, our priorities shifted from survival to enjoyment. Technologies like Facebook and Amazon, which are fundamentally about leisure and consumption, went from being fun and profitable spinoffs of defense efforts to the center of what Americans think of as tech. But China never really shifted out of survival mode. Yes, China's leaders embraced economic growth, but that growth has always been toward the telos of comprehensive national power. China's young people may be increasingly ready to cash out and have some fun, but the leadership is just not there yet. They've got bigger fish to fry. They have to avenge the century of humiliation and claim China's rightful place in the sun and blah, blah, blah. And so when China's

leaders look at what kind of technologies they want the country's engineers and entrepreneurs to be spending their efforts on, they probably don't want them spending that effort on stuff that's just for fun and convenience. They probably took a look at their consumer internet sector and decided that the link between that sector and geopolitical power had simply become too tenuous to keep throwing capital and high-skilled labor at it. And so in classic CCP fashion, it was time to smash, end quote. Okay, so trying to watch the Olympics here in the U.S. on the Peacock app, it's atrocious. Like, I have no idea who did the UI on this, But let's just say they're not anywhere close to being good at their jobs.

Let's say you want to watch something live, anything live, anything ongoing right now. I dare you to find that option easily. And since we're in the wrong time zone for most live things here in the U.S., let's say you wanted to watch a replay of an event that just happened. Again, I dare you to find it in the menu. It's all cruffed it up with highlights of various lengths and those feel-good background stories that the Olympics love. but what if you just want to watch, I don't know, the high diving? Not the easiest thing to do either.

Searching by sport is somewhat better, but not by much, for the corrupty reasons I just said. I guess the NBC sports app has always been this bad. It's just that when I had to use it in the past, it was merely to find one specific soccer game at a time, so I tended not to notice how hard it was to find other things. It is, as I say, atrocious. You know, if Comcast wanted to use the Olympics as a way to introduce Peacock to potential long-term subscribers. Let me just assure you that this is not doing them any favors. Talk to you tomorrow.