Tech Brew Ride Home - Wed. 07/06 – How To Beat The Quantum Rap

Episode Date: July 6, 2022

Will regulators wreck the great gaming consolidation? Can the US bully it’s way to blocking China’s chip development? Are Dilithium crystals the key to saving crypto from quantum computing? And why the crypto crash has been a footnote for Wall Street. At least, so far. Sponsors: AthleticGreens.com/ride Links: Microsoft’s $69 billion Activision takeover faces competition probe in the UK (CNBC) US Wants Dutch Supplier to Stop Selling Chipmaking Gear to China (Bloomberg) NIST unveils four algorithms that will underpin new ‘quantum-proof’ cryptography standards (SC Media) Amazon takes a Prime step back into restaurant delivery in the US with big Grubhub investment and partnership (TechCrunch) Voyager Seeks Bankruptcy Protection Amid Crypto Credit Crisis (CoinDesk) Crypto Mining Giant Dumped Most of Its Bitcoin Holdings in June (Bloomberg) How Wall Street Escaped the Crypto Meltdown (NYTimes) 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 Wednesday, July 6, 22. I'm Brian McCullough today. Will regulators wreck the great gaming consolidation? Can the U.S. bully its way to blocking China's chip development? Are dilithium crystals the key to saving crypto from quantum computing and why the crypto crash has been a footnote for Wall Street, at least so far?

Here's what you missed today in the world of tech. I feel the need to mix things up a bit, as I assume you do too. so we'll leave the crypto crash headlines for later in the show today, and instead let's elevate some things to the top to get a little bit of variety. First up, the UK's CMA has launched an antitrust investigation into Microsoft's Activision Blizzard acquisition, setting a September 1st deadline for its initial decision, quoting CNBC. It marks one of the first probes by a major antitrust enforcer into the $68.7 billion deal, which was announced in January, in a statement the UK's competition and markets authority said its investigation would, quote, consider whether the deal could harm competition and lead to worse outcomes for consumers,

for example, through higher prices, lower quality, or reduced choice, end quote. The acquisition has huge implications for the $190 billion video game industry, handing control of incredibly lucrative franchises, including Call of Duty, Candy Crush, and Warcraft, to one of the world's biggest tech companies. Microsoft hopes the purchase will help it in the race to build the so-called Metaverse, a hypothetical network of large virtual worlds. Various other companies are vying for a role in the space, including Facebook parent company Meta and Sony.

However, analysts are skeptical about the chances of a deal being approved by regulators. Microsoft is one of the largest game console manufacturers alongside Sony and Nintendo, and the company is sitting on a growing horde of first-party content, including popular game series like The Elder Scrolls and Doom, which it acquired after buying Bethesda owner Xenamax for $7.5 billion. and quote. Yes, this is why I find this story interesting. The big platforms want to make the Metaverse happen because it's, A, such a huge opportunity. You think there were profits to be made by monetizing and rent-seeking on the web. Imagine being able to take a Vig from everything

that happens in a reality that could in theory rival actual reality reality. But B, also because frankly, what else is there on the horizon for the big tech platforms? Can they extend their dominance to the next obvious thing, or are regulators now wise to this sort of game? Frankly, it's obvious that the gaming space needs consolidation for structural reasons, but also, given how big tech is shut out of acquisitions in other spaces due to regulatory scrutiny, what has so far been untested or allowed to happen is tech moving into gaming. So tech has been moving in this direction because they've not had their hands slapped in the gaming space. Yet, we're about to find out if that holds. In the continued awakening by world governments to the strategic importance of semiconductors,

I've been waiting for something like this to happen. The funny thing is, for an industry so important, there are only a handful of companies that are the really strategic bottlenecks to the whole silicon industry. I'm thinking of TSM, an arm, and ASML. Sources are telling Bloomberg that the U.S. is lobbying the Netherlands to ban ASML from selling some of its older deep. ultraviolet lithography systems for chip production to China. AsML, if you haven't guessed, is based in the Netherlands. Quote, Washington's proposed restriction would expand an existing moratorium on the sale of the most advanced systems to China in an attempt to thwart China's plans to become a world leader in chip production. If the Netherlands agrees, it would broaden significantly

the range and class of chipmaking gear now forbidden from heading to China, potentially dealing a serious blow two Chinese chipmakers from Semiconductor Manufacturing International Corp to Wauong Semiconductor. American officials are lobbying their Dutch counterparts to bar ASML from selling some of its older, deep, ultraviolet lithography or DUV systems, the people said. These machines are a generation behind cutting edge, but still the most common method in making certain less advanced chips required by cars, phones, computers, and even robots. The Dutch government has yet to agree to any additional restrictions on ASML's exports to Chinese chipmakers, which could hurt the country's trade ties with China, the people said.

ASML is already unable to ship its most advanced extreme ultraviolet or EUV lithography systems, which costs about 160 million euros or 164 million dollars per unit to China, as it cannot obtain an export license from the Dutch government, end quote. This is not an insignificant consideration for ASML or the Dutch government, though maybe there's a win-win here, quoting Mashiro Wagasuki and Brian Moran, an industry analyst, quote, ASML's sales could narrow by 5 to 10% if it's banned from selling deep ultraviolet tools in China. As the chip equipment maker's revenue already reflects a ban on extreme ultraviolet tool shipments to the country, it may experience less impact versus peers,

such as applied materials, which derives 20 to 30% of its sales from China, end quote. And long-time listeners to the show will know that I've been sort of obsessed with keeping an eye on this story, quantum computing seems right around the corner, which means the end of cryptography could also be right around the corner. Is anyone doing anything about this? Is anyone worried about it beyond me? Well, as we've seen, people are prepping for this eventuality. I just wasn't aware of it. From SC Magazine, the NIST has selected four encryption algorithms designed to withstand future quantum computing hacking threats as a part of its post-quantum cryptographic standard. quote, for years, the National Institute for Standards and Technology has been working on a project

to identify and vet a handful of new encryption algorithms that can help protect federal computers and systems from hacking threats powered by quantum computing. On Tuesday, the agency announced four new algorithms that will underpin its future cryptography standards by 2024. They include one algorithm for general encryption purposes, Crystal's Khyber, and another three for digital signatures and identity verification, crystals the lithium, falcon, and Sphinx Plus. NIST mathematician and project lead Dustin Moody told SC Media that at this stage all the finalists had met baseline standards and the choice came down to small but measurable differences

in things like speed and ease of use. Security was our number one criteria, but for all the finalists, we had enough confidence in that regard, so our second criteria was performance, looking at key size, signature size, how much memory is involved when you implement it, looking at benchmarks, how fast you implement it on a variety of platforms, he said in an interview. Three of the selections, Crystal's Khyber, Crystal's Dilithium and Falcon, are lattice-based algorithms. The NSA has already said that it also intends to select a lattice-based solution for its own next-generation encryption. Crystal's Khyber beat out two other similar candidates for general encryption, largely because

it had slightly stronger documentation. In our view, Khyber was the strongest, technically, of the three when we considered security and performance and its implementation numbers, Moody said in an interview. The other two were not too far behind it, but we felt that Khyber had a little bit more of an advantage, end quote. Crystal's DeLithium and Falcon are also lattice-based, but NIST expects most organizations to use deletium because it performs well, has strong documentation, and is also a lot simpler to implement than Falcon. While Falcon will require a complex implementation and may not work on all devices. It's also smaller, and there are certain use cases for applications that use smaller digital signatures, so NIST decided to include both. The fourth selection,

Sphinx Plus, was determined to be the strongest non-Lattice-based solution for digital signatures, in line with the agency's long-held belief, that it will need to develop backup options in case future weaknesses are discovered in any one post-quantum cryptographic approach, end quote. By the way, today I learned that dilithium is a real thing. Look it up on Wikipedia. It's not just an invention of the writers of Star Trek, but the fact that crystals are also a part of this in real life is what has blown my mind. In headlines germane to my personal gastronomic interest, Amazon has partnered with Just Eat Takeaway to offer a free annual Grubhub plus subscription to Prime members in the United States. Amazon also is going to receive apparently equity in Grubhub, quoting TechCrunch. Amazon tried but then ultimately stepped away from building its own cost-intensive Grubhub

and DoorDash competitor in the U.S. back in 2019. Now three years on, it's taking a different approach to tackling the space to build in one more sweetener to encourage more sign-ups to its prime subscription service. Today, the e-commerce giant and Just Eat Takeway, which owns Grubhub in the U.S., announced an investment and partnership in which Amazon will offer free membership to Grubhub plus for one year to prime members in the country and take equity in Grubhubbhub potentially worth hundreds of millions of dollars. Grubhub Plus, when it launched in 2020,

was described as the Amazon Prime of food delivery. Like other loyalty programs run by delivery services, it's a subscription service where members get free delivery on orders and potentially other bonuses. It's normally charged at $9.99 per month. The commercial terms of the agreement look like it will give Amazon a stake in Jet,

as Just Eat Takeaway abbreviates its name. Specifically, it will include a provision to renew the deal annually, just like a prime subscription, and that, quote, a subsidiary of Amazon will receive warrants over 2% of Grub's fully diluted common equity, end quote. It also notes that, quote, Amazon will also receive warrants exercisable at a formula-based price over up to a further 13% of Grubhub's fully diluted common equity, the vesting of which is subject to the satisfaction of certain performance conditions,

principally the number of new consumers delivered through the commercial agreement, end quote. Those actual values will change, but as of December 31st, Jett said that, the gross assets of Grubhubbh were $6,521 million, or $6.7 billion down from the $7.3 billion it paid in 2020, and that the loss before tax for the 12 months ending that period was $403 million. Doing the math, that works out at the first set of warrants being valued at about $134 million, with the performance-based warrants valued at $870 million, end quote. Given that I order from Grubhub owned Seameless, at least half a dozen times a week. I guess I've probably lost a ton of money because I'd never signed up for Seamless Plus. No excuse now, I guess. I wonder though,

is this a day to play? Think about it. Takeout, ordering, and delivery is one of the few commerce verticals that Amazon has basically zero insight into, right? All right, let's go ahead and get to the crypto stuff. Toronto-based crypto lender Voyager Digital has officially filed for Chapter 11 bankruptcy protection in New York, estimating it has 100,000 creditors and $1 billion to $10 billion in assets, quoting Coin Desk. The company also recorded the same range for its liabilities, however. The company believes that, quote, funds will be available for distribution to unsecured creditors, according to the filing. Voyager joins Three Arrows Capital and filing for bankruptcy. Three Arrows, however, filed a Chapter 15 petition tied to an ongoing liquidation effort

ordered by a court in the British Virgin Islands. According to writer Francis Coppola, Voyager's loan book accounted for nearly half of its total assets and nearly 60% of that loan book was composed of loans to Three Arrows Capital, end quote. Also, Nexo, a crypto lender managing assets for around 4 million users, says it has signed a term sheet to explore buying Vald, which I told you yesterday had halted withdrawals and manages assets for around 100,000 people. also, as these bank runs and liquidity crises and margin calls wreck the entire crypto space, there is still one more shoe to drop, potentially. Miners.

Core Scientific is a top Bitcoin miner with nearly 10% of the network's hash rate. Well, it's sold 7,202 mined Bitcoins for $167 million. It did so back in June, and it now only holds 1,959 bitcoins. quoting Bloomberg. Crypto miners are struggling to repay debt and complete large purchase orders for expensive mining machines they made during the bull run several months ago. Operational costs have exceeded mining revenue for some miners as Bitcoin had its worst quarter in more than a decade. Public mining companies often hold the vast majority of their mined Bitcoin to serve as a proxy in the stock market, drawing investors that want to get cryptocurrency exposure while not holding

the tokens directly. Some firms believe large Bitcoin holdings will boost their balance sheet in the long run, as the token appreciates in value over time. While Bitcoin hoarding public miners, such as Marathon Digital and Hutt 8 Mining Corp, have not sold any of their Bitcoin so far. Others have started large sales to keep afloat. Canadian Crypto Miner Bitfarms sold about half of its mined coins in June and used part of the proceeds to pay down a loan while Riot Blockchain had its first sale earlier this year, end quote. So the miners, by and large, haven't dumped their holdings in any great numbers so far, but they're beginning to, and they could. And when you add to that, the whole change to proof of stake going on in Ethereum that's already depressing the

market for GPUs, it's a tricky time for the mining ecosystem underpinning the entire crypto space, a tricky time for it to be unstable. And finally, like yesterday, one interesting bit of analysis. Yesterday we saw how maybe the decentralized exchanges are surviving better than the centralized ones, holding up better at least so far. Well, what if I told you that as crypto markets have tumbled, strict U.S. regulatory rules on risky bank assets have largely insulated Wall Street from the crypto chaos. Well, of course, retail investors have been hit hard, quoting the New York Times. In the great cryptocurrency bloodbath of 2022, Wall Street is winning.

It's not that financial giants didn't want to be. part of the fund, but Wall Street banks have been forced to sit it out, partly because of regulatory guardrails put in place after the 2008 financial crisis. At the same time, big money managers applied sophisticated strategies to limit their direct exposure to cryptocurrencies because they recognize the risks. So when the market crashed, they contained their losses. When the crypto market was rollicking, Wall Street banks sought ways to participate, but regulators wouldn't allow it. Last year, the Basel Committee on Banking Supervision, which helped set capital requirements for big banks around the world, propose giving digital tokens like Bitcoin and Ether the highest

possible risk weighting. So if banks wanted to put those coins on their balance sheets, they would have to hold at least the equivalent value in cash to offset the risk. US bank regulators have also warned banks to stay away from activities that would land cryptocurrencies on their balance sheets. That meant no loans collateralized by Bitcoin or other digital tokens, no market-making services, where banks took on the risk of ensuring that a particular market remained liquid enough for trading, and no prime brokerage service, services where banks help the trading of hedge funds and other large investors, which also involves taking on risk for every trade. Banks thus ended up offering clients limited products related to

crypto, allowing them an entree into this emerging world without running a foul of regulators. You hear of the stories of institutional investors dipping their toes, but it's a very small part of their portfolios, said Rina Agrawal, a finance professor at Georgetown University and the director of its Parsos Center for Financial Markets and Policy. But if the crypto meltdown has been a footnote on Wall Street, it is a bruising event for many individual investors who poured their cash into the cryptocurrency market. I really do worry about the retail investors who had very little funds to invest. Ms. Agrawal said, they are getting clobbered, end quote. Nothing for you today, more tomorrow.