FRIDAY NEWS ROUNDUP — OCTOBER 23, 2020
U.S. Tech Strategy; GRU Indictments; New START Talks; DOD 5G IOT; Voter Suppression; and Ant Group “Techfin”
Happy Friday from Washington, D.C. It is only 11 days until Election Day and last night, Americans were able to tune into what was a far more conventional presidential debate. What impact it will have, though, is a tough question, as the candidates’ polling has remained remarkably steady throughout 2020 — even with all that has gone on — and millions of Americans have already cast their ballots.
We know that you care deeply about national politics — we hope that is why you read our work — so you may not need to hear this, but nevertheless: Vote. Don’t forget to vote. Make a plan to vote. Turn out and vote. By mail or in person, on Election Day or before, the act of voting remains the most compelling, revolutionary act that you can take. Our mothers and fathers fought hard for the franchise; it is why our nation’s enemies, foreign and domestic, seek to disrupt and discredit it; do not take it for granted.
This week, Joshua reviewed Daniel Yergin’s The New Map: Energy, Climate, and the Clash of Nations and, despite a “new map,” finds the same inescapable realities of geopolitics.
Mark your calendars for next week, as we will be hosting a webinar on Tuesday, October 27th, entitled “Digital Privacy & Security in a Connected World,” which will discuss how the 2020 winner can address pressing issues related to the data-driven digital economy.
In this week’s roundup, Dan looks at some of the questions surrounding U.S. tech strategy given recent developments and growing international competition. Joshua covers what the latest indictments handed down against Russian intelligence operatives mean. Michael analyzes the latest developments in negotiations with Russia over strategic arms control, while Ethan looks at how 5G is being utilized by the military for future battlefields. Eric catalogues the ongoing efforts to suppress voters, and Thomas looks at how Ant Group’s rise in China reflects both growing transpacific tensions and the changing shape of the financial sector. As always, we wrap with news you may have missed.
What Exactly is Our Tech Strategy?
Dan Mahaffee
It is hard to believe there is any agreement to be found in Washington, but these days you can reliably find bipartisan agreement on two items: the threat of China and the power of big tech. These issues are complicated enough on their own, but they are inextricably linked. Technology and innovation leadership are the foundation upon which the economic, military, and political balance between Washington and Beijing will be settled, yet our own policy approach to technology is scattershot at best, and counterproductive at worst. Worse yet, the approach is increasingly driven by the tribal tenor of our domestic politics.
All of this has been on display over the past weeks. Much of the fanfare has been about the Department of Justice — along with Republican state attorneys general — filing antitrust suits against Google. Google has not been alone, as the House Judiciary Committee recently released a laundry list of complaints from the left and right about the size and influence of Facebook, Apple, and Amazon. Pundits and elected politicians have also suddenly become experts on (generally fictitious) issues related to Section 230 of the 1996 Communications Decency Act, as Twitter and Facebook find that one’s fact-checking — or merely asking that one read an article before further circulating it — is another’s “censorship.”
Remember when we were concerned about the fate of TikTok? That’s up in the air until courts rule, but the questionable particulars of the deal remain. Weren’t we on the verge of completely destroying Huawei by cutting off microprocessors? Well, it turns out they’ve managed to stockpile enough to try to bridge to other international or Chinese vendors. One could be forgiven for looking at the headlines and wondering which country’s tech industry the U.S. government felt was a greater threat to the American people.
The evolution of Google, Facebook, Apple, and Amazon — along with many other major tech, social media, and new media players — has resulted in massive economic and societal impacts. That there are consequences from their growth and disruption that require public policy solutions is clear. Public policy has grown ever more sclerotic while technological innovation, and its resulting disruptions, are ever swifter. COVID-19 has accelerated many of these trends. That challenge is complicated by the international competition in which we find ourselves. Innovation and the deployment of resulting technologies is inevitable. In so many ways, for so many discoveries, the bell simply cannot be un-rung.
At the highest strategic level, the question becomes not so much what course will technology and innovation take, but how will policies determine where technology is developed, who sets the standards for its adoption, and how its myriad use cases reflect the values of its users. Simply put, in the era of Geotech competition — the confluence of technology and global politics — what is invented may not be as important as where it is invented.
Addressing this requires a strategic approach. Last week, the White House released the National Strategy for Critical and Emerging Technologies. Charitably, the document is lacking. While it is laudable to see such high-level attention to this topic and hope that it belies a coordinated interagency process for addressing U.S. technology issues, the document is much more a list of various priorities and goals rather than a strategy.
At the same time, Congress’s increasingly adversarial relationship with big tech reflects just how that institution’s political deadlock has left the policymaking cupboard bare. Many of the questions raised about these companies’ influence reflects as much consumer preference for their products as it does their business decisions. How do the traditional metrics of harm or benefit to the consumer apply when many of the goods are free? Addressing these requires answers to those problems, not dragging out and dusting off the 20th century playbook. Antitrust is not designed to address questions about data privacy, app ecosystems, data management, nor online disinformation.
Over the next week, CSPC will be releasing our own reports on Geotech, as well as a sector-specific white paper on the global competition for semiconductor leadership. Combined with upcoming reports on the context of great power competition in technology leadership, global influence, and military might, we hope to provide some strategic frameworks for not only how a second Trump term or Biden administration can address this challenge, but also how Congress must consider this challenge and (re-)establish its own strategic and technology bonafides.
Our big tech companies are key economic engines and U.S. champions on the global economic stage. Bridging, not widening, the chasm between tech and Washington is more important than ever given the complicated challenges. This requires a thoughtful, strategic approach. Setting aside politics to answer these questions, and soon, is key.
Russian Military Intelligence Indicted for Hacking, Again
Joshua C. Huminski
On Monday, the Department of Justice charged six Russian military intelligence officers with responsibility for an aggressive global hacking campaign. Targets of the campaign included the recent French presidential election, the opening ceremony of the 2018 Olympics, and the electricity grid of Ukraine. According to the indictment, the hacks sought to “undermine, retaliate against, or otherwise destabilize” Russia’s adversaries.
The officers, members of the Main Directorate or GU (formerly known as the Main Intelligence Directorate or GRU, but since renamed in 2010 (although still commonly referred to as GRU)), are believed to be members of Unit 74455, known to cybersecurity experts as “Sandworm”. This unit, in partnership with another GRU hacking team, was responsible for the leak of Democratic National Committee emails in advance of the 2016 election.
According to John C. Demers, the assistant attorney general for national security, “No country has weaponized its cyber capabilities as maliciously or irresponsibly as Russia, wantonly causing unprecedented damage to pursue small tactical advantages and to satisfy fits of spite.” He added that the six officers were responsible for “the most disruptive and destructive series of computer attacks ever attributed to a single group, including by unleashing the NotPetya malware.” NotPetya was one of the most damaging and destructive malware attacks in recent history, resulting in at least $10 billion in damage. The malware struck Ukraine’s power grid, FedEx, Maersk, Merck & Co. DHL, and more.
The indictment itself contains a great deal of information that suggests the Department of Justice and the FBI have extensive insight into the GRU’s operations. According to the indictment, the GRU attempted to mask their operations, attempting to make their attacks appear to be from the Lazarus Group, a North Korean hacking unit. The unit also leveraged exploits such as EternalBlue and EternalRomance, originally developed by the NSA, as noted by security researcher and strategic studies professor Dr. Thomas Rid.
What is equally interesting is the very basic nature of the point of entry — spear phishing. Using bespoke emails, cleverly masked URLs, and apparently authentic emails, the unit was able to get users to click hyperlinks and download the malware, infecting their systems. While the exploits are certainly high-tech, the social engineering side remains very traditional and people are, perhaps, the weakest point in the technological chain.
Amusingly, the indictment notes that some of the malware filled users’ memory location with references to the television show Mr. Robot, about a cyber security engineer and an anarchist hacktivist collective. Additionally, one of the malware’s options would re-create the show’s fictitious group “fsociety’s” mask on the user’s screen. Clearly the show has fans in Moscow.
That the indictment contains this level of information, as noted by Dr. Rid, suggests that there is little concern about potentially compromising sources or methods. Indeed, it very much reads like a shot across the bow of the GRU — “we know who you are and we know what you’re doing and how.” The challenge is that there are few teeth behind this indictment. In reality it is little more than naming and shaming.
Previous indictments have done little to slow their operations and there is little to suggest that this most recent set of charges will have a different effect. Indeed, if the most recent disclosures about Russian intentions to cause chaos in the 2020 election are anything go by, Moscow did not and will not stop their hacking efforts.
There is something to be said about creating the appearance of chaos or potential chaos (a Russian hiding under every bed, in the words of one op-ed) more than actually creating chaos. By penetrating these networks and databases, Russia is already achieving its ends — any issue with the vote, its tally, or even its outcome could be blamed on Russian interference and tie America’s national security and law enforcement apparatuses in knots for the remainder of the year and beyond.
One of those indicted on Monday, Anatoliy Sergeyevich Kovalev, was also indicted two years ago as part of the special counsel investigation. Kovalev is alleged to have hacked election infrastructure as part of the 2016 DNC attack.
The indictment, while interesting, shows the limits of what the United States can do against Russian hacking. Many of the charges stem from attacks that took place after the imposition of sanctions in response to the 2016 hacking and following very public rebukes from administration officials. The Russian government will not hand over these officers for prosecution and will not stop their hacking attacks.
While it may be attractive to say that Russia doesn’t care about being caught, that is not entirely accurate. Clearly, as evidenced by the indictment, Moscow doesn’t want the finger being immediately blamed for cyber attacks and takes steps (effective steps at that) to provide some measure of cover. Mimicking the Lazarus Group’s tactics is not something the GRU would do if it didn’t care if it was caught.
Indeed, as with its real-world operations, Moscow may not care if it gets the blame, but it cares that it gets the blame on its terms. As long as the world knows Moscow it is capable of, be it poisoning, political assassination, coup attempts etc… that contributes to the mystique. The risk tolerance within Russian intelligence seems considerably higher, especially as these operations have the tacit strategic-level approval of President Vladimir Putin. According to the CIA, there is moderate confidence he is directing the election interference. While he unlikely to be signing off on every operation, no one is likely to be punished for being too aggressive or too bold.
Moreover, this is not evidence that the GRU is ineffective at what they do. This is merely what the Department of Justice was able to uncover and what they were willing disclose. It is plausible there are other operations that are successful and have thus far avoided detection. This is not to say that there is a Russian hand behind every unidentified or identified hack, merely that we don’t know what we don’t know.
That Russia continues its cyber operations reinforces the fact that there are also no real consequences for its behavior. As noted above another indictment will almost certainly not stop Moscow’s continued cyber operations. Sanctions are more annoying that impactful, and just encourage clever Russians to move their money around, hide it, or launder it in such a way that it escapes the grasp of the West. If anything, financial sanctions are now just a baked-in cost of doing business.
A New Dawn on New START
Michael Stecher
Over the past four years, the Trump administration has de-institutionalized the relationship between the United States and Russia by withdrawing from arms control treaties that bound both powers or simply allowing them to lapse. The last remaining major bilateral arms control agreement is the New STrategic Arms Reduction Treaty (New START), so-called because it replaced the original START treaty that lapsed in 2009. The current treaty is due to expire in February. Allowing this treaty to lapse would cause long-term harm to national security, but updating it will not be easy; a short extension is probably necessary at this point, but refreshing arms control for the next decade will require hard choices in 2021.
Until recently, there was no serious effort to negotiate an extension or replacement for New START from the Trump administration. This partly reflects long-held opposition to arms control agreements from elements of the Republican Party, especially the traditionally hawkish wing. When New START was up for consideration in 2011, it passed 71–26, but the opposition included 10 of the 12 Republicans on the Senate Armed Services Committee. Whatever his personal opinions of New START might be, this view also serves President Trump’s conception of international politics: that direct, leader-to-leader relationships are the keys to success and narrow agreements like arms control only serve to preclude linking issues in negotiations.
This has begun to shift since the end of the summer, largely for domestic political reasons. The Trump administration wanted a foreign policy win in its Great Power Competition rubric before the election to go along with the Israeli-Emirati-Bahraini diplomatic agreement and its (disputed) plan to withdraw all U.S. forces from Afghanistan by Christmas. It would be especially beneficial since it would show off the value of the president’s friendly relationship with Russian President Vladimir Putin. On October 13, the State Department’s Special Presidential Envoy for Arms Control Marshall Billingslea told the Heritage Foundation that an agreement in principle had been reached “at the highest levels of our two governments.” This followed a meeting between Billingslea and a Russian government negotiator in Geneva, after which an unnamed Trump administration official told the Wall Street Journal that “we have an agreement on a way forward.”
This scuttlebutt prompted the Russian Foreign Ministry to put out a statement on Twitter that there was no such agreement, but that they were ready for one “at any time should the [U.S.] accept our proposals.” While this is a hilarious burn, it does not appear to be — strictly speaking — true. The sticking point had to do with whether both countries would freeze all warhead production, even for weapons systems that are not covered by New START, but this week it appears that the Russians are willing to accept the Trump administration’s terms and a one-year extension of New START. An unnamed official added that the only remaining items are designing a verification mechanism and defining a nuclear warhead. The fact that “defining a warhead” is an outstanding issue gives some insight into how detailed and technical arms control negotiations can be.
With an additional year, whoever is president in the afternoon of January 20, 2021 can begin to think about what the priorities for arms control should be for the next generation. When START was adopted in 1991, both parties thought that they would develop a new generation of mobile, ground-launched intercontinental ballistic missiles, so verification protocols needed to be established at missile production facilities. In the end, the United States cancelled the very unfortunately named MGM-134A “Midgetman” launcher, so this protocol did not need to be updated for New START. When New START was adopted, hypersonic missiles — maneuverable weapons capable of traveling faster than five times the speed of sound — were science fiction; now they are entering development.
There are tradeoffs on including hypersonics in a new arms control agreement. For the United States, hypersonic weapons could play an important role in deterring China; they could be launched from thousands of miles away and strike active targets near the Chinese coast in less than an hour. They are also more difficult to detect with missile warning sensors and a potential target or third party might not be able to tell whether they carry conventional or nuclear payloads. Limiting their testing or deployment would make it harder to defend Taiwan, not doing so could increase the risk of an arms race or even nuclear war.
The Trump administration has also been very clear that they want to integrate China into the next generation of arms control agreements. When START and its predecessor the Strategic Arms Limitation Talks (SALT) were signed, the United States and the Soviet Union were the only great power games in town. China has shown absolutely zero interest in joining arms control talks because they have been free-riding on the nuclear stability created by U.S.-Russian agreements. Applying pressure on China to participate will require the United States and Russia to work together; getting Russia to agree to pressure China might require additional concessions because the lion’s share of Chinese military power is pointed at the United States and its allies.
Getting that balance right will take a serious effort in 2021 that will not lend itself to election cycle timing. Arms control agreements, however, remain critically important. No amount of intelligence collection can replace the regular program visibility that New START allows. The binding commitments in the deal also ensures that Russian force structure is predictable, which helps U.S. Strategic Command plan for its own future. This is what Ronald Reagan was talking about when he said, “Trust but verify.” It is certainly a more stable system than “distrust and spy” or “hope for the best.”
The DoD’s IoT: Mesh networks, augmented reality, and 3D imaging- standard video game stuff
Ethan Brown
It is a fun thought-exercise to envision the social, telecommunications, and lifestyle changes that will stem from the commercial 5G network coming online, which coincides with the domestic IoT (internet of things) changing our connectivity on a scale heretofore unimagined.
If you haven’t heard, the DoD is going to be applying the IoT construct to it’s warfighting task organization in a similar capacity — unleashing the potential of 5G into its networks and equipment, ensuring data-sharing at levels that previous generations of warfighters could not have imagined.
Big data for big combat
For reference, the Air Force has led the way in implementing the multi-domain data-sharing via the Advanced Battle Management System (ABMS), although the necessary cloud computing platform remains foggy as the Pentagon persists in its contract-awarding slugfest between cloudONE and JEDI. The Navy is pushing to create multi-role, hyper-connected warships capable of independent, coordinated fighting in the IndoPACOM theater. The Marines have moved to get lighter, faster, and modular in their push to become multi-domain maneuver capable. The Army is fully engaged in MDO by joining its artillery and missile commands in the effort to push ABMS into existence, through data-sharing collaboration with space and air.
Those big, strategic systems are fun to investigate and explore for changing the defense enterprise in the coming era of competition, but this author always goes to the tactical level first. That is, I’m more interested in what the individual warfighter (especially the pointy-tip-of-the-spear cats) are supported with in this grand scheme of things. How is the DoD equipping the individual soldiers, sailors, airmen, and marines to be integrated into these vast, hyper-connected networks?
During my time in the special operations community, we had the opportunity to dabble with some of the emerging commercial tech aimed at supporting the warfighter. I used smartphones and tablets (in spiffy, ruggedized cases) to connect to integrated networks that allowed everyone on the same ‘net’ and frequencies to have situational awareness of all of the green movers (good guys) on the nearby battlefield. Sometimes. If it worked.
Physics, cryptology, and environment always had a huge impact on whether those systems functioned as advertised, and more often than not, some bug, glitch, or missing software patch simply wrenched the whole system, forcing us to go back to simple line-of-site basics and analog systems for targeting and battlespace tracking. As the Joint Terminal Attack Controller, my job was to use aircraft in the ‘stack’ to watch the battlefield, brief that information to the ground commander, and keep those air players briefed on friendlies maneuvering across terrain. Most importantly, when things went sideways, I was the arm of the ground commander in directing close air support in extreme close proximity (language advisory for linked video) to friendly forces. Fairly simple when things stuck to the plan, and extremely challenging when bullets started flying. The enemy gets a vote too.
So if something ever happens to the JTAC, that conduit of information between the ground forces and the air is in trouble. Even battletracking friendly locations are severely reduced if that particular C2 node goes down.
How do you solve that situational awareness vulnerability? Make everyone situationally aware and connected, obviously.
Video games make it seem so easy — a corner of your screen provides a moving map with friendly (blue) dots depicting fields of fire and maneuver alignment, while bad guys (red dots) conveniently pop up just around the blind corner, preparing the gunslinger for immediate OODA-loop advantage. It even provides an ammo count, health bar, and your comms always work because developers haven’t quite incorporated actual battlefield dynamics like your squad radio dropping a crypto fill…right after you step off the helicopter ramp to begin the mission. The point being, video games of recent years have portrayed a vital precept for augmented reality and data sharing. The U.S. Army, chock full of healthy, young red-blooded heroes who enjoy their Call of Duty™, has taken a huge step towards actualizing what game developers have been toying with all along.
Soldier System of Systems
The Army calls it the Integrated Visual Augmentation System (IVAS), hosted within the Adaptive Squad Architecture, which considers each soldier not as a simple grunt, but a weapons system. These systems fuse individual soldiers and their squads into a mesh network that shares visual, location, and movement data across protected bandwidth for penultimate situational awareness. The lynch-pin for this system (and finally, the lede for this article), is the Enhanced Night-Vision Goggles-Binocular (ENVG-B)- simply the end-user device for making this ASA system of systems successful in the Army’s internet of things.
The War on Voting
Eric Dai
Harris County, which contains much of the Houston metro area, is larger than the State of Rhode Island and roughly as populous, with 4.7 million residents. Despite that, thanks to an October 1 order by Texas Governor Greg Abbott, any voter in Harris County who wishes to drop off an absentee ballot in person before Election Day — rather than braving long lines at polling stations during a pandemic or relying on the possibly unreliable postal service — has only one location where they can do so. Officials in Harris County had originally planned to install twelve sites, but now, just like in all other 253 counties in Texas, only one remains in operation.
Governor Abbott, citing unspecified concerns about ballot security, issued a proclamation that stated that each county in Texas would be limited to only one ballot drop-off site, regardless of its size or population. A number of civil rights organizations, seeing through Governor Abbott’s justification of ostensibly preventing election fraud, have called out his proclamation for what it clearly is: a blatant attempt at voter suppression that targets Texas’s more populous, Democratic-leaning counties. This is by no means a phenomenon isolated to Texas; just from the past week alone, there have been similar efforts at voter suppression in Ohio and Georgia, to name a few examples.
What these episodes tell us is that voter suppression — a tactic obviously antithetical to democratic ideals — is still alive and well in the United States. Officials have realized that rather than suppressing turnout by passing laws that explicitly restrict who can vote, they can achieve much of the same effect by raising the opportunity cost of voting: making it more inconvenient, time-consuming, or otherwise difficult for voters to cast their ballots. Several states have gone through such efforts to complicate the election process, whether it be through closing polling stations and ballot drop-off sites, purging voter rolls, or placing limits on absentee voting. The seemingly bedrock principle of universal suffrage is under threat, and a growing number of unscrupulous politicians have shown themselves willing to bend the rules of democracy for political advantage.
But could this happen? How could politicians from so many different jurisdictions, from Texas to Ohio to Georgia to Wisconsin to North Carolina to Iowa to… (well, you get the idea), even try to get away with such an affront to democracy itself?
A major milestone on the road towards the growing acceptance of voter suppression as an electoral tactic was the Supreme Court’s decision in the 2013 case Shelby County v. Holder. In a 5–4 ruling, the Court’s conservative wing struck down a provision of the Voting Rights Act that required certain state and local governments with a history of voting discrimination to obtain approval — or “preclearance” — from the federal government before they could make changes to their election procedures. The governments that were subject to preclearance under the Voting Rights Act were initially delineated by a “coverage” formula based on voting data from the 1960s and 1970s, but in Shelby County, the Court ruled that this formula was outdated and therefore unconstitutional, leaving it up to Congress to create a new coverage formula to determine which jurisdictions would fall under the Voting Rights Act’s preclearance requirement. Congress never did so, essentially rendering much of the Voting Rights Act unenforceable.
In the wake of the Shelby County ruling, state governments previously covered by the Voting Rights Act’s preclearance provision almost immediately began implementing policies aimed at suppressing turnout. Then-Texas Attorney General Greg Abbott, for instance, announced within 24 hours of the Shelby County ruling that Texas’s voter ID law and redistricting maps drawn by the Texas legislature would take effect immediately. In North Carolina, Shelby County set the stage for HB 589, a sweeping voting law that, among other things, mandated voter IDs, eliminated same-day voter registration, stopped pre-registration for teenagers, and drastically cut back on early voting days. When a federal court finally struck down HB 589 in 2016, it noted that the law had clear “discriminatory intent” and had “target[ed] African Americans with almost surgical precision.”
Shelby County’s impact on voting rights has been nothing short of disastrous. Absent that ruling, Governor Abbott would not have been able to arbitrarily shut down eleven of the twelve Harris County ballot drop-off locations, and thousands of polling stations would not have been strategically shuttered across the American South for partisan advantage. The Supreme Court has given state and local governments the green light to pursue voter suppression as a valid election-winning strategy.
However, Shelby County is not the whole story — after all, attempts at voter suppression are also taking place in jurisdictions not previously covered by the Voting Rights Act’s preclearance provision, and voter ID laws have been popular in some states for many years. The root of the problem lies with a broader trend of politicians seeking to untether their rule from the caprices of democratic elections, augmented by a federal judiciary that is willing to support their behavior.
On Monday, the 5th Circuit Court of Appeals, which covers Texas, Louisiana, and Mississippi, ruled in a separate voting rights case involving mail-in ballots that “Texas’s strong interest in safeguarding the integrity of its elections from voter fraud far outweighs any burden the state’s voting procedures place on the right to vote.”
Read that again. The panel of three Republican-appointed judges explicitly stated that combating the threat of mail-in ballot fraud — which, to be clear, is a vanishingly rare occurrence — takes precedence over the right to vote. And yet, that is a stance that many officials have apparently been willing to take; and worse still, the courts have largely let it happen. Some of the more egregious examples include the Iowa Supreme Court invalidating over 50,000 mail-in ballot request forms over a clerical issue, along with the 7th Circuit Court of Appeals allowing Indiana to throw out mail-in ballots that arrive after 12 PM on Election Day, even if they are postmarked before then. It is deeply troubling that a basic democratic right has been tossed aside across the country in so many instances, with the acquiescence and even support of federal and state judges.
This pervasive, insidious practice of voter suppression undermines one of the core principles of democracy — that government should reflect the preferences of the people. The fact it has been able to take root so quickly and so extensively in the past years raises some difficult questions about the state of American democracy. At CSPC, much work has been devoted to studying how to get the American political system back on track after years of government dysfunction, mounting polarization, and hyper-partisanship. Any solution will need to contend with the growing menace of voter suppression, as well as the wholesale rejection of democratic principles that has made it possible. It will not be easy, but if we want the United States to live up to its democratic ideals, it is certainly a goal worth striving for.
Ant Group and Financial Containment
Thomas Triedman
In 2014 Chinese entrepreneur Jack Ma founded Ant Group, a financial and technology company that he describes as a “Techfin” firm. Ma invented the term “Techfin,” inverting the traditional “fintech” abbreviation to better represent Ant Group’s priorities. Ma argued that while “‘Fintech’ takes the original financial system and improves its technology, ‘Techfin’ rebuild[s] the system with technology.” Needless to say, Ma does not shy away from the disruptive capabilities of his new company, and claims that only a truly disruptive technology can fix the “lack of [financial] inclusiveness” in China. But Ant will be disruptive geopolitically, too, potentially decentralizing the global financial system and empowering Shanghai at the expense of Western financial hubs.
In the next couple weeks, Ant Group will go public, listing equity on the Shanghai and Hong Kong stock exchanges in what will likely be the world’s largest initial public offering (IPO) ever. The Chinese financial and technology company is expected to raise more than $30 billion and will undoubtedly generate global enthusiasm for the company and other data-driven enterprises like it, as data is increasingly considered the lifeblood of the modern economy. Following the IPO, Ant Group is expected to have a market capitalization greater than most established American banks and similar to that of Mastercard.
Ant Group started off as an online payment system, similar to PayPal, and has facilitated around $16 trillion worth of transactions so far. The group has leveraged its enormous troves of data to spread to other sectors of the financial industry: They now offer their customers access to over 6,000 investment products; an unsecured lines of credit through their virtual credit card company; different health and life insurance options; small loans with more appealing interest rates than other Chinese small-loan companies; and asset management services. They even experimented with securitizing loans until Chinese regulators got a whiff of 2007 and clamped down on the behavior.
Ant Group was founded with the goal of giving Chinese citizens easy access to banking services, which are tightly controlled by government-sponsored behemoths. “If the banks don’t change, we’ll change the banks,” Jack Ma proclaimed years earlier. His platform, however, may enable even more Chinese authoritarianism. Ant’s platform provides the Chinese Communist Party (CCP) with specific information about money flows and, importantly, sensitive information about specific individuals that is necessary to calculate the cost of insurance and of a loan. Although the CCP has thrown a few mini wrenches in Ant’s plans, they have mostly left the company alone, perhaps indicating that the CCP values Ant’s data and uses the platform to further surveil its people.
While the relationship between Ant Group and traditional banks is currently collaborative and friendly, there is little that is preventing Ant from increasing the size of their loans and elbowing into the banking market. The data the firm collects allows Ant to better assess borrowers’ creditworthiness. Additionally, borrowers may be less likely to default once they realize that their life and health insurance, wealth, and future loans are all being managed by the same company; in effect, borrowers’ financial products stored on Ant may serve as collateral for increasingly large loans. In fact, delinquent loans issued through Ant’s platform only rose by 1.5% as a result of the pandemic, a much smaller increase than most other Chinese banks.
After Chinese regulators balked at Ant’s efforts to securitize loans, the company instead began to act as a middle man between banks and borrowers. Ant does not actually provide loans; it matches borrowers with third-party lenders and collects a “technology service fee” from them, effectively profiting off of the underwriting process without assuming any of the risk (a business that currently makes 63% of the company’s overall revenue).
Increasing access to banking services is an important battle in the fight to reduce global poverty. People without access to banks are more likely to encounter corruption and struggle to save money for a rainy day. There are still nearly 2 billion people who are completely unbanked, with hundreds of millions more lacking the full suite of bank products. Mobile and digital platforms have the capacity to transform the banking industry, and the companies that can make online, scalable saving and lending platforms will help set the rules for the digital financial system — and make a fortune in the process. With the rise of Ant Group, Shanghai is well-positioned to become a hub of data-driven finance, possibly at the expense of legacy centers like New York and London. This would give China increased influence to design digital trust standards and other data ethics-related regulations.
Currently, Ant Group does business almost exclusively in China. Only about 5 percent of its revenue comes from abroad, and only a fraction of that 5 percent comes from America. There is no evidence to suggest that Ant is attempting to expand into American markets: in fact, the company claims that “Ant Group’s business is primarily in China and [they] are excited about [their] growth prospects in the China market.” But the United States still needs an answer to the challenge posed by Ant. Today, an American can send money through Venmo, borrow from SoFi, and invest through Betterment, and the competition in this space will hopefully allow these companies to evolve into a system that best serves customers. Banking and financial regulators, however, need to be aware that there are changes coming in a market that is still largely governed by laws passed during the Roosevelt administration. Failing to adapt to the challenges posed by the fusion of data and finance may weaken Western financial hegemony and result in someone else getting to set the rules of the global financial system.
News You May Have Missed
India Invites Australian Defence Force to Join Malabar 2020
Thomas Triedman
India has invited the Australian Defence Force to join “Malabar 2020,” this year’s set of military drills with the Japanese and American navies in the Bay of Bengal. Australia last participated in 2007. The involvement of Australia in this exercise is another sign of the growing coherence of the Quadrilateral Security Dialogue (“Quad”) among the United States, India, Japan, and Australia. The Quad is coming together at a time of increased assertiveness from China: India is still embroiled in a conflict with China on the disputed border in the Himalayas and Australia’s probe into China’s behavior surrounding the pandemic has stressed the Australian-China diplomatic and economic relationships. As the Quad flexes their muscles, China may begin to feel the heat and will, with any luck, rein in their military ambition, particularly in the South China Sea.
Nigerian Protesters in Lagos Killed by their Military
Thomas Triedman
Just days after the governor of Lagos declared a curfew on the city in response to growing demonstrations, Nigerian soldiers opened fire and killed several protesters. Pick-up trucks pulled up to Lagos’s Lekki toll gate, a major site of the protests, and shot tear gas and bullets into the crowd. The protests in Nigeria stemmed from a movement called #EndSARS, a fight to disband a police group named the Special Anti-Robbery Squad, which has allegedly committed acts of torture, and extorted and even murdered citizens. But the protests have expanded beyond police violence to include concerns about corruption and the weak economy. The Nigerian government’s response to the protest proves their willingness to use military force against their people. It also blatantly violates Nigeria’s constitutional limits on the government, rendering null whichever provisions remain in the document.
UK Government Grants Funding for World’s First “Human Challenge” Covid-19 Vaccine Trial
Eric Dai
Researchers at Imperial College London have obtained government funding for a “human challenge” trial for a Covid-19 vaccine — in which subjects will be administered a test vaccine before being deliberately exposed to small doses of the Covid-19 virus to see if they develop an immune response. Before that, however, the researchers must determine the lowest viral dose necessary for infection, which they will do by administering small doses of Covid-19 to volunteers who have not been vaccinated. The ethically questionable practice of human challenge trials, which has been used in the past with the development of vaccines for typhoid and malaria, could greatly expedite the vaccine testing process by allowing scientists to observe the vaccines’ efficacy in a more controlled setting. The researchers at Imperial College London plan to begin in January and hope to be directly testing vaccines by late spring.
Sweden bans Huawei, ZTE from 5G Networks
Oscar Bellsolell
Sweden’s telecommunications regulator announced on Tuesday a ban on 5G telecoms equipment from Chinese companies Huawei and ZTE, paving the way for competitors like Ericsson, Nokia, or even Samsung. The prohibition extends to new installations, but the regulator has said that existing infrastructure must be removed as well by 2025. Relations between Stockholm and Beijing have taken a nosedive in the past years. In the words of the head of Sweden’s security services, ”China is one of the biggest threats to Sweden.” The sentencing of Swedish publisher Gui Minhai in China triggered a halt to ties between Swedish and Chinese cities and companies. And yet, Sweden has not been the first (and will not be the last) European country to challenge Chinese network equipment providers. The UK announced in July a ban on new supplies starting next year, and an obligation to dismantle the existing infrastructure by 2027. Meanwhile, Germany is expected to introduce similar restrictions in the coming weeks.
Washingtonians — Don’t Mind the Helicopter.
Oscar Bellsolell
Citizens who have spotted a low-flying helicopter over downtown D.C. should not panic. The aircraft — a twin-engine Bell 412 helicopter — is being used by the National Nuclear Security Administration (NNSA) to measure naturally occurring radiation levels in the city ahead of Inauguration Day. The baseline radiation map is used to determine if any spikes in radiation are due to smuggled nuclear weapons or radioactive materials in a “dirty bomb.” These flights may have raised confusion among Washingtonians, especially after June 1 episodes of low-flying by military helicopters over demonstrators in the streets of D.C. However, the Department of Energy has assured: “no surveillance or other form of monitoring will occur during these flights.” It seems unlikely that the next inauguration ceremony will involve a crowd of hundreds of thousands at the National Mall. Still, the NNSA will continue to perform these flights in a grid pattern 150 feet above the ground at 70 knots.
The views of authors are their own and not that of CSPC.