UN IGF meets in Addis Ababa

The UN Internet Governance Forum (IGF) convened this week in Addis Ababa, Ethiopia, using a fully hybrid format. Avoiding Internet fragmentation and digital sovereignty are two of the most popular topics, along with a somewhat contradictory combination of calls for controlling & regulating AI and calls to use AI to automate the detection of misinformation and disinformation on vast social media networks. While the IGF brings an unparalleled diversity of people together, and the quality of the workshops and discussions we have seen has been high, there is widespread irritation at the clunkiness of the interface for online participants, login problems, the host country’s human rights record, and the decision to force all in-person attendees to surrender their cellphones, laptops and devices to attend the opening session (except “VIPs”!). As expected, the new Leadership Panel spent most of its time in closed meetings with “high level” people. In short, the IGF embodies all the strengths and weaknesses of intergovernmental organizations.

On Thursday, Dec 1, IGP and ORF America will host a “Dialogue on the Declaration for the Future of the Internet,” including U.S. Assistant Secretary of Commerce Alan Davidson, the German Cyber Ambassador Regine Grienberger, Observer Research Foundation’s Dhruva Jaishankar, former IGF MAG Chair Anriette Esterhausen of South Africa, and Brazil’s Louise Marie Hurel. Add to your schedule here and get up early (7:30 am US Eastern time) to join us.

Dot ORG Snubs Noncommercials

The Public Interest Registry, which was awarded the .ORG domain based on promises that it would support noncommercial participants in the ICANN process, has progressively backed away from supporting the official noncommercial constituencies in ICANN. It took the latest step recently, refusing to appoint any representatives nominated by the Noncommercial Stakeholders Group (NCSG) to its Advisory Board. PIR’s Advisory Board has no real power and is largely honorary anyway, but it originally set aside a dedicated slot on the AC for NCUC. That precedent just ended. PIR justifies this by claiming that it chose AC members based on their “quality” not on who they represent. But this is exactly the problem: PIR’s council is just a bunch of people the PIR board likes and feels comfortable with, they are not independent representatives of .ORG users who are involved in the ICANN process. PIR has turned its appointment process into a beauty contest and its Advisory Council into a unilaterally-bestowed privilege that allows it to filter out anyone who might talk back.

Meet Ophelia

We’ve converted our “What is Internet Governance” material into an explainer delivered by, well, an AI-powered bot named Ophelia. Don’t worry, though, we still write Ophelia’s scripts and she doesn’t (yet) say anything we don’t approve. Come to think of it, she might make a good nominee for the PIR Advisory Council. Take a look:

Pushback on US Digital Cold War

It is anybody’s guess right now how the USG’s unilateral export control measures targeting leading edge semiconductor technology and manufacturing equipment will play out, but governments and firms in Asia and Europe are pushing back publicly. Predictably, Chinese government-backed publications are highlighting how the measures disrupted the globalized industry and supply chains, but the feeling seems to be shared outside China. In remarks to the Dutch Parliament, Minister of Foreign Trade Liesje Schreinemacher said that the home of lithography machine maker ASML, should “defend our own interests — our national safety, but also our economic interests.” Others were less diplomatic. It was reported from the Trilateral Commission that Japan’s Establishment is “sick and tired of the decoupling with China imposed by the US.”

Meanwhile, industry reports say that firms are ignoring US requests to voluntarily implement the controls and/or devising ways to deliver products around the measures. NVIDIA rolled out a revised GPU chip for export to China that is hobbled to meet the US controls. In its earnings call, Baidu told investors its growing AI Cloud business does not rely on controlled chips, instead relying on its own Kunlun chip, which reflects a broader trend in the industry of purpose- specific, in house development. Experts have noted the disconnect between the US bureaucrats developing the measures and how the industry and specific applications enabled by semiconductor technology work. Whether government resistance is real or posturing will likely be more clear after an upcoming U.S.-EU Trade and Technology Council (TTC) meeting, Dec 5. The undisclosed participants of the TTC’s working groups coordinate “on export controls, investment screening and security risks, and a range of global trade challenges,” as well as (ironically), “countering the harmful impact of non-market, trade-distortive policies and practices on technological development and competitiveness in sectors of shared priority.” The Dutch Minister said the European Commission is working with the US on the possible outcomes to be presented at the TTC.

New US Bans on Chinese equipment

On November 25, the Federal Communications Commission (FCC) unanimously passed an order to stop authorizing equipment from companies on its “Covered List.” US-based firms can no longer import or market products and services from “Chinese state-backed firms” because they allegedly pose an unacceptable risk to national security (or, perhaps, some firms’ market share). The list of covered firms, originally published by the FCC’s Public Safety and Homeland Security Bureau under the Secure and Trusted Communications Networks Act of 2019, includes the usual suspects like Huawei and ZTE but also Hytera, Hikvision, and Dahua, suppliers of networked video and radio surveillance apparatus.

By tapping into its equipment authorization process, the FCC is carrying out the main provision of H.R. 3919, the Secure Equipment Act of 2021. The Act was introduced in the 117th Congress by rep. Anna Eshoo (D-CA), in conjunction with lead sponsor Scalise (R-LA) on the house side, and followed with a companion bill by Sen. Marco Rubio (R-FL) in the Senate. The broad bipartisan support for decoupling the US and Chinese economies is clearly allowing the gears of government to continue to grind down Chinese IT. The congressional “debate” on China competition is sadly more of an echo chamber where political expediency and lack of critical thinking replace viable long-term solutions. In a proud tweet, FCC Chair Brendan Carr recently declared that the decision “represents the first time in FCC history that we have voted to prohibit the authorization of new equipment based on national security concerns.” While this bizarre boast may point to a unique turning point in history, FCC actions confirm how the hawkish policies of the Trump administration continue to offer a viable political equilibrium when Democrats are in power. This equilibrium will likely be one of the few points of agreement in a divided 118th Congress.

The FCC’s “Covered List” can be understood as a means to avoid perceived shortcomings and regulatory inconsistencies especially between inbound and outbound investments with China. In May 2019, the Trump administration added Huawei to the Bureau of Industry and Security (BIS) ‘s Entity List, starting a cat-and-mouse game of tightening and evading export controls. These short-term measures were somewhat successful in stifling Chinese national champions’ growth by limiting US manufacturers’ ability to supply them with goods and services- anything from Snapdragon processors to the Google PlayStore. However, the US government needed to make the argument that Chinese IT is a trojan horse for malign Chinese Communist Party (CCP) behavior more palatable. After banning Huawei and ZTE from using the Universal Service Fund to supply rural operators, the US also needed to force cash-strapped rural operators and local governments from importing the cheaper Chinese IT. This latest FCC enforcement action closes the loop on the presence of Chinese hardware in US networks.

In the meantime, the big question is whether the Biden administration will risk upsetting Gen Z by banning TikTok. If so, the US will escalate China competition into the already dangerously politicized world of content regulation which, let’s face it, will only benefit the CCP’s censorship agenda. Let’s hope the “Grand Strategy commission” will be more astute in protecting long-term US interests.

FTX Debacle

If you have been wondering what this whole Fiasco is about, here’s a short summary. It started when Binance decided to sell all of its FTX tokens (FTT) causing a panic in the market. Customers began withdrawing their funds, leading to a liquidity crisis. Things would have been fine if only FTX’s claims about its assets actually matched its balance sheet. Turned out FTX was using the assets to bail out Alameda Research, a firm owned by Sam Bankman-Fried (SBF), the CEO of FTX. The company used customer funds to bail out a branch firm, the holdings of which were mostly in FTT. One thing led to another, and the company soon filed for Bankruptcy.

There were varied speculations following this incident. Three additional companies (BlockFi, Voyager, and Celsius) have since filed for bankruptcy. The crypto market has been down. And Miami’s nightlife has been affected negatively. But it doesn’t appear to be all doom and gloom though it has brought several aspects of the crypto industry to a new light. The failure of FTX had little to do with the blockchain or the protocol itself, and more with the structure and composition of FTX. Dealing with crypto didn’t automatically make it decentralized nor did it make the risks dissimilar to those in traditional finance.

In traditional finance, intermediaries manage risks partly by converting liabilities into assets and partly by complying with regular reporting and auditing of reserves, assets, and liabilities, thereby diluting the risks and mediating the friction arising from asymmetric information and centralized decision-making. It doesn’t make a crisis impossible, but it does make it less probable. Adhering to this, people are calling for aggressive regulation. So, will regulation solve all the problems of the crypto exchanges? Maybe, but one needs to consider that FTX was in fact a regulated exchange, at least in the derivatives market. So are Coinbase, Binance, and several others.

Would it have helped if FTX was not centralized instead? Or to put it differently, is DeFi inherently better because it upholds the decentralized nature of blockchain? Programmable money does not require any custody. A DeFi exchange platform would attract liquidity and the tokens as well as the code for pricing would be embedded in smart contracts. This will allow for the transaction to be immutable and easily auditable since the chain will be public. So, it would solve the friction from asymmetric information. But, as pointed out by WSJ earlier, the risks in DeFi are not addressed or mitigated, just moved around from counterparty risks to technology. It would still be dealing with crypto. The interconnected nature of the ecosystem with no underlying productivity (in an economic sense) creates uncertainty. This coupled with the asset being used as its own collateral, as in the case of FTX, leads to heightened credit risks. So it will eventually run into a different version of the same problem. What will happen remains to be seen but one thing is clear – the skepticism around crypto’s promise of redefining finance is growing strong. And it is not necessarily a bad thing.

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