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The silver lining in rising rates

Good morning, and welcome to Protocol Fintech. This Tuesday: Coinbase and Robinhood’s surprising gains from rising rates, why Changpeng Zhao and Sam Bankman-Fried are fighting on Twitter, and BlockFi’s return to the crypto yield market.
Off the chain
The crypto boys are fighting! If you haven’t been keeping up with the Twitter feud between Binance’s Changpeng “CZ” Zhao and FTX’s Sam Bankman-Fried, I dug into it in this morning’s Source Code. As I wrote there, this isn’t just about mean tweets, though. The heart of the dispute seems to be what crypto regulation looks like in the United States. Congress is considering the Digital Commodities Consumer Protection Act, or DCCPA, a bill that Bankman-Fried says he’s “optimistic” about and that would advance the CFTC’s position in regulating crypto. If that law ends up giving FTX an edge against Binance, well, all’s fair in love and crypto. And if you do like mean tweets, we rounded up some of the best in Overheard.
— Owen Thomas (email | twitter)A silver lining in rising rates
Rising interest rates are generally seen as bad news for fintech and crypto. Capital becomes more expensive and customers find themselves grappling with rising prices and a bleak economic outlook.
But Coinbase and Robinhood managed to find some upside in their otherwise downbeat earnings reports from the Fed’s aggressive but controversial bid to curb inflation.
Trading isn’t hot, but holding cash is. Coinbase and Robinhood both reported drops in customers and revenue, but hit on similar bright spots.
- Both made money from holding cash in the wake of the Fed’s big rate hikes. Coinbase said its interest income tripled to $102 million from the previous quarter — a twelve-fold increase year-over-year.
- Robinhood said its interest revenue soared 73% sequentially to $128 million, or 103% year-over-year. CFO Jason Warnick said the company expects “another quarter of net interest revenue growth” in the last three months of the year.
- Rising rates meant “we've seen trading come down,” Warnick said, but Robinhood is generating interest revenue from about $17 billion in assets. Net interest revenues is “a growing part of our revenue mix,” he said.
A stablecoin deal is boosting Coinbase. Coinbase is part of the Circle-led Centre consortium that supports the USDC stablecoin, the crypto market’s second-biggest stablecoin with a market circulation of $42 billion.
- Coinbase makes money off of USDC from a revenue-share arrangement, CFO Alesia Haas said on last week’s earnings call.
- The company also makes money on the interest collected from reserves of cash and Treasury bills backing USDC. That was worth pretty much nothing when rates were near zero, but has turned into a meaningful amount as the Fed continues hiking rates.
- Patrick Corker, Circle’s treasurer and vice president of finance, said rising rates are clearly having a huge impact on the USDC ecosystem. “When you take the Fed funds [rate] from basically zero to north of 400 basis points, that's going to be a powerful stream of revenue,” he told Protocol.
Diversification helps in uncertain times. The era of “basically zero” interest rates is over for now. Consumers are pulling back on trading and holding more in cash. The difference now is that caution literally pays.
— Benjamin Pimentel (email | twitter)A MESSAGE FROM THE FINANCIAL TECHNOLOGY ASSOCIATION

Don’t miss out! Register today to hear some of the biggest players in fintech discuss the industry’s most pressing issues at the Financial Technology Association’s inaugural Fintech Summit: Shaping the Future of Finance. Produced in partnership with Protocol, all sessions of the event will be live-streamed on November 16th.
RSVP here today to join us on November 16.
On the money
The SEC won a case against crypto firm LBRY. The ruling that LBRY’s offerings were securities could be the kind of legal precedent the agency’s been looking for.
On Protocol: BlockFi has introduced a new digital assets interest product for accredited investors, after previously agreeing to shut down a yield-paying crypto product that the SEC said was illegal.
Zelle is acting as a loophole for new small-business tax rules. Venmo, Cash App, and PayPal must issue tax forms for users who receive more than $600 and also file them directly with the IRS — but Zelle says the rule does not apply to its bank-owned payment service, since it operates directly over the ACH network.
OpenSea launched its first royalty enforcement tool. The goal of the tool is to make creator fees enforceable on-chain, and will apply to new collections listed on the platform starting Nov. 8.
Also on Protocol: The Justice Department seized $3.4 billion worth of bitcoin stolen in the 2012 hack of the Silk Road dark web marketplace.
Supreme Court hears a challenge to the SEC and FTC’s administrative law judges. The legal issue before the Supreme Court is whether parties facing enforcement actions can bring arguments against the commission structure to federal court before completing administrative proceedings.Overheard, the CZ vs. SBF edition
Where to start with Sam Bankman-Fried and Changpeng “CZ” Zhao’s Twitter beef? It probably dates back to the tiff that led FTX to buy back Binance’s stake in the smaller crypto exchange last year, but things definitely got testier recently, especially after the balance sheet of a subsidiary of Alameda Research, Bankman-Fried’s trading firm, leaked online.
Then again, Bankman-Fried arguably heated things up last month when he suggested in a since-deleted tweet that Zhao was persona non grata in Washington: “Excited to see him repping the industry in DC going forward! Uh, he is allowed to go to DC, right?”
Zhao replied with Binance’s wallet, moving half a billion dollars in FTT, FTX’s native token, in preparation for sale, in a move most in the crypto world took as hostile. “Due to recent revelations that have [come] to light, we have decided to liquidate any remaining FTT on our books,” Zhao wrote.
What revelations, exactly? Zhao didn’t say, but he suggested it had to do with FTX’s moves in Washington: “We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs.”
“A competitor is trying to go after us with false rumors,” Bankman-Fried wrote.
Patrick Hillmann, Binance’s chief strategy officer, specifically denied having anything to do with the Alameda leak and blamed Bankman-Fried for failing “to address concerns about FTT.”
But everything’s fine now and there’s no fight, no, no, no! Bankman-Fried expressed hopes that he and Zhao could “work together for the ecosystem.” “Back to building,” Zhao wrote.Deal flow
Insurtech Cover Genius raised $70 million in a series D round led by Dawn Capital. The company’s series C was larger at $100 million, but its successful fundraising bucks a trend of insurance startups struggling to win over investors.
Wealth management startup Arta Finance raised a $90 million series A round from Sequoia Capital India, Ribbit Capital, Coatue, and over 140 entrepreneurs. The company is led by former Google Pay chief Caesar Sengupta and had been raising while in stealth.
British fintech lender Plend raised a $46 million seed round from existing investors Ascension, Tomahawk VC, DD Venture Capital, Haatch, and new investors Active Partners, Velocity Juice, Sivo, and several entrepreneurs. The firm calls itself an “ethical lender” because it uses open banking to underwrite borrowers instead of the traditional credit system.
AI-driven underwriting platform Zest AI raised $50 million in a growth round led by Insight Partners and CMFG Ventures. The company has raised several growth rounds since its series C in 2013, according to Crunchbase, the most recent of which was $18 million in June 2021.
Chicago-based payments tech company Loop raised $30 million between seed funding and a series A round led by Founders Fund. The company serves shipping and logistics companies and was founded by two former Uber employees who worked on Uber Freight.
Insurance risk-transfer service Vesttoo raised $80 million in a series C funding round from Mouro Capital, Gramercy Ventures, Black River Ventures, Hanaco Ventures, and, according to Reuters, Goldman Sachs. The round brings the company valuation to $1 billion, tripling since the company’s previous raise.
Digital asset management service Bakkt will acquire Apex Crypto for $200 million. According to a press release, Bakkt believes Apex will help it get to market faster with products such as staking, external transfers, and NFTs.A MESSAGE FROM THE FINANCIAL TECHNOLOGY ASSOCIATION

Don’t miss out! Register today to hear some of the biggest players in fintech discuss the industry’s most pressing issues at the Financial Technology Association’s inaugural Fintech Summit: Shaping the Future of Finance. Produced in partnership with Protocol, all sessions of the event will be live-streamed on November 16th.
RSVP today to join the conversation.
Thanks for reading — see you tomorrow!
Brad Smith explains why the world needs to go carbon-negative — and how to get there

This week, Microsoft President and vice chair Brad Smith is heading to Egypt for the United Nation’s annual climate conference with a mission: show the world that the tech giant is “consistent and committed” in its climate goals, as well as communicate the “vital role” that the tech industry as a whole has to play in battling the climate crisis.
The Microsoft leader has been busy in recent months since the departure of chief environmental officer Lucas Joppa, stepping in to lead the company’s climate initiatives (something Smith has always been intimately involved with, as Joppa’s boss prior to his departure).
Last week at the Web Summit tech conference, he spoke about the urgency of the workforce transformation the world needs to reach net zero, as well as the current skills gap. “The key to the future is going to be a new generation of people with a new generation of technology coming from a new generation of companies,” he said, highlighting the work of startups like the India-based SEEDS, which is using satellite data and AI to identify homes that would be most susceptible to extreme heat, then helping them adapt.
Using AI and data to help the Global South adapt to climate change is one of Microsoft’s main focuses going into the COP27 climate talks. The company published a report on Monday about expanding its AI for Good Research Lab into Egypt and Kenya, as well as growing its collaboration with satellite data startup Planet Labs, which is intended to accelerate local development of climate solutions, with a focus on adaptation and early warning systems.
Smith sat down with Protocol last week ahead of COP27 to discuss Microsoft’s climate goals, challenges in reaching them, as well as the private and public sectors’ roles in reaching global net zero.
This conversation has been edited for brevity and clarity.
Microsoft has an ambitious goal of going carbon-negative by 2030 and investing significantly in carbon removal purchases. Is there a limit to how far the tech industry and private sector can go in terms of reaching global net zero? Where do governments need to step in?
I think the right way to think about it is that the market and companies cannot solve this problem by themselves. I also think it’s important to recognize that governments cannot solve it by themselves either. As with almost all big problems in the world, it’s a three-legged stool: You have business, you have nonprofits, and you have governments. I think businesses have a unique role to play in innovation, especially technology and product innovation. I think nonprofits are often the best at incubating new solutions using business innovation in part. Governments can make things scale in a way that no one else can, both through the bigger budgets they have and the power to legislate and regulate. So all three of us need to come together.
I think that tax policy and tax credits can play a very important role in two respects. One is continuing to spur innovation and investment in R&D. But the other is really helping small businesses, including in the skilling space. I think large employers can afford to invest in skilling in a way that a small company often cannot, and I think we should look more broadly at tax incentives to help. But I do think we should get more precise and targeted in the way we put incentives to work.
“You look at some of the big oil companies or … coal-burning electricity companies: We shouldn’t want them to die. In my opinion, I think we should want them to transform.”
Photo: Ben McShane/Web Summit via Sportsfile
Microsoft sells cloud computing services to fossil fuel companies that arguably increases the speed at which oil is extracted and shipped to market. Will there ever be a point where Microsoft stops working with them, as Google has?
We’ve already put some limits in place. We announced four energy principles earlier this year worth taking a look at. I’ll just highlight the first and the fourth, because the first is really that what we want to do is help the energy sector transition. That’s what the energy sector needs to do.
But the fourth is the one that’s probably the most pertinent to your question. We said that we may use our advanced engineering and co-development resources to work with fossil fuel companies on things like discovery, exploration, exploitation, but only if the company has a net zero pledge. So that was a step in limiting our focus on where we’ll put our resources to work. I think as time goes by, what we’re really seeing is almost a natural evolution. The responsible energy companies are wanting to move, and then we get to move in tandem with them and help them make that progress.
There’s one school of thought that says, “Don’t invest any money that is using coal to produce electricity.” I come from the school of thought that says, “Invest money, but invest it for the purpose of helping them transition from coal to other sources of energy.” And I think that’s the type of action that we need to focus on taking.
So what are some specific steps that Microsoft is taking to help these companies get closer to net zero?
The best example is our Climate Innovation Fund. In some ways, we play an almost three-part role. Of course, we provide technology to companies, so they can use the cloud and AI and data to accelerate their innovation. But through the Climate Innovation Fund, we’re actually investing in these companies that are at the forefront of change. And then we’re a purchaser. So if you look at a company like Climeworks and ask them what role Microsoft has played, I think it’s that we’ve helped really accelerate their progress by standing behind them as an investor and standing next to them as a purchaser. And when you do both of those things together, that’s when you help to not just build a new market, but you help to build momentum for the companies in that market. And then they can use our technology for their own innovations.
But you know that Climeworks won’t allow fossil fuel companies to buy its carbon removal services.
I’m not here to tell them how they should do their business. You look at some of the big oil companies or my other example of coal-burning electricity companies: We shouldn’t want them to die. In my opinion, I think we should want them to transform. And you don’t help people transform if you stop working with them. That’s my fundamental philosophy about all of them.
Microsoft’s support of Climeworks is partly through your involvement in the First Movers Coalition. Who would you like to see join the coalition?
Everybody. I sort of joked with Secretary Kerry that we were actually the second generation of the First Movers, because I wish we had joined in Glasgow and COP last year. We joined in WEF at Davos in May. We’ll do more with them next week at COP27. The group needs to continue to expand. I thought it was great in Davos to have Google and Salesforce and Microsoft all sitting at a press conference together making huge financial commitments. What I love about the First Movers Coalition is the high-quality, long-duration carbon removal that we’re all investing in is one of the world’s most important markets that needs to be created.
You look at some of the big oil companies or my other example of coal-burning electricity companies: We shouldn’t want them to die. In my opinion, I think we should want them to transform.”
Do you think every company in tech has the ability to become carbon-negative?
I don’t know. I think that we hopefully will blaze the trail. But if we blaze the trail, hopefully we’ll discover and then show others a way that they can get onboard. I think that we need to create a net zero world by 2050, but we need to create a carbon-negative world by 2060 and actually even raise our ambition. We will have the technological capacity in the second half of this century to start to reverse the impact of climate change and bring the temperature of the planet back down by removing more carbon than humanity creates every year. The question isn’t whether we’ll have the way or whether we’ll have the will. If we have the will as a planet, the way will be clear.
I think that we need to create a net zero world by 2050, but we need to create a carbon negative world by 2060 and actually even raise our ambition.”
In times of economic uncertainty and recession, is it harder to keep climate commitments on track? What do you say to other business leaders to convince them that sustainability is just as important as, say, economic growth?
When it comes to the climate, the world cannot afford to wait. We don’t have time to take our foot off the accelerator. It’s tempting for many businesses, I get it. They’re under economic pressure. The reality is there will be more public pressure and more regulatory pressure. I think business leaders understand that. The real question is how to do all of these things at the same time. The thing that’s most interesting is that all of the pressures that are going to make this a harder winter, especially in Europe, will also create the foundation for faster progress in the balance of this decade. We will see people turn more to coal or natural gas or whatever they can get their hands on to keep their homes warm, and that’s understandable.
But what people have recognized is that they are more reliant than they should be on Russian gas and gas in general. What I find across Europe, when I meet with government leaders, as well as in the U.S. with things like the Inflation Reduction Act, is that this is also going to help accelerate the transition to solar, wind, nuclear, and other less carbon-emitting electrical fuels. So I’m optimistic about 2030 in part because I’m perhaps pessimistic about the winter of 2022.
Sony’s PSVR 2 will be a major test for the VR market

Hello, and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Tuesday, we’re taking a look at Sony’s upcoming PSVR 2 headset, its steep price, and what it will mean for the future of the VR market. Also: the developers behind the next major Final Fantasy entry respond to diversity complaints, and why we’re all so obsessed with Marvel Snap.
Who is the PSVR 2 for?
Sony last week finally announced pricing and a release date for its sequel to the PlayStation VR headset. At $550 and a confirmation of at least 20 launch games with no support for original PSVR titles, the company is making a bold wager for the future of consumer VR with a focus on gaming and enthusiasts. Bloomberg reported last month that Sony is optimistic, with plans to sell 2 million units by the end of March.
While market leader Meta is trying to cater both to the mainstream consumer with the $400 wireless Quest and the business-focused “prosumer” with its $1,500 Quest Pro, Sony is falling somewhere in the middle. With few companies interested in competing with Meta, the PSVR 2 will in many ways be a litmus test for consumer VR and whether it stays a niche, expensive hobby or breaks further into the mainstream.
The PSVR 2 comes with plenty of compromises. Sony’s headset isn’t a slam dunk for several reasons, namely price and backward compatibility.
- The PSVR 2 costs $550, more than the PlayStation 5 console (at $400 or $500 with a disc drive) it requires to run. Additionally, PSVR 2 can’t run older games or apps initially developed for Sony’s predecessor.
- Instead, the company is porting over a handful of Quest and PSVR 1 titles, contracting with third-party developers, and relying on some of its first-party talent to fill the library.
- So far, Sony says it will have 20-plus games at launch, including some exclusives like Guerrilla Games’ Horizon Call of the Mountain, but it has yet to confirm the full lineup.
- The PSVR 2 sports some impressive specs, especially when compared with Meta’s Quest 2 and Quest Pro, including higher-resolution OLED optics and superior field of view. But Sony’s headset is tethered and decidedly non-portable. That means avoiding a cable as you bumble around your living room.
- Oh yeah, and you also need a PS5, which remains supply constrained around the world and, as of August, is 10% more expensive in most markets at a time when inflation is high and consumer spending on entertainment is down across the board.
Reception on Sony’s strategy has been mixed. Many industry analysts and critics saw Sony’s $600 price tag as confirmation that this device is not, and likely never was, designed to be a true Quest competitor.
- “The question isn't is the price good for the tech included,” wrote NPD executive director and game analyst Mat Piscatella. “[T]he question is will anyone beyond the core niche want to spend that kind of money regardless of the tech. The way down this road is well traveled.” Piscatella pointed out that the original PSVR headset never attained a double-digit attach rate, meaning fewer than 10% of the roughly 100 million PS4 owners at the time had bought the device when Sony announced in 2020 that it sold 5 million units.
- Sony has sold only 25 million PS5 units, so it will likely take many years for the company to achieve similar results with PSVR 2.
- Piers Harding-Rolls with Ampere Analysis said the challenge will be “convincing lapsed VR gamers who bought the original PSVR for the tech novelty factor to buy again.”
Sony wants its own premium PlayStation enthusiast market. One key difference between PSVR 1 and its successor is Sony’s direct-to-consumer strategy. At launch, the headset won’t be available at major retailers and instead will be sold through preorder via Sony’s own website.
- Sony is targeting customers who have built their gaming identities around the growing PlayStation ecosystem and will line up to buy direct, in many ways similar to Apple’s approach to selling accessories, subscription services, and software to iPhone owners.
- “They want the customer relationships and all of the data that comes with managing sales directly with consumers,” said Baird analyst Colin Sebastian in an interview with GamesIndustry.biz. “Long-term, I don't think they necessarily see a big role for retail if their platforms are largely virtual and their services are managed online and through the cloud."
- Last quarter, Sony said around 90% of all software revenue came from digital sales and add-ons like in-game purchases.
- Sony now has a PlayStation-branded Backbone One mobile controller costing $100, a soon-to-launch premium gamepad called the PlayStation DualSense Edge for $200, and higher-priced PS Plus subscription tiers on par with Netflix’s priciest plans.
Competing with the Quest was always Sony’s biggest challenge. According to market researcher IDC, Meta has sold more than 15 million Quest 2 headsets and captured about 90% of the VR hardware market in the first quarter of 2022. Sony’s decision not to compete with a wireless headset of its own and instead target PlayStation enthusiasts may prove to be a shrewd one in the long term.
But it also feels like Sony is simply setting itself up for a PSVR 1 replay. Meta has proven that making VR cheap and wireless can help it break through to mainstream buyers, even if there has yet to be a killer app that justifies its growing metaverse expenditures. Meta is also buying up some of the most successful VR studios, many of which developed games for PSVR.
Sony, on the other hand, seems committed to a strategy of serving a more singular audience with disposable income and an early adopter mindset. With a new library being built from scratch and little money to be made on developing for a fledgling platform, consumer and developer enthusiasm for PSVR 2 is at risk of drying up long before there's a critical mass of PS5 owners to sell to.
— Nick Statt
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Overheard
“Ultimately, we felt that while incorporating ethnic diversity into Valisthea was important, an over-incorporation into this single corner of a much larger world could end up causing a violation of those narrative boundaries we originally set for ourselves. The story we are telling is fantasy, yes, but it is also rooted in reality.” — Naoki Yoshida, a producer on Square Enix’s upcoming Final Fantasy XVI, responded to an IGN question about the lack of diversity within the game’s roster using a now-familiar crutch.
“It was a little bit of a good finish at the finish line, and that classic runner's mistake of tripping and stumbling as you come across the finish line and we've got to recover there. The burden is on us … and the team is very focused on that right now.” — Matt Booty, the head of Xbox Game Studios, gave a candid response on the “Friends Per Second” podcast last week about the beleaguered launch and ongoing state of Halo Infinite.
In other news
HBO’s “The Last of Us” will arrive early next year. The new series will drop on Jan. 15, HBO confirmed after a leak of the premiere date showed up on the HBO Max app and website in the U.K.
“Stranger Things” is coming to VR. Netflix has partnered with Tender Claws, the studio behind Virtual Virtual Reality, to launch a Stranger Things VR game in late 2023.
Square Enix isn’t giving up on NFTs. The Japanese publisher last week announced a new game called Symbiogenesis, an “NFT collectible art project” that will launch on the Ethereum blockchain.
Apple is building a live video ad network. The company is working on adding TV-like ads to its MLS soccer livestreams.
Call of Duty: Modern Warfare 2 sails past $1 billion. The latest game in Activision’s shooter series has sold more than $1 billion in its first 10 days, making it the fastest-selling game in franchise history.
PlayStation’s subscription business is shrinking. Sony reported earnings last week that revealed its PS Plus platform has shrunk since this summer, when it launched new service tiers. But thanks to higher-priced offerings, revenue is actually up.
The Candy Crush drone ad didn’t go over well. Mobile giant King tried an unconventional marketing schtick last Thursday by flying 500 drones to form the Candy Crush logo over the NYC sky. In true New York fashion, lots of people hated it.
YouTube Shorts are coming to the TV. The short-form format will be available on most smart TVs and game consoles in the coming weeks. We first reported about this in August.
Marvel Snap is a fair, generous, and genius mobile success story
Over the past week or so, I’ve played close to two dozen hours of a single game. Not an immersive RPG, battle royale title, or a grindy looter shooter, but a mobile game called Marvel Snap. Created by lead members of Blizzard’s Hearthstone team, Snap is an approachable digital card game within an astounding level of depth.
Snap fits into your life. What makes the game so compelling is how both bite-sized and dynamic it feels. Every game takes only six turns, letting you slide one in during any five-minute break throughout the day. But if you have the time, it’s easy to get lost in deep play sessions.
- Each game features a random set of elements you must take into account when playing an opponent, keeping the gameplay fresh and your senses on high alert as you try your best to outmaneuver the enemy’s strategy.
- Snap also has a wagering system, whereby “snapping” in the middle of a match can raise the stakes for how many points you earn, or lose, at the match’s conclusion.
- “When we were thinking how we wanted to forge [Marvel Snap], [we thought] ‘Hey, what if a game could be super strategically deep, and what if we could also somehow make it, like, three minutes long?’” Yong Woo, Snap’s chief production officer and co-founder at developer Second Dinner, told The Verge. The team, in fact, succeeded.
Snap is a master class in monetization. Far and away the most generous part of the game is how fair and rewarding it feels for a free-to-play title.
- The designers at Second Dinner have made a free-to-play game that doesn’t feel like it's encouraging you to spend real money at every turn.
- Instead, Snap uses a clever system of incentives and timed rewards to ensure you don’t have to spend a dime to feel rewarded for your time.
- If you want to spend money, you can do so on alternative card designs and a currency that helps you unlock new cards faster. But Snap also features a rewarding battle pass and seasonal events for earning those items organically.
Snap is far and away the most engaging mobile game I’ve played in ages, and I’ve already made room for it as a part of my daily routine for hopefully many months or perhaps even years to come. It’s well worth a try.
— Nick Statt
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Thoughts, questions, tips? Send them to entertainment@protocol.com. Enjoy your day, see you Thursday.
Why an 'us vs. them' approach to China lets the US avoid hard AI questions

Before the COVID-19 pandemic, William McClellan “Mac” Thornberry — a former U.S. congressman representing Texas and the top Republican on the Armed Services Committee from 2015 to 2019 — traveled around the U.S. speaking to business and community leaders and showing them photos of surveillance tech in China.
“I’d show pictures of the Chinese surveillance cameras and talk about their social credit system, and how the government is using technology to control its population. And they’re exporting it to other countries, and so there’s a real competition about what the future is going to look like between government control and not,” Thornberry said while speaking at an event held by the Special Competitive Studies Project, a nongovernmental organization funded by former Google CEO and AI investor Eric Schmidt that advocates for more U.S. AI spending.
A member of the Pentagon’s emerging tech advisory group, the Defense Innovation Board, Thornberry also has championed the use of AI and emerging tech to help the U.S. defend against China and preserve democratic values. By displaying those photos showing China’s AI-fueled surveillance apparatus, Thornberry aimed to illustrate exactly what the U.S. defense department is up against.
“You have to remind people the context, the bigger picture and why it matters,” Thornberry, also a member of SCSP’s board, said.
But as national security fears of China’s AI advancements propel U.S. AI policy, some human rights and AI watchdogs worry investments in AI with military applications will become a major focus, allowing the U.S. to deflect scrutiny or legal guardrails for its own AI practices.
“I’m far more worried about the risks to our society from failing to regulate AI than the risk that we fall behind China in some aspects of the technology,” said Matt Sheehan, a fellow in the Asia Program at the Carnegie Endowment for International Peace.
Renard Bridgewater, a member of New Orleans’ Eye On Surveillance coalition who has advocated against surveillance tech including AI-based technologies there, questioned Thornberry’s use of China surveillance photos.
“It feels vaguely hypocritical, if we’re talking about China in one way, and using that as a motivation of sorts to spend more money on AI here, when metropolitan areas across the country — predominantly Black and brown communities — are negatively and directly impacted by that same technology or similar tech,” Bridgewater said during a Protocol event last week.
In July, the New Orleans City Council voted to reverse its facial recognition prohibition.
Photo: Kate Kaye/Protocol
China’s use of AI-based surveillance technologies to monitor and penalize minority Uyghurs is often pointed to by U.S. lawmakers, national security officials, and tech investors as a key justification for blocking China’s access to tech that could advance its surveillance and military AI capabilities, as well as for increasing federal spending on unregulated AI in this country.
Not only is the so-called AI race considered a competition with China for economic or technological superiority, but one of democratic values. Miriam Vogel, co-chair of the White House National AI Advisory Committee, suggested at a POLITICO event in September that democratic values can be baked into U.S. tech like cinnamon and nutmeg in an apple pie.
“AI embeds our culture, and our culture in the U.S. is trust and democratic values,” Vogel said.
Vogel’s remarks mirrored sentiments found in one of the most influential documents guiding U.S. AI policy and investments thus far: the 2021 final report of the National Security Commission on Artificial Intelligence.
I’m far more worried about the risks to our society from failing to regulate AI than the risk that we fall behind China in some aspects of the technology.
“The AI competition is also a values competition,” stated the report. In an effort to stay ahead of China and combat what the report called the “chilling precedent” created by China’s use of “AI as a tool of repression and surveillance,” the commission called on the federal government to double annual non-defense funding for AI research and development to $32 billion per year by 2026.
Today, people including Thornberry and others working at Schmidt’s SCSP have picked up the NSCAI’s mantle in the hopes of influencing federal spending on AI and emerging tech.
Still, the U.S. has yet to pass any federal regulations or laws governing AI development and use, despite an explosion of AI deployment by businesses and government. Letting China’s AI threat distract the U.S. from meaningful AI regulations would be a mistake, Sheehan said.
“We’ve already seen the way technology left to its own devices can widen inequality, deepen social divisions, and exacerbate political extremism. Unchecked AI deployment could put risks like those on steroids in a way that threatens the foundations of our democracy,” he said.
Surveillance in the USA
In September, when China’s Suzhou Keda Technology promoted its “smart community” project involving 2,000 facial recognition-enabled cameras installed in communities in Xinghua, a city about 150 miles north of Shanghai, the company said the system would identify people and vehicles to accurately warn of security risks and improve the level of safety for residents there.
It sounded familiar. When U.S. municipalities and everyday homeowners in the U.S. implement surveillance technology, protecting safety is often a primary reason.
“All I want is a safer city,” said New Orleans city council member Freddie King III in July when he voted for the heavily surveilled city to reverse a facial recognition prohibition, allowing use of the technology by the New Orleans Police Department.
Other cities in the U.S. including Detroit and San Francisco are home to growing publicly and privately owned surveillance camera networks that law enforcement can access. In small towns, AI-based license plate readers and vehicle recognition cameras with police access are being installed by private homeowners associations. There is little accountability or transparency when surveillance tech is deployed by private entities.
There’s also a buildup of AI-enabled surveillance tech in use by U.S. Customs and Border Protection at the southern U.S. border. Earlier this year the U.S. Government Accountability Office warned of the border protection agency's failure to notify people of its use of facial recognition at U.S. airports.
“The way that the Uyghur people of China are continuously surveilled in such a highly oppressive way, that could readily happen here [in] a slow, creep-like fashion,” Bridgewater said.
In the U.S. Black people and women have been subjected to discriminatory AI systems used in hiring, banking, and health care. Some Black men have been wrongfully arrested because of inaccurate facial recognition in policing software.
And use of other controversial forms of AI that have sparked concern among civil and human rights advocates when deployed in China is growing in the U.S. Emotion AI, which is intended to determine people’s emotional attitudes, has been baked into software sold and used throughout the U.S. by companies including Google and Microsoft. Emotion AI providers in the U.S. have attracted millions of dollars in venture capital funding.
But even though various U.S. agencies including the Department of Defense, intelligence agencies, and the White House Office of Science and Technology Policy have released nonbinding guidance on AI principles and rights, there are no federal AI regulations or laws in the U.S. And the country still has not enacted federal data privacy legislation despite indiscriminate harvesting and use of people’s data to build AI.
[A lot of people] have this notion that AI that's developed in China somehow embeds a different system of ethics and values that's uniquely Chinese.
At the same time, China has established new data protections and AI-related regulations. The country established its Personal Information Protection Law in 2021, which some consider to be similar to Europe’s General Data Protection Regulation. That year, China’s Supreme People's Court ruled to require businesses to obtain consent to use facial recognition. In January, China’s Cyberspace Administration was among the first regulatory bodies to establish rules requiring algorithmic transparency and explainability, allowing people to opt out of algorithmic content targeting.
AI policy watchdogs recognized that China’s regulations serve a dual purpose, allowing the government to censor and shape public discourse. However, they said China’s regulations could have some positive influence on how other governments craft regulations and how corporations implement them.
“These regulations will cause private companies to experiment with transparency and explainability and impact assessments. China can help the global conversations around that because they’re moving from principle to practice,” said Merve Hickok, senior research director and chair of the board for the Center for AI and Digital Policy, a nonprofit AI policy and human rights watchdog.
Sheehan also saw value in China’s AI laws. “The irony here is that Chinese leaders get this,” he said. “They are putting out some of the most concrete regulations on algorithms anywhere in the world, and they’ve spent two years going after monopolies in their tech sector. We obviously shouldn’t try to mimic China’s controls on free speech, but we should recognize that strong regulation doesn’t need to be in opposition to innovation.”
Fighting regulations with AI values assumptions
Schmidt, who has the ear of several high-powered U.S. lawmakers and current and former government officials when it comes to AI policy, has vocally advocated against U.S. AI regulations.
In October, when the White House unveiled a nonbinding “Blueprint for an AI Bill of Rights,” he told The Wall Street Journal that the U.S. should not regulate AI yet because “there are too many things that early regulation may prevent from being discovered.” It’s a stance inspired by a common motto in Silicon Valley: “Move fast, break things.” It’s an approach that Schmidt seems to openly espouse when it comes to AI advancement.
“Why don’t we wait until something bad happens and then we can figure out how to regulate it — otherwise, you’re going to slow everybody down. Trust me, China is not busy stopping things because of regulation. They’re starting new things,” he said during an interview last year.
At the same time, Schmidt and others suggest that AI built in China is ethically flawed. Earlier this year during a panel discussion at the Aspen Institute’s Security Forum, when Schmidt referenced Microsoft software that automatically writes programming code, he implied that it would be inherently nefarious had it been built in China: “Now imagine if all of that was being developed in China and not here. What would it mean?” he said.
Since then, Microsoft has been sued for copyright infringement in relation to that software.
“[A lot of people] have this notion that AI that's developed in China somehow embeds a different system of ethics and values that's uniquely Chinese,” said Rebecca Arcesati, an analyst at the Mercator Institute for China Studies.
Listen: Kate Kaye talks with Rebecca Arcesati about the pros and cons of China’s potentially influential AI regulations.
“I fear that sometimes we may risk falling into this Orientalist trap, seeing China as this alien place where things are just different from what we are used to in the West,” Arcesati said.
There’s little indication that a technology’s country of origin automatically instills values — particularly AI technologies that are commonly constructed from borderless, open-source components. For instance, computer vision AI researchers from the U.S. and around the world have resisted requests to consider fairness or prevent discrimination in their work, despite the fact that some of it can be used to build controversial systems such as facial recognition and surveillance tech, deepfake videos, and AI that is meant to detect people’s emotions.
When chairs of one of the world’s most important computer vision AI conferences, held this year in New Orleans, tried to make minor ethics-related changes to research reviews, they were met with resistance from researchers, including some from the U.S. who told Protocol that requiring ethical reviews would hamper their independence and is “not their job.”
It’s very easy to use that approach to deflect any responsibility and accountability for the [things] that other countries are doing, and use this AI race framing for more funding into military or surveillance technologies.
Abigail Coplin, an assistant professor of sociology and science, technology, and society at Vassar College who studies research and development in the AI-enhanced realms of biotech and agro-biotechnology in China, agreed. “There’s a very prevalent discourse right now, definitely in political circles, [about] whether values are intrinsically baked into technologies. I would say I’m a little bit skeptical of that,” Coplin said.
“It’s easy to criticize China or some of the other autocratic governments and shield the U.S. and other democratic countries from criticism,” Hickok said. “Some of it is legitimate criticism, but it’s very easy to use that approach to deflect any responsibility and accountability for the [things] that other countries are doing, and use this AI race framing for more funding into military or surveillance technologies which then find their way into experiments in domestic law enforcement or migration management,” she said.
Ultimately, by planning AI strategy and investment through a national security lens, the U.S. could drown out important efforts such as drug discovery, development of climate change-related technologies, and global AI standards that could benefit from collaboration with China, Arcesati said.
“At the time when this rhetoric of an AI arms race is really crowding out other conversations, global links with Chinese academia and Chinese researchers are fundamental and should be strengthened even further,” Arcesati said. “While countering and pushing back against China’s use of AI in ways incompatible with international human rights law and norms, democracies like the U.S. will also have to find ways not to shut the door on cooperation completely.”
Special series: Are the U.S. and China really in an AI race?
Tuesday, Nov. 1
Wednesday, Nov. 2
Thursday, Nov. 3
What’s the most important element in speeding up the energy transition?

Good afternoon! In today's edition, we asked a group of experts to tell us what they thought would help advance the energy transition most. Questions or comments? Send us a note at braintrust@protocol.com
Peter KoerteSiemens

Chief technology and strategy officer at Siemens
Resource efficiency, energy independence, and supply chain resilience are imperative. But we will not be able to tackle these challenges without digital technologies. Digitalization can not only enable industry to greatly reduce its carbon emissions, it can also give us unprecedented trust and visibility into supply chain carbon footprints.
Today, industry accounts for 20% of global carbon dioxide emissions and more than one-third of global energy consumption. Looking at the carbon footprint of a product, up to 90% are created in the upstream supply chain. Creating transparency is a surprisingly complex task because a product’s carbon footprint can only be determined when the information on all components, raw materials, and transportation routes are complete and precise. That’s why we at Siemens initiated an open and decentralized network for meeting this challenge: the Estainium network. Through this network, companies from a wide range of industries and countries can exchange information about the carbon footprint of their products.
But creating transparency alone is not enough. We need to accelerate digital transformation to drive innovation, resource efficiency, and sustainability in industry. One way to do this is with digital twins to simulate the real-world operation of products and systems. This way, we can enable companies to plan and build digitally before they even start building in the real world and begin to consume resources.
Lila PrestonGeneration Investment Management

Head of growth equity at Generation Investment Management
To speed up the energy transition we need three things, all at the same time.
First, we need to electrify everything. As we modernize and decarbonize the grid, the more we electrify, the faster we can move to a net zero future. This includes mass adoption of heat pumps, electrifying stove tops and rooftops, and our vehicle fleet.
Second, we need to mobilize finance. Investment in the clean economy is expected to exceed $1 trillion annually in the next few years. Yet to hit our 1.5-degree goal, Bloomberg New Energy Finance calculates that investment needs to reach $2 trillion by the middle of this decade, then double again by 2030. To achieve those commitments, we need a system in which all investors integrate climate impact into their decisions, and we need to see innovation in transition financing to deploy more capital against the transformational opportunities.
Third, we need to support the best system-positive entrepreneurs across all sectors. Not just leaders who will build best-in-class products, software, and solutions that people will buy, but also ones that will truly drive the transition to a sustainable future. The magnitude of the climate crisis requires all sectors to be transformed: not only energy, transport, agriculture, food, buildings and cities, but also technology, health care, and finance — the very best entrepreneurs should think about their role in a net zero future and put responsible innovation at the core of their business purpose.
We believe this transition will be the most significant opportunity in economic history, but only if we move fast enough to ensure it is successful, and just.
Donnel BairdBlocPower

CEO at BlocPower
Workforce! We don’t have enough skilled construction workers in America to meet the challenge of climate change! That’s why we are so excited to partner with Mayor Eric Adams to launch the NYC Civilian Climate Corps, to train ex-offenders and vulnerable individuals to green buildings across NYC using cutting-edge technology!
Preeti PandePlug Power

Chief marketing officer at Plug Power
The major challenge for the energy transition is the current premium paid for green energy over traditional sources of energy. Large-scale adoption of green energy is dependent on closing this price gap.
Green hydrogen — produced by pairing an electrolyzer with renewable sources like wind, water, or solar — can displace diesel and other fossil fuels to enable the transition to a low-carbon economy. This transition is taking shape through sustainable solutions and decarbonization of industries such as transportation (aviation and logistics), energy, power, industrial processes, material handling, and data centers.
While government support is crucial in scaling green energy technologies in the near term, innovation is the most important long-term element to successfully transition the energy economy. To achieve the solutions at scale, continual innovation is needed to drive lower costs, increase efficiencies, and improve durability.
One area that requires more innovation is optimizing the material supply chains. With critical materials in short supply, innovation is needed to improve the efficient use of existing precious materials, while also designing solutions for alternative materials that can achieve similar performance.
As these innovations generate greater levels of efficiency, lower material and labor costs, and extend product lifespans, this will drive down the total cost of ownership and provide the attractive economics needed to speed up the energy transition.
Steve WilhiteSchneider Electric

President of sustainability business at Schneider Electric
The complexity of reducing greenhouse gas emissions is a challenge that organizations, governments, and nations are all actively working to address. One of the most fundamental needs to speed the energy transition and reduce emissions from fossil generation is to remove barriers to clean energy adoption. These barriers commonly include:
- transmission limitations
- finance limitations
- market and legislative regulations
- natural resource constraints
While these complex barriers are real, the good news is that our clients are not waiting for these difficult problems to be solved before they act. They are instead using the tools and options available to them — including their influence — today to move forward and accelerate the energy transition.
Alyssa RadeSustain.Life

Chief sustainability officer at Sustain.Life
The most important accelerant in the energy transition isn’t any one strategy, but rather a three-pronged approach: regulatory pressures, economic factors, and tech. Alone, each component is insufficient; only together can they achieve sustainable and permanent progress.
Regulations: The Inflation Reduction Act is a perfect example of utilizing policy to steer market conditions. Take for example the series of incentives for the EV industry including tax credits for domestically mined and produced batteries and assembled cars. This not only makes it economically advantageous to electrify transportation, the country’s highest-emitting sector, but also boosts the domestic manufacturing sector and protects the American economy against global supply chain disruptions.
Economic factors: The war in Ukraine highlights the inextricable link between energy independence and economic stability. With fuel prices at all-time highs, the value of producing reliable domestic, renewable, energy supply is clear.
Tech: U.S. VC investment in climate tech increased 80% between 2020 and 2021 with energy and power experiencing the fastest growth, according to Silicon Valley Bank. Despite an economic downturn, regulatory and economic forces have created an ideal environment for tech development when it comes to funding new projects and R&D. The key here is the reduction and ultimate elimination of green premiums, resulting in new, affordable, and scalable technology.
Ann MooreAVEVA

Global industry principal of power and utilities at AVEVA
Digital innovation is one of the most important tools in the climate action toolbox. Technology is raising the bar on what companies can achieve and proving that profitable and sustainable growth can go hand in hand. Digital technologies can help achieve up to 75% of the United Nations Sustainable Development Goals, including significant reductions in greenhouse gas emissions. Currently, our research shows that 82% of power sector executives are making key business decisions without full data visibility and insights from plants and assets most of the time. Realizing the global goal of an energy transition is going to demand we rebuild value chains and switch to decarbonized operating models. And, as the world is rocked by energy shocks, we need to ensure that agility and resilience are not sacrificed in the rush to decarbonize.
Navigating this transition will require industries to also undergo a digital transformation. With growing energy demand and increasing focus on energy security and supply resiliency, governments and businesses alike have turned to digital strategies to shape the new energy landscape. Integrated data management, artificial intelligence, and cloud technology are three essential pieces of building that digital infrastructure. Collectively these solutions give businesses the ability to predict probable failures and suggest a set of actions to mitigate losses, problems, or underperformance. From a sustainability perspective, they can help to eliminate fugitive emissions, decarbonize supply chains, and vastly reduce the carbon generated as a result of operations ─ all while increasing revenue.
See who's who in the Protocol Braintrust and browse every previous edition by category here (Updated Nov. 8, 2022).