China Secretly Accesses Nvdia Microchips by Leasing Computers

Despite the US blocking the export of Nvdia chips to China, Chinese artificial-intelligence developers have found a workaround. They are accessing these advanced American chips without bringing them into China.

Sanctions Prove Ineffective

The Wall Street Journal has reported that Chinese AI engineers are covertly accessing prohibited Nvidia chips. Derek Aw, a former bitcoin miner, has been instrumental in this process. Aw convinced investors in Dubai and the US to finance the acquisition of AI servers that house Nvidia's powerful H100 chips. In June, Aw's company installed these chips into over 300 servers in a Brisbane, Australia data center. Within three weeks, these servers started processing AI algorithms for a Beijing company.

Remote Computing Power Rental

The practice of renting remote computing power is not novel. Many global companies transfer data globally using services from US companies like Google Cloud, Microsoft Azure, and Amazon Web Services. However, these companies have "Know Your Customer" policies that may hinder some Chinese customers from acquiring the most advanced computing power.

Legal Transactions

Lawyers familiar with US sanctions state that the buyers and sellers of computing power, and the intermediaries connecting them, are not breaking any laws. While Washington has targeted exports of advanced chips, equipment, and technology, cloud companies argue that the export rules do not prevent Chinese companies or their foreign affiliates from accessing US cloud services using Nvidia chips.

Smart Contracts and Cryptocurrency

The parties involved in these transactions use a "smart contract" where the terms are set in a publicly accessible digital record book. The parties are identified only by a series of letters and numbers, and the buyer makes payments with cryptocurrency. This process extends the anonymity of cryptocurrency to the contract itself, using the digital record-keeping technology known as blockchain.

Subsidiaries and Anonymity

Chinese AI companies often conduct transactions through subsidiaries in Singapore or elsewhere to further mask their identities. One decentralized GPU provider, io.net, with more than 40,000 chips in its network, advertises that it does not impose know-your-customer restrictions. This allows users to access GPU supply and deploy clusters in less than 90 seconds.

Future Plans

Aw is currently raising more funds from a group of investors in Saudi Arabia and South Korea. They plan to build a cluster of Nvidia's latest Blackwell chips for another Singapore company with a Chinese parent company.

Sanctions and Their Impact

Despite the outrage of US politicians, the reality is that sanctions often fail to achieve their intended effects. Instead of cloud profits going to US corporations, the profits are redirected to Saudi Arabia, Singapore, Dubai, and South Korea. Only Amazon is forced to "know your customer".

Historical Failures of Sanctions

There have been several instances of sanctions failing to achieve their intended effects. For example, China and India continue to buy despite sanctions because it is in their best interest. Sanctions often result in the creation of new markets, drive up prices, and create competition for US companies. The beneficiaries are often the sanctioned company or intermediaries.

Recent Sanctions and Their Consequences

There have been several recent instances of sanctions and their consequences. For example, in April 2024, President Biden eased sanctions on Venezuela and blocked rare earth mining in Alaska. The question that arises is whether these sanctions have been effective.

Bottom Line

Sanctions often fail to achieve their intended effects and can sometimes result in unintended consequences. The case of China covertly accessing Nvidia chips is a prime example of this. What are your thoughts on this issue? Do you think sanctions are an effective tool for achieving political objectives? Share this article with your friends and let's get the conversation started. Remember, you can sign up for the Daily Briefing, which is available every day at 6pm.