Business Maverick

Business Maverick

US demands TikTok’s Chinese owners sell stakes or face ban

US demands TikTok’s Chinese owners sell stakes or face ban
The logo for ByteDance's TikTok app is shown on a smartphone in Hong Kong, China, on Tuesday, 7 July 2020. (Photo: Lam Yik/Bloomberg)

The US has told TikTok’s owners in China to sell their shares or risk a ban of the popular video-sharing app, people familiar with the matter said, a major escalation in the long-running standoff over privacy concerns around Chinese control of its data and algorithm.

The Treasury Department’s Committee on Foreign Investment in the US made the demand recently to TikTok’s owner, ByteDance, the people said, indicating that the Biden administration has given up on a security review that was intended to blunt potential Chinese influence regarding the app. They asked not to be identified discussing private deliberations.

Under the demand, Cfius would start a process to approve a buyer for TikTok’s US assets, according to one of the people. The objective would be to find a purchaser that could reconstruct the algorithm for the US operations, walling off access by the Chinese to US users and their data, the person said. There are a number of potential buyers who might be interested, including content companies, tech players and private equity, said the person.

At the same time, ByteDance is determining whether to sue, the person said. A forced sale of TikTok’s operations under former President Donald Trump was stayed while the Biden administration reviewed the national security risks posed by the social media app.

TikTok’s leadership has been discussing the possibility of separating from ByteDance, its Chinese parent, to help address concerns about national security risks, Bloomberg News reported. One person said TikTok’s owners could retain some form of ownership but through a passive structure.

“If protecting national security is the objective, divestment doesn’t solve the problem: a change in ownership would not impose any new restrictions on data flows or access,” TikTok spokeswoman Maureen Shanahan said in a statement. “The best way to address concerns about national security is with the transparent, US-based protection of US user data and systems, with robust third-party monitoring, vetting, and verification, which we are already implementing.”

Under the Cfius security review, the company agreed last year to implement a number of changes in a plan it calls Project Texas. The proposal includes bringing in American technology giant Oracle to host US user data and review its software, and appointing a three-person government-approved oversight board. Many of the moves are already under way.

The Cfius divestiture demand signals that US regulators don’t think Project Texas goes far enough to address security concerns. The administration was unconvinced by TikTok’s proposal to add layers of oversight and separation from ByteDance, according to another person familiar with the matter. 

Its administration’s stance would likely face renewed legal challenges — just as a similar attempted ban did under Trump. His Treasury secretary, Steven Mnuchin, oversaw an agreement under which ByteDance would sell its American assets to the Oracle-led group, but the sale was delayed after the Chinese company scored a series of legal victories. 

Early on, the Biden administration asked a federal judge to pause a lawsuit over that ban while it reviewed its options.

Still unclear is how Beijing would respond to a forced sale by TikTok’s owner, the world’s largest startup at a valuation of $220-billion and considered one of China’s highest profile companies abroad. The government in the past has indicated it would scrutinise such a deal carefully, for fear of data or algorithms ending up in foreign hands. 

TikTok itself could be valued at $40-billion to $50-billion based on social media multiples and other factors, according to Bloomberg Intelligence analysts Mandeep Singh and Damian Reimertz. TikTok has poured $1.5-billion into Project Texas, but the details have been met with scepticism on Capitol Hill as well.

The move will only add to strain in the US relationship with China at a time when the two countries are already clashing over issues ranging from the fate of Taiwan to export controls of microchips to China’s strengthening partnership with Russia.

The US National Security Council and the Treasury Department declined to comment on Wednesday night. The Justice Department declined to comment. The Wall Street Journal reported the Biden administration’s demand earlier Wednesday.

US officials have been airing longstanding national security concerns about TikTok. FBI director Christopher Wray told legislators in November that China’s government could use the app to control millions of users’ data or software, and its recommendation algorithm — which determines which videos users will see next — “could be used for influence operations if they so choose”.

“Under Chinese law, Chinese companies are required to essentially — and I’m going to shorthand here — basically do whatever the Chinese government wants them to do in terms of sharing information or serving as a tool of the Chinese government,” Wray told the House Homeland Security Committee. “That’s plenty of reason by itself to be extremely concerned.”

The issue had also become a focus of US lawmakers as part of intensified hawkishness against China. Several lawmakers had proposed bills that would ban TikTok in the US or force its sale.

TikTok CEO Shou Chew has been asked to testify before a House committee next week about the app’s data privacy and security practices, and the company’s relationship with the Chinese Communist Party. BM/DM

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