A new White House “final rule” announced Monday aims to shut down the flow of U.S. venture capital and other investment funds into Chinese technology that poses a national security risk, such as quantum computers, artificial intelligence and advanced microelectronics, senior White House officials said.
The rule is intended as a guide to implement an executive order the White House put out last August, ordering the Treasury Department and other relevant agencies to identify categories of investment in Chinese tech that could pose a threat to the United States. Today’s rule “prohibits U.S. persons from engaging in certain transactions involving semiconductors, quantum and artificial intelligence. And second, it requires U.S. persons to notify treasury of certain other transactions involving semiconductors and artificial intelligence,” a senior White House official told reporters ahead of the release.
The rule bars investments in any Chinese company that is developing or scaling quantum computers or networks that could undermine encryption. That follows the publication of multiple research papers out of China purporting to show that Chinese advancements in quantum computing have rendered key U.S. encryption standards vulnerable, such as the 2,048-bit RSA encryption system used by banking systems and software makers the world over.
Experts have pushed back on those papers’ claims, but the White House says the threat posed by China’s ongoing quantum work remains very real, even if it hasn’t yet resulted in encryption-destroying capabilities.
“These technologies can be used for advanced code breaking, the development of the next generation military applications, or offensive cyber operations,” said a senior White House official.
AI is another key focus area of the new rule. Chinese investments in AI include areas like facial recognition to target minority groups, deep fakes to spread disinformation, and autonomous weapons.
How big a problem is U.S. investment in Chinese military tech? A February 2023 paper from the Center for Security and Emerging Technologies said that between 2015 and 2021, U.S. investors pumped $40.2 billion into 251 Chinese AI companies, accounting for 37 percent of the $110 billion raised by all Chinese companies working on AI.
According to CSET, “167 U.S. investors participated in 401 investment transactions—or 17 percent of 2,299 global investment transactions—into Chinese AI companies.” The vast majority of those investments, more than 90 percent, came from venture capital.
“I think if you think about those sets of facts and scenarios, that’s the kind of situation, that when it comes to certain artificial intelligence capable of impacting our national security, from a military intelligence, cyber, other related perspective, that’s what we’re concerned about,” a senior White House official said.
Said another Senior White House official, a lot of the venture capital investment that has gone to Chinese startups went to companies that eventually ended up on the Treasury Department’s “Entity List” of companies, which restricts some types of U.S. investments.
“As we were looking at some case studies to inform the development of this executive order, and the regulation actually was focused on cyber security… we saw a number of VC investments directly into firms working on cybersecurity that ended up on the Entity List for working with Chinese military and intelligence services.”