Authored by Mike Shedlock via MishTalk.com,

The US has blocked export of Nvdia chips to China. But where there’s profit, there’s a way.

Sanctions Fail Again and Again

The Wall Street Journal reports China’s AI Engineers Are Secretly Accessing Banned Nvidia Chips

Chinese artificial-intelligence developers have found a way to use the most advanced American chips without bringing them to China.

One entrepreneur helping Chinese companies overcome the hurdles is Derek Aw, a former bitcoin miner. He persuaded investors in Dubai and the U.S. to fund the purchase of AI servers housing Nvidia’s powerful H100 chips.

In June, Aw’s company loaded more than 300 servers with the chips into a data center in Brisbane, Australia. Three weeks later, the servers began processing AI algorithms for a company in Beijing.

“There is demand. There is profit. Naturally someone will provide the supply,” Aw said.

Renting far away computing power is nothing new, and many global companies shuffle data around the world using U.S. companies’ services such as Google Cloud, Microsoft Azure and Amazon Web Services. However, those companies, like banks, have “Know Your Customer” policies that may make it difficult for some Chinese customers to obtain the most advanced computing power.

The buyers and sellers of computing power and the middlemen connecting them aren’t breaking any laws, lawyers familiar with U.S. sanctions say. Washington has targeted exports of advanced chips, equipment and technology, but cloud companies say the export rules don’t restrict Chinese companies or their foreign affiliates from accessing U.S. cloud services using Nvidia chips.

Buyers and sellers of computing power use a “smart contract” in which the terms are set in a publicly accessible digital record book. The parties to the contract are identified only by a series of letters and numbers and the buyer pays with cryptocurrency.

The process extends the anonymity of cryptocurrency to the contract itself, with both using the digital record-keeping technology known as blockchain. Aw said even he might not know the real identity of the buyer. As a further mask, he and others said Chinese AI companies often make transactions through subsidiaries in Singapore or elsewhere.

One decentralized GPU provider with more than 40,000 chips in its network, io.net, advertises in its user guide that it doesn’t impose know-your-customer restrictions. This “allows users to access GPU supply and deploy clusters in less than 90 seconds,” it says.

Meanwhile, Aw is raising more money 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.

“No one is breaking the export controls,” Aw said. “Legally speaking, they are Singapore companies.”

Know Your Customer’s Customer’s Customer

China sets up an AI company in Singapore.

AI developers buy cloud time through a subsidiary that further masks the operation by paying in Bitcoin.

In turn, the subsidiary buys time from a company Dubai or Singapore that hosts the servers.

US politicians outraged. But some of us are amused knowing full well that sanctions don’t work.

And instead of cloud profits going to US corporations, the profits go to Saudi Arabia, Singapore, Dubai, and South Korea.

Only Amazon is forced to “know your customer”.

Flashback Lesson

Didn’t you declare victory on these sanctions?

Here’s the deal: China and India will always buy. And they should. It’s in their best interest.

— Mike “Mish” Shedlock (@MishGEA) September 18, 2023

Massive Failure of Sanctions

September 19, 2023: Lesson of the Day: Sanctions Don’t Work Because They Create New Markets

December 29, 2023: How Russia Makes a Mockery of US Sanctions in One Picture

February 19, 2024: US Impounds Thousands of German Vehicles Over One Tiny Part Made in China

May 21, 2024: Another Sanction Failure: The US Blacklisted Xiaomi Three Years Ago Now it Makes EVs

June 11, 2024: Russia to Export Coal to India Via Iran. It’s a 4 Alarm Bells Fire

Sanctions don’t work but they do drive up prices and/or create competition for US companies.

The beneficiary is either the sanctioned company, as in the case of China’s EV maker Xiaomi, or intermediaries as in today’s example.

Biden Eases Sanctions on Venezuela, Blocks Rare Earth Mining in Alaska

On April 21, 2024 I noted Biden Eases Sanctions on Venezuela, Blocks Rare Earth Mining in Alaska

What a hoot. How’s that great tradeoff working out?

Since we know the answer, here’s our real question of the day: Is robin Brooks finally ready to throw in the towel on the effectiveness of sanctions?

If he responds, I will add an addendum.