When the TikTok USDS deal was introduced underneath the Defending Individuals from Overseas Adversary Managed Functions Act, it was framed as a clear decision to years of national-security issues expressed by many within the US. TikTok was to be reborn as a U.S. firm, with U.S. management, and international affect neutralized. However in the event you look previous the press language and concentrate on incentives, possession, and legislation, a special image emerges.
TikTok’s “pressured sale” underneath the PAFACA (to not be confused with COVFEFE) traces again to years of U.S. national-security concern that TikTok’s proprietor ByteDance—one of many Folks’s Republic of China’s largest tech firms based by Zhang Yiming amongst China’s richest males and a self-described member of the ruling Chinese language Communist Social gathering—could possibly be compelled underneath PRC legislation to share knowledge or to permit the CCP to affect the platform’s operations. TikTok and its lobbyists repeatedly tried to deflect the eye of regulators by means of measures like U.S. knowledge localization and third-party oversight (e.g., “Mission Texas”). Nevertheless, lawmakers concluded that aggressive structural separation—not guarantees which no person was shopping for—was wanted. Congress then handed, and President Biden signed, laws requiring both divestiture of “international adversary managed” apps like TikTok or face a complete a U.S. ban. Dealing with app-store and infrastructure cutoff danger, TikTok and ByteDance pursued a restructuring to maintain U.S. operations alive and keep an exit to US monetary markets.
Lawmakers’ issues had been actual and apparent. By buying and selling on social media habit, TikTok can compile wealthy behavioral profiles—particularly on minors—by combining what customers watch, like, share, search, linger on, and who they work together with, together with gadget identifiers, community knowledge, and (the place permitted) location indicators. At scale, that sort of telemetry can be utilized to deduce vulnerabilities and goal susceptibility. For the navy, the priority just isn’t solely “TikTok tracks troop actions,” but in addition that social media posts, aggregated location and social-graph indicators throughout a whole lot of thousands and thousands of customers may reveal patterns round bases, deployments, routines, or delicate communities—therefore warnings that harvested info may “presumably even reveal troop actions,” therefore TikTok’s longstanding bans on government-issued gadgets.
These issues shot by means of authorities circles whereas the Tok turned ubiquitous and thoroughly engineered social media habit gripped the US, and certainly the West. (TikTok simply this week settled out of the most important social media litigation in historical past.) Congress was very involved and with good motive—Rep. Mike Gallagher demanded that TikTok “Break up with the Chinese language Communist Social gathering (CCP) or lose entry to your American customers.” Rep. Cathy McMorris Rodgers stated the invoice would “stop international adversaries, corresponding to China, from surveilling and manipulating the American individuals.” Sen. Pete Ricketts warned “If the Chinese language Communist Social gathering is refusing to let ByteDance promote TikTok… they don’t need [control of] these algorithms coming to America.”
And naturally, who can neglect a traditional Marsha line from Senator Marsha Blackburn. I don’t know say “Bless your coronary heart” in Mandarin, however in English it’s “we heard you had been opening a TikTok headquarters in Nashville and what you’re in all probability going to search out is that the welcome mat isn’t going to be rolled out for you in Nashville.”
So there’s that.
TikTok can compile wealthy behavioral profiles—particularly on minors—by combining what customers publish, watch, like, share, search, linger on, and who they work together with, together with gadget identifiers, community knowledge, and site indicators. At scale, that sort of telemetry can be utilized to deduce vulnerabilities and focusing on susceptibility. These exploits have actual strategic worth. With the CCP’s curiosity in undermining US pursuits and particularly blunting the navy, the priority just isn’t essentially that “the CCP tracks troop actions” instantly (though who actually is aware of), however that aggregated location and social-graph indicators may reveal patterns round bases, deployments, routines, or delicate communities—therefore warnings that harvested info may “presumably even reveal troop actions,” and the TikTok’s longstanding bans on government-issued gadgets. You recognize, sort of like in the event you flew a balloon throughout the CONUS. navy bases.
It should even be stated that if you watch TikTok’s poor efficiency earlier than Congress at hearings, it actually got here right down to a easy query of belief. I feel no person believed a phrase they stated and the TikTok witnesses exuded a sort of vanity that merely doesn’t work when Congress has a bit within the enamel. Full disclosure, I’ve by no means believed a phrase they stated and have at all times been troubled that artists had been unwittingly main their followers to the social media abattoir.
I’ve been writing about TikTok for years, and never as a result of it was modern or politically straightforward. After a traditional MTP-style presentation on the MusicBiz convention in 2020 the place I laid out all the problems with TikTok and the CCP, one way or the other I by no means obtained invited again. Again in 2020, I warned that “you don’t want proof of misuse to have a nationwide safety drawback—you solely want authorized leverage and opacity.” I additionally argued that “knowledge localization doesn’t clear up a governance drawback when the mother or father firm [Bytedance] stays topic to international nationwide safety legislation,” and that specializing in the placement of knowledge storage missed “the extra vital query of who controls the system that decides what individuals see.” The pressured sale didn’t vindicate anyone prediction a lot as verify the essential level: construction issues greater than assurances, and management issues greater than rhetoric. I nonetheless have that concern after all of the sound and fury.
There’s additionally a authentic constitutional concern with PAFACA: a government-mandated divestiture dangers resembling a Fifth Modification taking if structured to coerce a sale with out simply compensation. PAFACA deserved severe scrutiny even given the authentic nationwide safety issues. Had the mud settled with the CCP suing the U.S. authorities underneath a takings concept, it might have been each too cute by half and completely on-brand—an instance of the CCP’s “unrestricted warfare” method to lawfare, exploiting Western authorized norms strategically. (The CCP’s main navy technique doctrine, Unrestricted Warfare poses terrorism (and “terror-like” financial and data assaults corresponding to TikTok’s potential use) as a part of a spectrum of uneven strategies that may weaken a technologically superior energy just like the US.)
Certainly, TikTok did problem the divest-or-ban statute within the Supreme Courtroom and mounted a SOPA-style marketing campaign that largely failed. TikTok argued {that a} government-mandated pressured sale violated the First Modification rights of its customers and exceeded Congress’s national-security authority. The Supreme Courtroom upheld (unanimously) the PAFACA legislation, concluding that Congress permissibly focused foreign-adversary management for national-security causes quite than suppressing speech, and that the ensuing burden on expression didn’t violate the First Modification. The case in the end underscored how far national-security rationales can slender judicial urge for food to second-guess political branches in foreign-adversary disputes irrespective of what number of high-priced attorneys, lobbyists and spin medical doctors line up at your desk. And, boy, did they’ve them. I feel at one level near half the shilleries in DC had been on the PRC payroll.
In that sense, the TikTok deal itself might show to be one other illustration of Grasp Solar’s maxim about successful with out combating, i.e., attaining strategic benefit not by means of open confrontation, however by shaping the terrain, the principles, and the opponent’s decisions prematurely—and maybe most significantly on this case…deception.
However the deal we obtained is the deal we’ve so let’s see what we even have achieved (or how unhealthy we obtained hosed this time). As I typically say, it’s a rattling good factor we by no means let one other MTV construct a enterprise on our backs.
The Three Pillars of TikTok
TikTok USDS is the U.S.-domiciled mother or father holding firm for TikTok’s American operations, created to adjust to the divest-or-ban legislation. It’s majority owned by U.S. buyers, with ByteDance retaining a non-controlling minority stake (reported round 19.9%) and licensing core advice expertise to the U.S. enterprise. (Beneath U.S. GAAP, 20%+ possession is a standard rebuttable presumption of “vital affect,” which may set off much less favorable accounting and extra scrutiny of the connection. Staying beneath 20% helps preserve the stake trying purely passive which is sort of a joke contemplating Byte nonetheless owns the important thing asset. And we nonetheless must ask if BD (or CCP) has any particular voting rights (“golden share”), board management, dual-class inventory, and so on.)
The deal seems to relaxation on three pillars—and brought collectively, they level to one thing nearer to an ouroboros than a divestment: the construction consumes itself, leaving ByteDance, and by extension the PRC, ready that’s materially completely different on paper however strikingly comparable in observe.
Pillar One: ByteDance Retains the Crown Jewel
The primary and most vital level is the only: ByteDance retains possession of TikTok’s advice algorithm.
That algorithm just isn’t an ancillary asset. It is TikTok’s product. Engagement, advert pricing, cultural attain, and political concern all move from it. Promoting TikTok with out promoting the algorithm is like promoting a automobile with out the engine and calling it a divestiture as a result of the client controls the steering wheel.
Public reporting strongly suggests the answer was not a sale of the algorithm, however a license or managed use association. TikTok USDS might personal U.S.-specific “tweaks”—content material moderation parameters, weighting changes, compliance filters—however these sit on prime of a core system ByteDance nonetheless owns and controls.
That distinction issues, as a result of possession determines who in the end controls:
- architectural adjustments,
- main updates,
- retraining methodology,
- and long-term evolution of the system.
In different phrases, the cap desk modified, however the swap didn’t essentially transfer.
Pillar Two: IPO Optionality With out Instant Disclosure
The second pillar is liquidity. ByteDance didn’t battle this battle merely to maintain working TikTok within the U.S.; it fought to protect entry to an exit in US monetary markets.
The TikTok USDS construction clearly retains open a path to an eventual IPO. Ready a 12 months or two just isn’t a draw back. There’s a crowded IPO pipeline already—AI platforms, infrastructure performs, defense-adjacent tech—and time helps normalize the construction politically and operationally.
However right here’s the catch: an IPO collapses ambiguity.
A public S-1 must disclose, in plain English:
- who owns the algorithm,
- whether or not TikTok USDS owns it or licenses it,
- the fabric phrases of any license,
- and the dangers related to dependence on a international associated occasion.
That is the place previous Obama-era China-listing methods now not work. Primarily based on what I’ve learn, TikTok USDS would doubtless be a U.S. issuer with a U.S.-inspectable auditor. ByteDance can’t lean on the previous HFCAA/PCAOB opacity playbook, as a result of HFCAA is about audit entry—not about shielding a related-party licensor from scrutiny.
ByteDance certainly is aware of this. Which is why the construction buys time, not aid from transparency. The IPO is feasible—however solely when the market is able to worth the chance that the politics are at present papering over.
Pillar Three: PRC Legislation because the Final Escape Hatch
The third pillar is the quiet one, however it might be probably the most consequential: PRC legislation as an exterior constraint. So long as ByteDance owns the algorithm, PRC legislation is at all times ready within the wings. These legal guidelines embody:
Export-control guidelines on advice algorithms.
Knowledge safety and cross-border switch regimes.
Nationwide safety and intelligence legal guidelines that impose duties on PRC firms and residents.
Collectively, they kind a common reply to each onerous query:
- Why can’t the algorithm be bought? PRC export controls.
- Why can’t sure technical particulars be disclosed? PRC knowledge legal guidelines.
- Why can’t ByteDance absolutely disengage? PRC authorized obligations.
This isn’t hypothetical. It’s the identical concern that animated the unique TikTok controversy, simply reframed by means of contracts as an alternative of possession.
So whereas TikTok USDS could also be auditable, ruled by a U.S. board, and compliant with U.S. operational guidelines, the second oversight turns upstream—towards the algorithm, updates, or technical dependencies—PRC legislation reenters the image.
The result’s a U.S. firm that’s clear on the edges and opaque on the core. My hunch is that this sovereign management danger is clearly spelled out in any license doc and can get disclosed in an IPO.
Placing It Collectively: Divestment of Optics, Not Management
Taken collectively, the three pillars inform a constant story:
- ByteDance retains the algorithm.
- ByteDance will get paid and retains an exit.
- PRC legislation stays out there to constrain switch, disclosure, or cooperation.
- U.S. regulators oversee the wrapper, not the engine.
That doesn’t imply ByteDance is in precisely the identical authorized place as earlier than. Governance and possession optics have modified. Some types of U.S. oversight are actual. However by way of sensible management leverage, ByteDance—and by extension Beijing—could also be uncomfortably near the place they began.
The international management drawback that launched the TikTok saga was by no means nearly fairness. It was about who controls the system that shapes consideration, tradition, and data move. If that system stays owned upstream, the remainder is scaffolding.
The Ouroboros Second
For this reason Congress is more likely to be livid as soon as the implications sink in.
The story started with issues about PRC management.
It moved by means of years of negotiation and political theater.
It ends with an “authorised construction” that will depart PRC leverage intact—simply expressed by means of licenses, contracts, and sovereign legislation quite than a majority stake.
The divestment eats its personal tail.
Or put extra bluntly: the sale might have modified the paperwork, nevertheless it didn’t essentially change who can say no when it issues most. And that’s management.
As we watch the Folks’s Liberation Military practising its invasion of Taiwan, it’s not rocket science to ask how all it will look if the PRC invades Taiwan tomorrow and America involves Taiwan’s protection. In a U.S.–PRC capturing struggle, TikTok USDS would doubtless face both a speedy U.S. distribution ban on national-security grounds (already blessed by SCOTUS), a pressured clean-room severance from ByteDance’s algorithm and companies, or an operational breakdown if PRC legislation or wartime measures disrupt the licensed expertise the platform depends upon.
The TikTok “sale” seems to be much less like a divestiture of management than a divestiture of optics. ByteDance might have decreased its fairness stake and ceded governance formalities, but when it retained possession of the advice algorithm and the U.S. firm stays depending on ByteDance by license, then ByteDance’s—and by extension the CCP’s—authorized leverage over ByteDance—can stay in a largely comparable management place in observe.
TikTok USDS might change the cap desk, nevertheless it doesn’t essentially change the sovereign. So long as ByteDance owns the algorithm and PRC legislation may be invoked to limit switch, disclosure, or cooperation with out CCP approval, the tip state dangers trying eerily acquainted: a U.S.-branded wrapper round a system Beijing can nonetheless affect on the vital junctions. The entire saga begins with bitter complaints in Congress about “international management,” ends with “authorised construction,” however largely lands proper again the place it started—an ouroboros of governance optics swallowing itself.
Certainly I’m lacking one thing.
[This post first appeared on MusicTech.Solutions]
