Defense Tech in Focus As Iran Conflict Widens

18:16Sam Liccardo:I mean, realistically, are you able to have the time, the insight, the focus at the moment when we've got an erupting war with Iran and indeed, well, government shutdown? How effective can you be at this moment, Congress?

18:29Caroline Hyde:Well, I'm not going to speak for Congress because, frankly, as you know, if you ever made a bet on Congress not getting anything done, you win 99 times out of 100.

18:39Sam Liccardo:Predictions markets are for that. Yeah, yeah, they're doing pretty well.

18:41Caroline Hyde:But I will say this week I'll be introducing a provision in what's called the Defense Productions Act, really to prevent any federal agency from retaliating against companies like Anthropoc when they propose reasonable limits on the deployment of their technology. Technology is obviously a wonderful thing. We know it has enormous risks. We ought to take the cues from industry when industry tells us these risks are too great. Let's draw lines.

19:08Sam Liccardo:What do you think will be the support of that bill across both aisles?

19:13Caroline Hyde:We'll be discussing it this week in the House Financial Services Committee where we're having a markup. I'm still having those conversations with my colleagues.

19:22Sam Liccardo:OK, so maybe we can find some support that it shouldn't be down. There shouldn't be retribution. There shouldn't be sort of unprecedented moves where you deem a company a homegrown domestic champion as a supply risk in some way. But when you think more broadly about AI regulation in the hands of Congress or in the hands of the executive right now, are you comfortable with the amount of executive orders that have been deemed around AI, the way in which the administration has had to take maybe the steps necessary if the Congress void is still there?

19:51Caroline Hyde:Well, I know this president is not unique in using executive orders where Congress is failing to act. The way in which these executive orders have been deployed are deeply problematic. And certainly we've seen in many cases quite unconstitutional. Congress needs a step up, and that requires the majority party to do its job. That is to defend the prerogatives under Article 1 of the Constitution where Congress has authority. and we've seen a host of areas from tariffs, certainly to AI, where Congress has simply not been stepping up and allowing this president to take too much of the turf. There's a reason why we want Congress to be deciding this.

20:29Caroline Hyde:These are issues that have massive impacts in many communities that are diverse, communities that are simply not benefiting from AI as much as my community in Silicon Valley might be. That's why you need to have a national conversation.

20:44Sam Liccardo:You were having a national conversation before the conversation became much more of war in the Middle East and war with Iran. You were talking about how we shouldn't see Congress just slam the brakes on AI innovation. But equally, they shouldn't accelerate. There should be a way of grabbing the steering wheel is the way you wrote it in an op-ed. Can we get some sort of bipartisan approach to grabbing a steering wheel in when you say so many states are affected in different ways by AI?

21:13Caroline Hyde:I'd like to think we can. Look, there's a lot of fears right now around AI, around loss of jobs, around impacts on utility bills. There are opportunities for us to move together. For example, we know these hyperscalers need speed. Let's give them federal permits, enable them to accelerate if they're keeping ratepayers whole and protecting them from these utility, the risk of higher prices on their utility bills and investing in batteries and the kinds of technology we know that will be sustainable rather than simply pulling more natural gas and coal in. You know, for example, on jobs, there are things that we can do that are bipartisan that can incentivize companies to invest in community colleges and local state universities to upskill and reskill.

21:58Caroline Hyde:These are not necessarily partisan notions. This is a time for us to be thinking more creatively across the aisle on these kinds of solutions. We don't have the kind of administration now in office that is particularly bipartisan. And so it's really going to have to come from ground up.

22:16Sam Liccardo:You mentioned social media. And I think in many ways, people have felt that there's been a void of lawmaking around social media because there is so much nuance to much of this. Is there sometimes too much nuance when it comes to the likes of impact by the Pentagon's decisions on mass surveillance, on issues of autonomous weaponry, that really laws can't be made that can keep up briefly?

22:41Caroline Hyde:It's fair to say that this is incredibly complex and you can't simply declare amateur hour and start to announce edicts that are going to apply broadly across multiple industries where the impacts may be very different. You know, what I have been proposing and will be coming out with legislation soon is how, for example, on AI, we can essentially enable industry experts, academic experts, to be able to establish what those best practices are in an industry, allow industry to reach those best practices rather than having some kind of monolithic edict come from Congress or the administration. Government's not going to get it right.

23:21Caroline Hyde:We have to acknowledge that. This is moving too fast. We need to rely on the best thinking in the industry to establish what the best practices are and then mandate that if folks can reach those, they can have the benefits, for example, of preemption. If they don't, then they're subjected to the edicts of 50 different states.

23:41Sam Liccardo:We appreciate you stopping by.

23:42Caroline Hyde:It's great to be with you.

23:44Sam Liccardo:Here in New York, Representative Sam Licato, who represents the heart of Silicon Valley and much more in California. Now coming up, Bitcoin. It shakes off investor caution as Middle East tensions, they rattle global markets. We'll bring you more market impact next. This is Bloomberg Tech.

24:26Caroline Hyde:days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world.

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25:21Sam Liccardo:Bitcoin staging a comeback nearing$70 ,000 levels after the US and Israeli attacks on Iran shook investor confidence over the weekend. Here with the latest is Bloomberg cross-asset reporter Isabel Lee. They shape people. We're thinking of a world of war. That is not something to take lightly, but we think about the assets impacted. How is Bitcoin managing to rally through this? Definitely behaving like a risk asset. I feel like, I mean, when you see a big pullback like that, it's eventually going to bounce back. It's now higher by around 6 % after dropping as much as 63 ,000 over the weekend. Other less liquid smaller coins are also in the green, higher by 6%, like Ether.

25:55Sam Liccardo:The thing I love about cryptocurrency is it trades 24-7. And you really can see and use it as a risk sentiment when markets are closed. And now that we see U.S. stocks open, you see worries about an inflation resurgence. For instance, bonds are slumping. Traders are trimming their Fed rate cuts. Haven assets are surging. Dollar, gold, oil, of course. And interestingly, higher oil prices will actually weigh on crypto prices because crypto prices are behaving like tech stocks and risk assets. And of course, those are sensitive to Fed rate moves. So everything is just interconnected. And I find that very interesting.

26:25Sam Liccardo:And on top of all of this, it's a busy week for U.S. eco data. We have non-farm payrolls. We also have unemployment rate. And now for now, we have more questions than answers. We have President Trump saying that the attacks could last a few weeks. So I think investors are just really preparing themselves for the tail risk events and preparing for worst case outcomes. But at least for now, Bitcoin is nearing 70 ,000. You keep us prepared, Isabelle Lee. We appreciate it. On all things of the market's reaction to a story that continues, because coming up, we will be joined by American Enterprise Institute senior fellow, Corey Schocke, on all things defense tech, geopolitics, so much more.

27:00Sam Liccardo:This is Bloomberg Tech.

27:14Sam Liccardo:welcome back to bloomberg tech we take a look at these markets markets that are currently reacting to the news over the course of the weekend war in the middle east war with iran we're currently down on the nasdaq 100 by some five tenths percent coming back into lows having tried to bounce into the green on the broader indices nvidia is actually up more than two percent because deals are still getting done from an M &A perspective or from an investment perspective. This is, as we see, NVIDIA making$4 billion investment in data center optics companies. That's Coherent and Lumentum. Their stocks surge.

27:45Sam Liccardo:Palantir, Defense Tech. There is buying of this name for obvious reasons on the day. We're up almost 6%. But CrowdStrike is also interesting. Look, our great colleagues at Bloomberg Intelligence, like Mandeep Singh, putting out really great notes talking about how Palantir, of course, is going to see buying amid geopolitical tensions. We'll also see tailwinds for security spending, with the larger companies such as CrowdStrike Palo Alto likely to see some focus amid concerns about cyber attacks. We'll get into that in a little bit. But let's head back now to D.C., where it's notable that the Pentagon is shifting AI providers after reaching a deal with OpenAI to deploy its models within the department's classified network.

28:23Sam Liccardo:Bloomberg Senior Tech Editor Mike Sheppard joins us on what is an extraordinary story that intertwines with a geopolitical story. How significant is this move that Sam Altman goes where Dario Amadei won't?

28:36Caroline Hyde:Well, it's not just significant that it happened. It's also, Caro, that it happened so quickly after the Pentagon decided that it would walk away from its relationship with Anthropic, which had been in place for roughly a year. And Anthropic had really worked itself into the classified space that is crucial for the Pentagon, being able to deploy artificial intelligence in some fashion during critical operations, including combat. And Anthropix products have been used by Palantir as part of this so-called MAVEN system that colloquially might be thought of as windows for war, where battlefield commanders can have access to information and have it interpreted and processed and analyzed and assessed in a much faster fashion and presented to them.

29:26Caroline Hyde:Now, what this means is that within six months, the Pentagon must transition to a new provider. And OpenAI, an arch rival to Anthropic, is stepping in. And what they are saying also is that they are willing to take the terms that Anthropic thought were unacceptable, terms that OpenAI says still respects its own guidelines when it comes to two key areas, and that is mass surveillance of Americans and also deployment of fully autonomous weapons. OpenAI says that the contract and the relationship with the Pentagon are strong enough that those two requirements by the firm are respected. Anthropic, from its standpoint, did not see the same in the contract language.

30:09Caroline Hyde:And it'll be interesting to see how this unfolds, Carol, because the U.S. government has declared Anthropic a supply chain risk and also ordered it off U.S. government agency networks elsewhere.

30:22Sam Liccardo:And Treasury Secretary Scott Bessent talking this morning saying that the Treasury Department is terminating all use of Anthropic products. He's following President Trump's direction on Anthropic. But of course, this is as the consumer moves in a different direction, Mike. We've actually seen Anthropic in many ways knocked offline for consumers because so many people were demanding the product and downloading it. And maybe as some sort of pushback to open AI, there's calls to cancel GPT on the Internet.

30:50Caroline Hyde:Well, that's right, Carol. We are seeing some of this popular sentiment swell in Anthropik's favor. Certainly online, there is a lot of applause in favor of Dario Amadei and what is seen as a principled stance by many against the Pentagon, against the administration that, you know, look, if you thought that you couldn't do business with Anthropic, why not just cancel the contract declaring them a supply chain risk was seen by many as going a step too far and being vindictive. It's also important to remember that Claude's products are gaining popularity because many see them as quite good. And we have talked in this space about how much Claude is threatening to disrupt other industries, such as law, such as financial services, wealth management, you name it.

31:38Caroline Hyde:And the tools that Claude offers really have some benefits. And that is yet another reason in addition to perhaps this populist sentiment swing.

31:47Sam Liccardo:Mike Shepard, always on the news. We appreciate it so much from D.C. Let's bring in Corey Schrocking, Senior Fellow and Director of Foreign and Defense Policy Studies at the American Enterprise Institute. You've been thinking about really the Pentagon's reaction to this. Just talk us through your thinking as to whether the step of banning anthropic from the supply chain in this way is the right step.

32:10Caroline Hyde:It's a petulant reaction by the secretary of defense that's likely to turn out to be advantageous to anthropic. But it's going to be bad for the defense department and bad for the security of the United States. The idea that you could either nationalize or blacklist a leading American company is outrageous, and it's going to discourage other leading-edge tech firms from being willing to expose their business by participating in the defense ecosystem.

32:44Sam Liccardo:OK, there's going to be immediate shock, as you say, from those in the space and the reaction function of the Pentagon. But more broadly, how transparent should these sorts of conversations become at this moment? Very difficult ethical questions that seem to be shone a significant public light on by Dario Amadei, the leader of Anthropic himself.

33:05Caroline Hyde:Yeah, I think that's exactly right. I mean, this is a frontier technology that we are still understanding what its consequences are going to be. And to suggest that we have less transparency or that a firm has no right to set standards on how a cutting edge technology will be utilized by the Defense Department, I think is probably a losing proposition for DOD.

33:34Sam Liccardo:what should be forced what could be forced by congress we just had a representative of california to start the show talking about wanting to bring law to bear that that companies aren't pushed off of any sort of national supply chain in any retribution act but what more broadly can be done by congress at this moment to make clearer the lines

33:55Caroline Hyde:well congress really runs defense policy and they can legislate in this space and dod will be required to be compliant with it. It's actually shocking to think that the Defense Department blacklisted an American company. That's the kind of thing we do to Chinese firms, not to patriotic American firms who are already participating in classified DoD activity.

34:22Sam Liccardo:Can you give us some guiding principles on then how OpenAI and Sam Altman might be able to find appeasement in a contract? Do you think extra steps had been taken? Is there, though, really a need at this moment for companies to see the law as it stands as where the line should be, rather than trying to insert their own language into certain contracts?

34:45Caroline Hyde:Well, it's an open question. But I do think that OpenAI is saying, yes, we trust the government that they won't use our product in a way they say they won't. And Anthropic is saying, we actually need proof and we need indemnification that our product is being used as we are advertising our product. I think given the low level of trust in the Trump Department of Defense, this is likely to be advantageous marketing for Anthropic and very difficult for DOD to be able to say, you need to trust that we will abide by the law when so much of their behavior, including blacklisting an American company, looks to be a bending of the law or at least

35:36Sam Liccardo:an aggressive and predatory use of the law. Corrie, it's interesting OpenAI defended saying that it built a number of safeguards into the contract with the Pentagon and, quote, agrees with, said the Pentagon actually agrees with these principles and reflects them in law and policy. When we're thinking about where AI's role now is in defense, in war, as we're currently seeing it unfold, can you just educate our audience as to how integral AI has now become?

36:03Caroline Hyde:Yes. What AI is already proving incredibly valuable for in the defense space is surveying enormous amounts of data and, for example, identifying threat portfolios. the ability to see patterns in large amounts of data. But what Anthropic is saying is we do not want it to be used for domestic surveillance of the U.S. or for decisions about the use of lethal force before we have higher confidence in the model. And those are not unreasonable standards and provide the basis for what Congress perhaps ought to put into law until we have better transparency and better understanding of what these models are capable of in future iterations.

36:56Sam Liccardo:Corey Schalking. Great to speak with you of the American Enterprise Institute. We appreciate your time and expertise today. Look, as the conflict with Iran intensifies cybersecurity experts, their warning of a rise in Iranian-linked cyber threats targeting critical networks and infrastructure. Joining us to discuss, Cynthia Kaiser, SVP, Senior Vice President of Ransomware Research Center at Halcyon and former Deputy Director of the FBI's Cyber Division. Cynthia, are those threats real?

37:22Caroline Hyde:They are. We're already seeing Iran have real threats and conduct cyber activity against organizations in the Middle East. and we anticipate that they could follow on with operations here in the United States.

37:36Sam Liccardo:And we said infrastructure in particular, where are the vulnerabilities likely to be targeting?

37:42Caroline Hyde:So throughout infrastructure in the Middle East and in the U.S., we see Iran target what they can get into. So it doesn't really matter the sector. It matters how the specific organization has done with their cybersecurity has been able to fix those vulnerabilities because what Iran does, they go on, they try to exploit something, get into something, and then they go out in the media and they say, we've done more. So I've gotten onto one machine in an organization, but I'm going to say that we've gotten onto the entire facility and say a water treatment facility is down. So it's really a mix within critical infrastructure of getting onto something, but then moving on and lying and exaggerating to try to stoke fear and chaos.

38:29Caroline Hyde:How sophisticated is their ability to get onto something? So they are one of the world's most malicious and capable cyber actors. In critical infrastructure overall, there are many, many devices that are connected to the internet and haven't been patched for vulnerabilities that Iran is exploiting. Just late last year, FBI put out a warning about Iranian state-sponsored actors who are targeting critical infrastructure in the United States through these types of vulnerabilities.

39:01Sam Liccardo:From the perspective that we see the market, as always, trying to get ahead of any sort of concerns and indeed, well, move money on the back of it, we've seen CrowdStrike on the higher side, seen Palo Alto networks in the green. I mean, are we seeing really a desire to beef up the infrastructure of resistance, to see our companies having the right place, the right sort of restraints and use cases in place at the moment?

39:29Caroline Hyde:Absolutely. We've seen a lot of movement towards being able to practice incident response plans, know what you're going to do if you are hit, including what you're going to do in the media to say if something's being exaggerated, to patch devices that maybe were on some type of schedule to be patched later, doing that today, and conducting a lot of engagement across industry, as well as with the FBI, to be able to know the latest on what might be coming down and what threats that they're facing. And the threats are all AI in many ways, I'm sure, Cynthia. They are. We've seen a lot of AI-enabled threats, And really where we see the biggest risk with AI-enabled threats is in kind of wannabe or very low-level actors.

40:15Caroline Hyde:But that's who Iran might use. Iran uses proxies to be able to conduct their activity. There's one group our Halcyon Intel team had identified named Sakari, who is currently telling its members to conduct activity, conduct attacks in the Middle East. But they've used AI to make their bad software, what they're deploying, and it doesn't work very well. But what it actually means is it destroys networks when it gets on instead of being this kind of ransom you're going to pay to try to get back online.

40:48Sam Liccardo:Oh, so like collateral damage when actually just trying to exert financial damage. Cynthia, from the perspective of AI, look, we just come off the back of a couple of weeks where software names were pummeled, where particularly cyber companies were under pressure because people thought generative AI companies were going to be able to take their business. A plug-in from Anthropic would be the answer to all our ransomware and cyber concerns. How are you seeing that evolve? How are you seeing companies actually wanting to use and build from within or still dependent on external offerings?

41:21Caroline Hyde:Being able to build within is really important. in a way to consistently know what's going on in your network, be able to fix those vulnerabilities I talked about in real time, and then be able to identify other errors or things that might be going on that are malicious across a network. But it's only going to know what's plugged into it. It's not going to have a lot of this additional information, what a threat group might be saying in a dark web forum? What's the new zero day that might be coming down the pike? Figuring out that aspect, being able to plug the really sensitive, great information the private sector has into some of these new processes organizations do, just means cybersecurity is going to be better.

42:08Caroline Hyde:It doesn't mean there's a replacement on either side.

42:10Sam Liccardo:Can you take us to allies? Can you take us as to how strong their defenses are?

42:17Caroline Hyde:across the close allies the united states has there are lots of sharing implement things implemented as well as these sharing mechanisms where we're sitting inside different governments they're sitting with us to be able to counter cyber threats because this has been practiced for years cyber threats just don't have any boundaries they're going across the entire world That's especially true with our European allies, with Australian allies, with Israel. And so we have really identified ways to share quickly, share in real time these threats that are facing all of us. And we all face the same challenges, but we all can come up with the same solutions and really counter these adversaries together.

43:05Sam Liccardo:And look, Cynthia, from just an audience perspective, is this likely to be an attack that is focused in the enterprise, in one's work environment? Or could this be something that you're navigating as a consumer right now?

43:19Caroline Hyde:It's mostly going to be focused within the enterprise environment, especially within the United States. We have seen Middle Eastern countries and organizations in those countries being targeted by Iranian state-sponsored groups in the last few days for some of the data they might have on people, whether that's patients, customers, parts and employees of that organization. We do see Iran going out trying to identify personal information for people they perceive may be dissidents or enemies of the Iranian regime. And that's something to watch out for there. But we haven't necessarily seen that come over to the United States or to our European allies.

44:02Sam Liccardo:Cynthia Kaiser of Halcyon and former FBI deputy director, we appreciate your time.

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