The Rise of Cloud Computing: Challenges and Implications
Introduction:
In recent years, the rise of cloud computing has revolutionized the way businesses store and process data. However, this seemingly mundane technology has caught the attention of financial regulators and industry experts who are growing increasingly concerned about the potential risks it poses to the stability of the financial system. This article will explore the key issues surrounding cloud computing and its implications for investors and consumers of financial services. We will delve into the speed of change in computing practices, the capability of financial regulators to handle this disruptive technology, concentration risks, and the commercial power wielded by the dominant cloud computing providers. Ultimately, we will examine possible solutions and how this topic requires the attention it deserves.
The Speed of Change in Computing Practices:
The speed at which businesses are adopting cloud computing is staggering. The US Treasury’s Financial and Banking Information Infrastructure Committee (FBIIC) report reveals that more than 90% of American Bankers Association members are moving their business to the cloud. Despite this rapid transition, over 80% of these institutions believe they are still in the early stages of adoption. This trend is not limited to the United States; European financial institutions are following a similar path. It is predicted that within the next three years, two-thirds of banks expect at least 30% of their operations to be cloud-based, resulting in a tripling of cloud usage. However, the quick pace of adoption raises concerns about the ability of financial regulators to keep up with this transformative technology.
The Capability of Financial Regulators to Handle Cloud Computing:
Historically, financial regulators have struggled to keep pace with evolving information technology. With the shift towards cloud computing, where Big Tech vendors dominate the market, regulators face a new challenge. Unlike when financial firms ran their own IT operations, regulators could easily scrutinize them. However, the concentration of cloud services in the hands of a few major players, such as Amazon, Microsoft, and Google, raises concerns about the lack of oversight. The Financial Services Committee’s report highlights the regulatory gray area in which the cloud operates, making it difficult for any single agency to comprehend the various use cases and interdependencies within the financial industry. The need to broaden the “regulatory perimeter” and ensure effective oversight becomes paramount.
Concentration Risks Associated with Cloud Computing:
While one of the primary motivations for financial institutions adopting cloud computing is to reduce reliance on internal data centers, a bitter irony emerges regarding concentration risks. Prior to the 2008 financial crisis, securitized mortgage products intended to distribute default risk among multiple players inadvertently concentrated it within entities like AIG Financial Products. Similarly, cloud computing, dominated by a small group of companies, creates a concentration risk that, if one of the major players encounters a cyberattack, outage, or bankruptcy, could have significant consequences for the entire financial system. The recent SolarWinds hack on Microsoft’s cloud systems underscores the vulnerability even these tech giants face. Addressing concentration risks should be a priority for regulators.
The Commercial Power of Dominant Cloud Computing Providers:
Aside from concentration risks, the commercial power wielded by dominant cloud computing providers raises concerns, especially for Europeans. The European Union has taken steps to address this issue, with investigations launched into the practices of these companies. However, dismantling Big Tech or imposing tight government controls may not be feasible or desirable solutions. The challenge lies in finding an appropriate balance between innovation and regulation to prevent abuses of power and preserve fair competition in the industry.
Additional Piece:
Recognizing the significance of cloud computing is not only crucial for financial regulators and industry insiders but for the average consumer as well. Cloud computing has become an integral part of everyday life, from storing personal photos to accessing online services. While the focus has often been on the convenience and scalability provided by the cloud, it is vital to consider the potential risks and vulnerabilities that come along with this technology.
A major concern is the cybersecurity aspect of cloud computing. The increasing reliance on cloud services and the vast amounts of data stored within them make them attractive targets for hackers. The recent slew of data breaches highlights the urgency for cloud service providers to strengthen their security measures. Striking a balance between accessibility and security is challenging but essential to maintain trust in the cloud industry.
Moreover, the issue of data sovereignty arises when data is stored in the cloud. With the jurisdiction of data becoming more blurred, questions around privacy and control over personal information come to the forefront. Legislation and regulations must adapt to ensure the protection of individuals’ data and their right to determine where it is stored and how it is used.
Additionally, the environmental impact of cloud computing cannot be ignored. The vast data centers required to power the cloud consume significant amounts of energy, contributing to carbon emissions. While cloud service providers are making efforts to improve their sustainability practices, there is still much work to be done. Investing in renewable energy sources and implementing energy-efficient technologies should be prioritized to mitigate the environmental footprint of cloud computing.
Summary:
In summary, the rise of cloud computing poses several challenges and implications for both investors and consumers of financial services. The rapid adoption of cloud computing by financial institutions, coupled with the inability of regulators to keep up with this transformative technology, raises concerns about the potential risks it poses to the stability of the financial system. Concentration risks associated with the dominance of a few major cloud computing providers and the commercial power they wield further exacerbate the need for effective oversight and regulation. Additionally, cybersecurity, data sovereignty, and environmental sustainability are important considerations that must be addressed to ensure the responsible and secure use of cloud computing. As the cloud continues to permeate various facets of our lives, it is imperative that we strike a balance between reaping its benefits and managing the associated risks.
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Three weeks ago, the US Treasury announced the launch of a new oversight committee called the “Cloud Executive Steering Group”.
It received almost no public attention. No wonder: Compared to the explosive controversies around cryptocurrencies, ChatGPT or Europe’s new push to break Google’s dominance in adtech, cloud computing – the public and private data storage and processing platforms operated by Big Tech vendors – sounds painfully boring. So much so that most Americans see Amazon as “just” an online retail giant, even though its cloud division now generates significant revenue.
But both investors and consumers of financial services should wake up. For how to relationship by the Treasury’s little-known Financial and Banking Information Infrastructure Committee stated earlier this year, regulators are getting nervous about systemic financial risks stemming from the cloud. Indeed, the Bank for International Settlements suggested last year – echoing work of the European central banks – that the “interdependencies between big technologies” have become “a key political blind spot”.
So the crucial question for the Treasury’s cloud committee — which includes both regulators and bankers like PNC’s Bill Demchak — is whether this “blind spot” can be corrected before a not-so-dull crash erupts.
There are at least three major issues to consider. The first is the speed of change in computing practices. The FBIIC report finds that more than 90% of American Bankers Association members are moving their business to the cloud, even though more than 80% say this is in an early stage. Since a separate survey suggests that two-thirds of banks expect at least 30% of their businesses to be cloud-based over the next three years, the FBIIC calculates that cloud usage will triple by then. The pattern in Europe looks similar.
Second, financial regulators are not equipped to handle this explosive growth. They’ve always struggled to keep track of information technology, since they’ve historically hired economists, not technicians. But when financial firms ran their own IT operations, regulators at least had a mandate to scrutinize them.
However, the dash in the cloud it puts more of that business in the hands of Big Tech vendors who have never faced serious central bank scrutiny before. Some observers, such as Agustín Carstens, head of the BIS, think a review is overdue, in order to broaden the “regulatory perimeter”. Maybe.
But America’s tech giants will fiercely resist efforts to put them under the oversight of central banks or other financial regulators — and the White House currently shows little stomach for that fight. This leaves the cloud in a financial regulatory gray area. “Because of differing legal authorities for each agency, no single agency can see through the many use cases and web of cloud services dependencies within the financial industry,” the FBIIC report noted. Simply put: this is a fog.
Third, to the extent that data is available, there appear to be large and growing concentration risks. This might seem surprising. After all, one reason financial groups are rushing to the cloud is to reduce reliance on expensive and potentially vulnerable internal data centers. A distributed model should be more resilient.
But a bitter irony of finance is that innovations that purport to reduce risk by distributing it can sometimes also concentrate it in new, surprising, and half-hidden ways. Consider credit. Prior to 2008, it was assumed that innovations such as securitized mortgage products would foster resilience by spreading default risk beyond banks.
But when the 2008 crisis erupted, it emerged that a number of players had quietly hedged their businesses with the same entity: AIG Financial Products. Who created a hidden “single point of failure”, to use an engineering term, and generated shocks when the AIGFP faltered.
Cloud computing echoes this so-called SPof problem, as Michael Hsu, as Comptroller of the Currency, he told the BIS earlier this year. In particular, and as Brussels often complains, the cloud is dominated by an oligopoly of Amazon, Microsoft and Google. If one of those players suffers a major cyberattack, weather-related outage, or simply goes bankrupt, it would rock the system.
Big Tech executives insist that won’t happen. You hope so. And these large companies are almost certainly better at managing cyber risks than the banks’ internal teams. But tSolarWinds hack of 2020 on Microsoft’s cloud systems has proven that no one is infallible. So did the recent Ion saga AND Data breaches per capita.
And even without cyber risks, the commercial power wielded by this oligopoly is unnerving, particularly for Europeans. Indeed, of Great Britain Ofcom launched an investigation.
So now all eyes are on the Treasury Cloud Committee. Unfortunately there are no easy fixes; or not, unless the US government does something it seems unwilling or unable to contemplate, namely dismantling Big Tech and/or imposing tight government controls. But if nothing else, the issue shows that AI isn’t the only tech topic that matters now. Maybe that Cloud Committee should ask ChatGPT how to defuse the Spof threat. The answer would probably be easier for Big Tech to digest than asking Brussels.
https://www.ft.com/content/0a20fe94-c128-4aad-a8a0-a0cb828c88f6
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