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Clouds and Chains

First presented on April 4, 2018 at Deconomy event in Seoul, South Korea. Based on a previous presentation on the same topic at the Smart Cloud event held on September 21, 2016 also in Seoul.

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Clouds and Chains

  1. 1. Clouds and chains Opportunities and Challenges for Financial Services in the cloud (...but mostly challenges)
  2. 2. Disclaimer ● These slides contain names of specific companies. This is for illustrative purposes only and is not intended to be seen as an endorsement. ● The contents herein does not reflect the views or opinions of anyone else but myself. ● I am not a lawyer.
  3. 3. Who in the audience... ● Is a lawyer? ● Data privacy expert? ● Runs their own node and/or a node on behalf of someone else? ● Is building some type of cross-border technology-based infrastructure? (… like a blockchain)
  4. 4. In less than 280 characters
  5. 5. And just on Sunday “Some blockchains, as currently designed, are incompatible with the GDPR. EU regulators will need to decide whether the technology must be barred from the region or reconfigure the new rules to permit an uneasy coexistence.” - Michele Finck, Oxford University
  6. 6. General Data Protection Regulation ● If a company processes data of EU citizens or targets them, data protection regulations in the EU have a big impact on how a company can operate in Europe ● In the case of GDPR, it doesn't matter if the entity is a small or big organization, or a financial company because there is no distinction based on an industry − Note: Germany was the 13th largest trading partner (measured in imports) for South Korea in 2017
  7. 7. Other 'Older' quotes ● Brock Pierce in May 2016: “The solution to SWIFT's issues is blockchain” − Verdict: No, SWIFT’s security issues at the time were not directly solvable because of the usage or adoption of a blockchain. ● E&Y July 2016 report: “Blockchains may also cause the ground to shift rapidly beneath providers of cloud services, especially infrastructure-as-a-service (IaaS) providers.” − Verdict: TBD, depends on what a “blockchain” actually is viewed as in practice.
  8. 8. Everything onto a blockchain? ● Even if it was technically possible to somehow store and secure all financial information on a blockchain (which it probably isn’t), each country has its own specific laws surrounding ‘regulated data’ ● And encryption probably isn't the silver bullet answer, more on this later.
  9. 9. Pre-GDPR that are on the books ● “Right to be forgotten”: existed in EU and Argentina and other regions for ~10+ years ● Personally Identifiable Information (PII): − HIPAA; Financial Privacy Rule / Safeguards Rule; FISMA; Fair Credit Reporting Act; Regulation S-P; Data Protection Act of 1998 ● BCBS 239: core principles for effective Risk Data Aggregation and Risk Reporting (RDARR) practices − Sidenote: data lakes
  10. 10. What laws are data subject to? ● Subject to the laws of the country in which the company (subsidiary) is located? ● ... in which it originated? ● … in which the cloud provider is headquartered?
  11. 11. “In the cloud, data sovereignty can become an issue because different countries have different laws governing the collection, use, storage, and transmission of data within their borders. So data sovereignty really is the question of which sovereign’s (i.e., country’s) laws govern your data. A related issue is that of data custody, which is about who controls your data. Essentially, who has the right – or the obligation – to hand it over if the government comes knocking?”
  12. 12. “As many details of the GDPR are still subject of interpretation and companies discussing it will have a competitive advantage in the EU if they are able to adapt their technological infrastructure and business models in accordance with the requirements under the GDPR. A forward-looking privacy by design approach will be key.” - Jana Moser, attorney and founder of Data Reality
  13. 13. US and the EU ● In 2015, the EU Court of Justice decided that Safe Harbor isn't valid anymore. ● As a result, Privacy Shield is being negotiated: to make companies that abide by the framework agreement are deemed to have an equivalent data protection level. ● On-going case centered around a Microsoft data center in Ireland which essentially says that these privacy model clauses are not valid.
  14. 14. Solutions? ● How to handle and solve for the problem surrounding sensitive information that cannot leave the border? ● Even if you encrypt sensitive data, if it is stored by a third party it still creates potential vulnerabilities: − Even with state-of-the-art encryption tools, allowing third parties to hold the data creates potential future risks − Some of this risk can be controlled via strict certification process and contractual/legal recourse
  15. 15. “But muh encryption!” ● Trade-off: you can try to be your own bank (e.g., a “sovereign” cryptocurrency user) but in practice due to convenience, a large portion of private key holding is outsourced to institutions such as banks and trusted intermediaries ● Now the third party has time to “crack the lock” so to speak and/or be subpoenaed - Also UX tradeoff
  16. 16. Opportunities
  17. 17. Be your own cloud! Or maybe not
  18. 18. Sovereign clouds ● Sovereign clouds for data sovereignty is a proposed solution. ● Microsoft Cloud Germany is a sovereign cloud operated by a German data trustee. ● Microsoft Azure Government cloud is a cloud for just the US government. − “Information Impact Level 5 DoD Authorization”
  19. 19. AWS Secret Region ● The AWS Secret Region can operate workloads within several U.S. security classification levels. ● “With the launch of this new Secret Region, AWS becomes the first and only commercial cloud provider to offer regions to serve government workloads across the full range of data classifications, including Unclassified, Sensitive, Secret, and Top Secret.”
  20. 20. Private clouds ● April 2, 2015: BNY Mellon launched a private cloud platform called NEXEN: “Allows programmers to build and store banking and trading apps. The platform, built largely with open source code, also includes a catalog for storing application programming interfaces, essentially instructions that tell software components what to do.” ● Private cloud providers for banks: Oracle, Cisco, IBM, BankOnIt
  21. 21. What do sovereign clouds and “secret spaces” have to do with the DLT-related industry?
  22. 22. Anarchic versus archic ● In practice, most blockchain implementations are effectively cryptographically linked data structures housed in a cloud ● Anarchic / public blockchains such as Bitcoin and Ethereum typically use a decentralized “cloud” comprised of non-KYC'ed pseudonymous validators (nodes) ● Private / permissioned chains sometimes use a “cloud” in which all validation is handled by known, legally accountable parties and all identities are KYC’ed
  23. 23. Challenges for anarchic chains ● By design anarchic / public blockchains intentionally lack: − Terms of Service; End-User License Agreement; service-level agreement; consumer protections; customer service ● They lack these contractual hooks because any such artifact in an anarchic chain leads to some "controller" who can be shut down
  24. 24. Anarchic cont'd ● Regulated institutions handling regulated data might not use an anarchic chain for a couple reasons including: - Because all information is replicated globally and stored publicly and can be downloaded by anyone allowing them to potentially learn some kind of proprietary information - This type of replication potentially violates various national and supranational regulations
  25. 25. Challenges for permissioned chains ● In contrast, private/permissioned chains are specifically built around contractual agreements and tie-ins with legal infrastructure. ● The challenge is in operation and maintenance: − SLAs: which cloud provider or 3rd party providers should the nodes operate out of? − How to prevent the network from becoming centralized such that collusion or abuse could occur? (e.g,. the problems that database have) − How to handle disputes that span multiple jurisdictions?
  26. 26. Other impact of GDPR on a chain ● For a company, this impacts HR and payroll systems more in the forefront, which typically gets controlled by some cloud central database solution with easy deletion. ● For a blockchain platform, this gets tough because of right to be forgotten rules that force deletion (unrecoverable pseudoanonymization) or full anonymization. ● The hard part is breaking the chain of provenance and revocation.
  27. 27. Doomed, right? Not all is roses for a fully chained world
  28. 28. ● A single cloud provider could host the nodes across multiple data centers, giving you some fault tolerance of physical failure. ● But then you're dealing commercially with a single party, who can 'extort' the network participants if migration to another cloud(s) is difficult (monopoly rent seeking). ● There are other more subtle risks to cloud, like some unknown vulnerability in the client software that can be exploited across the entire network because cloud provider uses the same hypervisor software on all its hardware.
  29. 29. For blockchains: who sues who? ● The fact that data is stored in perpetuity is a problem under a lot of regulators views of perpetuity and around "purpose limitation" (you don't collect for other purposes) ● Also limitation of retention past when the data is useful. So keeping data forever that is not required, that will be an issue. ● If you're a conduit of data, if you have no control of it, you were not liable. But the bright line between being a conduit and hosting is being eroded.
  30. 30. Key takeaways
  31. 31. SFYL
  32. 32. Also, more SFYL
  33. 33. Other takeaways ● Data privacy issues are not inherently solved because of the usage “blockchains” ● In fact, the opposite may be true, especially with blockchains that use a “gossip” method and replicate all information to every node globally. ● If you plan to build, maintain, or operate infrastructure – including a blockchain – be sure to have a lawyer who specializes in data privacy to scrutinize your platform.
  34. 34. Contact ●
  35. 35. Appendix