Three weeks ago, the US Treasury unveiled the establishment of the “Cloud Executive Steering Group.” Unfortunately, this initiative largely went unnoticed by the public. It’s understandable, considering the attention-grabbing controversies surrounding cryptocurrencies, ChatGPT, and Europe’s efforts to challenge Google’s dominance in adtech. Cloud computing, which refers to the storage and processing platforms operated by major tech companies, may not be the most exciting topic. Many people still perceive Amazon solely as an online retail giant, oblivious to its significant revenue from its cloud division.
However, both investors and consumers in the financial services industry should pay attention to this emerging field. A report from the Treasury’s obscure Financial and Banking Information Infrastructure Committee earlier this year highlighted regulators’ concerns regarding the systemic financial risks originating from the cloud. The Bank for International Settlements has also emphasized the “blind spot” in policy regarding the interdependencies of big tech companies.
Therefore, the key question for the Treasury’s cloud committee, which includes regulators and banking industry representatives such as Bill Demchak of PNC, is whether they can rectify this “blind spot” before an unanticipated crisis occurs. Let’s consider the three major issues at hand.
The first issue is the rapid pace of change in computing practices. According to the FBIIC report, over 90% of members of the American Bankers Association are gradually transitioning their operations to the cloud, although 80% consider this to be at an early stage. Another survey suggests that two-thirds of banks anticipate at least 30% of their activities to be cloud-based within the next three years, indicating a tripling of cloud usage. The trend in Europe appears to be following a similar pattern.
The second issue is the inadequacy of financial regulators in managing this exponential growth. Historically, regulators have struggled to keep up with advancements in information technology, employing predominantly economists rather than tech experts. However, the shift towards cloud computing places more responsibility in the hands of major tech vendors who have not previously been subjected to rigorous scrutiny from central banks. The head of the BIS, Agustín Carstens, and others argue that updating regulations to encompass these developments is long overdue.
Yet, American tech giants strongly resist attempts to subject them to the oversight of central banks or other financial regulators, and the current administration appears reluctant to engage in such a battle. This results in a regulatory gray area for cloud services, with no single agency having comprehensive visibility due to differing legal authorities. The FBIIC report aptly describes this as a “fog.”
The third issue revolves around the concentration risks associated with cloud computing. Surprisingly, data suggests that these risks are substantial and growing. While financial institutions embrace the cloud to reduce their reliance on in-house data centers, aiming to enhance resilience through a distributed model, it can inadvertently concentrate risk in new, unexpected ways. The 2008 financial crisis exposed hidden vulnerabilities when various entities had quietly linked their activities to AIG Financial Products, resulting in a “single point of failure.” Similarly, the dominance of Amazon, Microsoft, and Google in the cloud sector creates vulnerability. A major cyber attack, weather-related disruption, or bankruptcy of any of these players could have a profound impact on the system.
Although Big Tech executives assure us that such events won’t occur, recent incidents like the SolarWinds hack on Microsoft’s cloud systems, the Ion saga, and the Capita data breach demonstrate that no system is infallible. Additionally, concerns arise over the commercial power wielded by this cloud oligopoly, particularly in Europe, leading regulatory authorities like Britain’s Ofcom to initiate investigations.
All eyes are now on the Treasury’s Cloud Committee. Unfortunately, there are no easy solutions to these complex challenges, unless the US government considers unconventional actions such as breaking up Big Tech or implementing strict governmental controls. However, this issue underscores the fact that AI is not the only technology topic deserving attention. Perhaps the Cloud Committee should seek advice from ChatGPT on how to mitigate the risks of concentration. Big Tech might find such suggestions easier to digest than those from Brussels.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
