End-to-end encryption is next frontline in governments’ data sovereignty war with hyperscalers

Data residency is no longer enough. As governments lose faith that storing data within their borders, but on someone else’s servers, provides real sovereignty, regulators are demanding something more fundamental: control over the encryption keys for their data.

Privatim, a collective of Swiss local government data protection officers, last week called on their employers to avoid the use of international software-as-a-service solutions for sensitive government data unless the agencies themselves implement end-to-end encryption. The resolution specifically cited Microsoft 365 as an example of the kinds of platforms that fall short.

“Most SaaS solutions do not yet offer true end-to-end encryption that would prevent the provider from accessing plaintext data,” said the Swiss data protection officers’ resolution. “The use of SaaS applications therefore entails a significant loss of control.”

Security analysts say this loss of control undermines the very concept of data sovereignty. “When a cloud provider has any ability to decrypt customer data, either through legal process or internal mechanisms, the data is no longer truly sovereign,” said Sanchit Vir Gogia, chief analyst at Greyhound Research.

The Swiss position isn’t isolated, Gogia said. Across Europe, Germany, France, Denmark and the European Commission have each issued warnings or taken action, pointing to a loss of faith in the neutrality of foreign-owned hyperscalers, he said. “Switzerland distinguished itself by stating explicitly what others have implied: that the US CLOUD Act and foreign surveillance risk renders cloud solutions lacking end-to-end encryption unsuitable for high-sensitivity public sector use, according to the resolution.”

Encryption, location, location

Privatim’s resolution identified risks that geographic data residency cannot address. Globally operating companies offer insufficient transparency for authorities to verify compliance with contractual obligations, the group said. This opacity extends to technical implementations, change management, and monitoring of employees and subcontractors who can form long chains of external service providers.

Data stored in one jurisdiction can still be accessed by foreign governments under extraterritorial laws like the US Clarifying Lawful Overseas Use of Data (CLOUD) Act, said Ashish Banerjee, senior principal analyst at Gartner. Software providers can also unilaterally amend contract terms periodically, further reducing customer control, he said.

“Several clients in the Middle East and Europe have raised concerns that, regardless of where their data is stored, it could still be accessed by cloud providers — most of which are US-based,” Banerjee said.

Prabhjyot Kaur, senior analyst at Everest Group, said the Swiss stance accelerates a broader regulatory pivot toward technical sovereignty controls. “While the Swiss position is more stringent than most, it is not an isolated outlier,” she said. “It accelerates a broader regulatory pivot toward technical sovereignty controls, even in markets that still rely on contractual or procedural safeguards today.”

Given these limitations, Privatim called for stricter rules on cloud use at all levels of government: “The use of international SaaS solutions for particularly sensitive personal data or data subject to legal confidentiality obligations by public bodies is only possible if the data is encrypted by the responsible body itself and the cloud provider has no access to the key.”

This represents a departure from current practices, where many government bodies rely on cloud providers’ native encryption features. Services like Microsoft 365 offer encryption at rest and in transit, but Microsoft retains the ability to decrypt that data for operational purposes, compliance requirements, or legal requests.

More security, less insight

Customer-controlled end-to-end encryption comes with significant trade-offs, analysts said.

“When the provider has zero visibility into plaintext, governments would face reduced search and indexing capabilities, limited collaboration features, and restrictions on automated threat detection and data loss prevention tooling,” said Kaur. “AI-driven productivity enhancements like copilots also rely on provider-side processing, which becomes impossible under strict end-to-end encryption.”

Beyond functionality losses, agencies would face significant infrastructure and cost challenges. They would need to operate their own key management systems, introducing governance overhead and staffing needs. Encryption and decryption at scale can impact system performance, as they require additional hardware resources and increase latency, Banerjee said.

“This might require additional hardware resources, increased latency in user interactions, and a more expensive overall solution,” he said.

These constraints mean most governments will likely adopt a tiered approach rather than blanket encryption, said Gogia. “Highly confidential content, including classified documents, legal investigations, and state security dossiers, can be wrapped in true end-to-end encryption and segregated into specialized tenants or sovereign environments,” he said. Broader government operations, including administrative records and citizen services, will continue to use mainstream cloud platforms with controlled encryption and enhanced auditability.

A shift in cloud computing power

If the Swiss approach gains momentum internationally, hyperscalers will need to strengthen technical sovereignty controls rather than relying primarily on contractual or regional assurances, Kaur said. “The required adaptations are already visible, particularly from Microsoft, which has begun rolling out more stringent models around customer-controlled encryption and jurisdictional access restrictions.”

The shift challenges fundamental assumptions in how cloud providers have approached government customers, according to Gogia. “This invalidates large portions of the existing government cloud playbooks that depend on data center residency, regional support, and contractual segmentation as the primary guarantees,” he said. “Client-side encryption, confidential computing, and external key management are no longer optional capabilities but baseline requirements for public sector contracts in high-compliance markets.”

The market dynamics could shift significantly as a result. Banerjee said this could create a two-tier structure: global cloud services for commercial customers less concerned about sovereignty, and premium sovereign clouds for governments demanding full control. “Non-US cloud providers and local vendors — such as emerging players in Europe — could gain market share by delivering sovereign solutions that meet strict encryption requirements,” he said.

Privatim’s recommendations apply specifically to Swiss public bodies and serve as guidance rather than binding policy. But the debate signals that data location alone may no longer satisfy regulators’ sovereignty concerns in an era where geopolitical rivalries are increasingly playing out through technology policy.