Not content with sticking two fingers up at the authorities with his Mega secure cloud storage service, larger-than-life entrepreneur Kim Dotcom is planning to release further privacy-centric services. And interestingly, in a Q&A session with the New Zealand Herald late last night, Dotcom said he intended the secure email and instant messaging services to be both military-grade and so easy to use that the user wouldn’t have to do anything to benefit from this security.

This is always the issue with security – if it requires much thought on the user’s part, it will generally fail. Dotcom, who also released a white paper on Tuesday to accuse the U.S. government of misleading New Zealand authorities while pursuing the German-born millionaire, said in the session that he wanted to “provide tools that give our users their privacy back”:

“We are working on encrypted email, IM, etc. The key to make encryption a global success is ease of use. So I am spending most of my time figuring out how I can give you encryption without you having to do anything and at the same time give you military grade privacy. You are all naked on the Internet. I like to help you put some pants on :-)”

It remains unclear what Mega is planning, technologically speaking, to achieve this kind of friction-free encryption. There are plenty of tools out there for sending encrypted emails and messages, but they tend to involve browser extensions or web forms, or paid subscriptions.

Mega’s cloud storage service has also come in for criticism by some security experts, who have pointed out that its use of so-called “convergent encryption” (in order to allow de-duplication) theoretically leaves a trace of who uploaded which file.

That extradition thing

Of course, Dotcom’s plans hinge somewhat on the ongoing extradition proceedings that he faces. The U.S. had Dotcom and some of his associates raided and arrested at the start of 2012 over allegations of copyright infringement, to do with their highly popular (and now deceased) Megaupload file-sharing service, and wants them sent over to face charges.

Since then, the case has occasionally veered into farce, with the New Zealand prime minister having to apologize for the country’s security services illegally spying on Dotcom, and a judge having to step down from the proceedings after describing the U.S. as “the enemy”.

All the while, Dotcom has maintained that Hollywood lobbyists were behind the raid and arrests. He reiterated and expanded upon these claims in the white paper released on Tuesday, verbosely entitled “Megaupload, the Copyright Lobby and the Future of Digital Rights: The United States vs You (and Kim Dotcom).”

The document highlights ties between U.S. vice president Joe Biden and Chris Dodd, the head of the Motion Picture Association of America (the MPAA, Dotcom’s bête noir), describing the whole affair as a “contract prosecution” linked to campaign contributions. It calls on the U.S. House Committee on Oversight and Government Reform and the Office of Professional Responsibility of the U.S. Department of Justice to “conduct an investigation and hearings into the conduct of the Megaupload prosecution by the U.S. Department of Justice.”

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If the accusations are true, it was one of the more successful pirate operations in history. At its peak, Megaupload saw approximately 7 percent of internet traffic and grossed over $150 million in annual revenue. But Megaupload’s incredible run ended in the fall of 2012 when the FBI forcefully took down the site and sought Kim’s extradition from New Zealand to face a litany of criminal charges.

Of course, you can’t expect to keep a guy with the last name Dotcom down, and sure enough he recently announced the relaunch of a Megaupload redux dubbed Mega. Only Mega is a security- and privacy-conscious file-sharing service that audaciously targets storage industry magnates like Dropbox and Box.net.

And loathe as some of us may be to admit it, he just may be on to something. Mega differentiates itself by embracing client-side encryption: generating and storing the keys on a user’s local machine rather than encrypting everything in the cloud. The result of such client-side encryption is not only a far more secure product – and a security practice the industry should embrace – but a significant reduction in cost and legal liability for Mega and other cloud storage providers that use this architecture.

How Mega is different

Security is one of the biggest inhibitors to cloud adoption. Yielding sensitive data to a third party over the public internet continues to be a dealbreaker for many medium- to large-scale enterprises, with their desire for privacy and concerns of regulatory and legal exposure.

In the movement to the cloud, data is exposed at two points to attack or compromise: in-flight (when it is being transmitted over the security no-man’s land of the public internet) and at-rest (when it physically sits on servers within the cloud system). In both instances there are a myriad of threats that could allow that data to be stolen or compromised.

Mega employs cryptography to protect data in-flight and at-rest. Now by all means, using encryption to protect data in-flight isn’t really game changing. Similar to most security-conscious sites, Mega wraps communication between its users with Secure Socket Layer (SSL) encryption.

But Mega is unique in its approach to handling encryption at rest. Rather than encrypting and storing keys for a client’s data within Mega’s infrastructure, Mega pushes their cryptography back to their users. So Mega users encrypt their own data prior to sending it to Mega’s servers, and store keys locally such that even Mega can’t read their data – or be forced to yield it to authorities.

While this sounds like a feature tailored solely to the needs of a company that will frequently find itself at the end of a subpoena, the desire to have users keep their own keys and send data in the form of encrypted “ciphertext” (rather than unencrypted “plaintext)” is actually one shared by mainstream small businesses and enterprises alike.

Benefit for providers

Having cloud providers hold ciphertext and having users handle their own encryption and keep their own keys makes sense on both sides of the fence.

In an architecture where customers are responsible for their own encryption and key management, significant legal liabilities are lifted from the service provider. Customers would assume personal liability for the selection and correct implementation of encryption algorithms – a critical concern for compliance regulations like PCI-DSS that incorporate strict rules on cryptography.

By having their customers manage keys locally, service providers can also significantly reduce costs. Many modern PCs incorporate a Trusted Platform Module (TPM) – a hardware device that can safely store cryptographic keys for prolonged periods of time. Storing keys locally on a TPM is relatively costless for the customer, but safely storing keys en masse in the cloud requires the use of expensive key management servers.

The cost of encryption

Encryption is also still not a costless process. By pushing customers to encrypt and decypt their own data, cloud providers can also redirect the significant compute time required to handle cryptography towards providing a higher quality of service for their customers.

For customers, sending only ciphertext to the cloud and keeping keys locally has real benefits beyond peace of mind. If a cloud services provider is ever hacked, that customer’s data will be encrypted in a way that can’t be decrypted using its service provider’s security infrastructure. There’s no master database of passwords that an attacker can break into. Customer data on the service provider remains locked in ciphertext and encrypted using one of any number of symmetric key algorithms.

It’s important to note, though, that there are consequences for moving to a client-side encryption architecture. For instance, when customers send only ciphertext to the cloud, popular means of reducing the on-disk footprint of data such as deduplication (in short, a process where copies or parts of files are deleted and data is instead “pointed” towards a single instance) are generally rendered impossible.

It’s also important to note that, for the server to dedupe data encrypted by the client, the client must yield sensitive information about the plaintext at various points during its encryption. The fact that Mega seems to perform client-side encryption with deduplication is a red flag to many security cognoscenti, and may even be a sign that Mega has more visibility into its clients; data then it otherwise claims.

Holes in Mega’s strategy

Mega’s security infrastructure is far from perfect. Their decision to handle cryptography in browser-based Javascript has already earned wide-spread criticism, and due to implementation issues in how Mega creates keys for users,  hackers could work around encryption and access plaintext data (what’s called a “side-channel attack”).

Regardless, to give credit where it’s due, Kim Dotcom’s decision to push encryption to the client is an impressively forward-thinking maneuver that should be replicated by Dropbox and other cloud storage providers. Client-side encryption makes financial and legal sense for customers and service providers, helping to enable even regulatory compliance-bound customers to embrace cloud computing at scale.

Andrew “Andy” Manoske is an Associate at GGV Capital, a Sand Hill and Shanghai-based venture capital firm. Prior to GGV, he was a product manager at NetApp and managed the design of security features across the company’s entire product line. Follow him on Twitter @a2d2.

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Some media outlets are celebrating Mega as a phoenix-from-the-ashes story and a triumph for technology and privacy. The content industry, however, points to the track record of Kim Dotcom to warn that his new “privacy company” is just another ruse for people who want to share content without paying for it.

Here’s a look at what the service is all about — and the legal case for and against what Mega is doing.

Mega: A super secure locker for your files (or Hollywood movies)

Mega is a successor to Kim Dotcom’s earlier venture, Megaupload, which millions of people used to upload and store their files before the site was taken down last year in a controversial raid backed by the US government.

The difference this time around is encryption. Every file that a Mega users uploads and places in the online locker is encrypted so that third parties, including Mega itself, are unable to tell if that video you are storing is your niece’s birthday or Zero Dark Thirty. Sites like Ars Technica and Torrent Freak provide a good overview of the cryptography involved but the gist of it is that Mega uses a combination of passwords and browser-based encryption to keep your files private.

While Mega is nominally a way to store your files, it can also serve as an easy way to distribute them too. A Mega user, for instance, can share a file’s URL along with the password or else simply create a URL with the password embedded within it.

An advocate or an opportunist?

In an age where governments and tech companies vacuum up vast amounts of personal data, there is an appeal to the sort of encryption that Mega offers. The company, aware of this desire for anonymity, is using its encryption as a marketing tool. On its website, the company invokes a privacy section from the Universal Declaration of Human Rights and promises to give users control over who sees their files.

While this all sounds grand in theory, it’s not clear how effective it will be in practice. As Torrent Freak notes, the privacy scheme is far from exhaustive and lets Mega keep “quite detailed records of its users, including IP addresses”.

Meanwhile, a closer look at Mega’s privacy policy also reveals several references to advertising. These include Mega’s right to collect information about your visits to the site so as to serve you ads; it also mentions Mega’s intention to sell information about its users’ (albeit anonymous) activities to advertisers.

These less-than-perfect terms suggest that Mega’s prime interest is profit not privacy. Just as ad sales and premium memberships from Megaupload allowed Kim Dotcom to blow a bundle on models and yachts, it appears “the privacy company” is likewise designed more as a money machine than a moral cause.

Mega’s See No Evil Strategy

The new Mega site is barely a day old but the content industry is already menacing it. The Motion Picture Association of America, for instance, said it is reserving judgment but cited Kim Dotcom’s history of “pushing stolen, illegitimate content into the marketplace” to say it is skeptical. Meanwhile, TorrentFreak reports that a group representing the adult entertainment industry plans to lobby Visa and others to cut off anyone that provides payments services on behalf of Mega.

These reactions are hardly surprising and, given the content industry’s history of legal overreach, one has to take their claims with a grain of salt. But given that the new Mega service is likely to be a bonanza for pirated content, it’s worth asking if the company’s strategy to avoid legal liability will hold up.

This time around, Kim Dotcom and his merry Mega men want to ward off copyright claims by pointing to the site’s encryption features to say they have no idea whether users are sharing copyrighted files or not. The site also boasts strong language that piracy is “strictly prohibited”.

Unfortunately for Mega, the site’s copyright strategy also sounds a lot like “willful blindness” — a legal concept that means you can’t avoid liability by deliberately staying unaware of what’s going on. US courts have recently taken dim views of willful blindness in both patent and copyright cases. Mega, however, has set up shop in New Zealand and the small country has so far succumbed to Kim Dotcom’s theatrics, which means the company is likely to remain open for business for the foreseeable future.

The bottom line is that Mega’s arrival puts internet users in a bind. On one hand, they can side with a company that is doing good things for privacy but that is also greedy, self-serving and manipulative. On the other, they can side with content owners who have legitimate complaints about Mega, but who have burned much of their credibility in past copyright debates.

(Image by Kletr, Thorsten Rust and suphakit73 via Shutterstock)

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Rothken was joined on the panel by EFF staff attorney Julie Samuels, whose organization is interceding in the proceedings on behalf of a MegaUpload user. The user is attempting to get access to his data, which was taken offline as part of the raid on MegaUpload’s U.S. data center earlier this year. Samuels agreed that the case looks pretty good for Dotcom overseas, stating: “The case is procedurally falling apart in New Zealand.” The situation is a little different in the U.S., in part because the warrants used to raid MegaUpload’s file hoster Carpathia are still under seal.

Samuels put the proceedings against MegaUpload into the context of other take-down cases against other websites, including Rojadirecta. “There is this lack of due process,” she lamented, saying that the government often relies on information from organizations like the RIAA to seize domains, only to turn them back over 12 to 18 months later if a site owner fights back. The problem is, she added, that many of the affected site owners don’t have the means or willingness to go to court against the government. “We are lucky that MegaUpload is in the position to fight back,” she said.

Dotcom has been working on bringing back MegaUpload, as well as launch a new cloud music service called Megabox. Rothken said that he was working on Megabox even before the raid. “Megabox was designed to cut out the large middle man and to allow artists to monetize their music directly with the consumer,” Rothken said, adding: “Days before Megabox was rolled out, the raid on MegaUpload occured.”

However, Rothken reminded his audience Tuesday that this isn’t just about the legality of a cloud storage business, but aslo about real-life consequences for Dotcom and his co-defendants. “(This) is more than just a case for them. Their liberty is at stake,” he said.

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New Zealand prime minister John Key on Monday said he has ordered an inquiry in to “unlawful interception of certain individuals by the Government Communications Security Bureau” in the inquiry which led to Kim Dotcom’s arrest in January.

I welcome the inquiry by @johnkeypm into unlawful acts by the GCSB. Please extend the inquiry to cover the entire Crown Law Mega case.

— Kim Dotcom (@KimDotcom) September 24, 2012

Megaupload had been the scourge of big entertainment companies for hosting unauthorized content but has also received popular user support. Megaupload and its domain names were shut down by the US Department of Justice following Dotcom’s arrest in January, which had come following an FBI request that he be extradited to face charges in the US.

In June, a New Zealand judge already ruled warrants used in Dotcom’s arrest invalid, and said the FBI should not have cloned hard drives that had been seized.

If the legality of the whole operation continues to be undermined, it could make extradition less likely.

Meanwhile, Kim Dotcom used Twitter to promise a reborn Megaupload site is under development…

Quick update on the new Mega: Code 90% done. Servers on the way. Lawyers, Partners & Investors ready. Be patient. It’s coming.

— Kim Dotcom (@KimDotcom) September 22, 2012

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The controversy began in January when Dotcom was arrested in a dramatic raid in New Zealand and the U.S. announced it would prosecute Dotcom and Megaupload in Virginia. Since then, however, Dotcom (a German national who legally changed his name to “Kim Dotcom”) appeared to have gained the upper hand after he was released on bail and extradition proceedings slowed to a crawl. A New Zealand court has also ruled the warrants used to conduct the raid were illegal.

On Tuesday, the chief judge of the New Zealand district court that must decide if Dotcom can be extradited announced that Judge David Harvey had surrendered the case and would be replaced. The move comes after reports that Harvey said ”We have met the enemy and he is [the] U.S.” at a recent conference in relation to the current state of copyright law.

According to a law professor quoted by the New Zealand Herald, the Dotcom affair was the “case of a lifetime” for Harvey who is one of his country’s leading copyright and internet authorities. Harvey’s sudden recusal is not surprising, however, given that a judge would be hard-pressed to appear neutral after describing one of the parties in a case before him as “the enemy.” His departure means that a new judge will oversee the extradition proceedings, which were slated for next year and may now take even longer if they go forward at all.

Overall, the case is exposing a growing global tension between the U.S. and the rest of the world over the boundaries of copyright law. Even though New Zealand, England and Canada share the same common law legal traditions as the U.S., judges and academics in those countries have grown uncomfortable with America’s increasingly expansive copyright laws and aggressive enforcement tactics. These tactics have included other extradition attempts, including one aimed at a 23-year-old UK student that is extremely unpopular with the British public.

The entertainment industry and U.S. authorities, on the other hand, are exasperated with services like Megaupload that allow users to store and swap copyrighted music and movies. “Its equipment, machinery,  and servers are here … Many of its victims are in the United States… countless American works illegally reproduced and distributed include, for example, works originally available on YouTube.com, The Sopranos, Seinfeld, Dexter, Chuck, Meet Dave, and The Simpsons,” wrote prosecutors in a filing last week to argue that Megaupload can be tried in the US.

The tension has led online activists to embrace the flamboyant Kim Dotcom as a hero while law enforcement has sought to portray him as the lead gangster of a multi-million dollar criminal enterprise. As for Dotcom, he has proved adept at cultivating support, in part through a defiant Twitter feed:

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He teased the new service with the following words:

“The major Record Labels thought Megabox is dead. Artists rejoice. It is coming and it will unchain you.”

The photo seems to show a website that advertises an Android app, which in turn promises “unlimited space for all your music.” The app seems to offer a music player, search, a shop and some kind of social component, and states that unlimited music uploads will be free.

Dotcom’s team was working on Megabox before the shut-down of MegaUpload, but details of the new service remained scarce. Dotcom has said that it will allow artists to sell their music directly to consumers while also earning money from free downloads. This was supposedly being facilitated through MegaKey, an adware service that swapped ads on third-party websites for MegaUpload’s own display advertising. It’s unclear whether this ad swapping scheme will still be part of the upcoming Megabox service.

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In the magazine’s 5,700 cover story titled “The Nerd Who Burned Hollywood” this week, writers Daniel Miller and Matthew Belloni talk to the German entrepreneur’s lawyers, friends and business associates (they were unable to get access to the subject himself), revealing Dotcom to actually be more of a Steve Jobs wannabe than self-described “Dr. Evil” of the hacking world.

“He basically sums up the piracy debate that has only grown in the aftermath of the failure of the SOPA and PIPA legislation,” said Belloni, who told paidContent in an email Wednesday that he and Miller spent about two months working on the project.

“To Hollywood, those pictures of Dotcom traveling the world in yachts and racing supercars and partying with models were the equivalent of flipping a middle finger at content owners. But online, and especially in the file-sharing community, he was a god,” Belloni added.

“We tried for months to get him on the phone (we even offered to go to New Zealand) but his lawyers wouldn’t allow him to talk to us. We did get the lawyers, though. What surprised me about reporting the piece was that it seems Dotcom’s ultimate goal was to become a so-called ‘legit’ media mogul. He wanted to be Steve Jobs, and he certainly didn’t think of himself as a pirate. It will be very interesting to see how this case plays out.æ

Here are a few interesting tidbits from the story:

– Belying the bellicose alter-ego, Dotcom’s friends and associates describe him as a ” fun-loving father of five whose appetite for fast cars and booze is matched by sharp intelligence and lofty business aspirations that fall more in line with, say, YouTube founders (and one-time alleged infringers) Chad Hurley and Steve Chen than a pirate flaunting copyright law from a beach in St.-Tropez.”

The Reporter quotes reality TV producer Ziad Batal, who tried to develop a series with Dotcom as star: “His plan was to create a more artist-friendly distribution platform where the creators would get paid more than what they do when Apple sells their product … He’s extremely smart, extremely driven. I think Hollywood can negotiate with someone like this. You don’t put a guy like this behind bars; you say, ‘This is what we need to work together.’ “

– Ira Rothken, one of Dotcom’s U.S.-based attorneys, told the Reporter that he believes his client’s arrest stems from the Obama Administration’s desire to do Hollywood a solid after the president failed to stop anti-piracy bill SOPA from getting killed in Congress.

“[Dotcom] innovated in a way that brought unfair attention from Hollywood,” Rothken told the trade.

– Anthony Falzone, a lecturer at Stanford Law School’s Center for Internet and Society, told the Reporter  that by extending the boundaries of U.S. copyright law beyond the civil penalties levied in the past against operators like Napster and Grokster and into the criminal realm, the Dotcom case could ultimately stifle innovation.

Should the U.S. government successfully establish precedent, Falzone said, social photograph-sharing platform Pinterest, for example, could be viewed as a tool for illegally distributing copyrighted material. “It creates tremendous risk if your platform is used for the wrong reasons,” he noted.

– Not all of Dotcom’s media persona is unearned. Maximillion Cooper, CEO of the Gumball 3000 road race, which Dotcom has won in the past, describes a 2001 trip to the south of France on a 264-foot yacht, the Golden Odyssey, that features a mosaic-tiled swimming pool, gym and coral-reef aquarium. At one point, Cooper said, Dotcom spent around $100,000 to treat his bodyguards and “huge entourage” to a lunch of champagne and lobster, paying for it all with “suitcases of cash arriving by boat.”

–Having hired a legal team featuring digital-rights expert Andrew Schapiro, the Reporter notes that New Zealand courts have already backed down on a number of initial bail restrictions, such Dotcom’s ability to use the internet, swim in a nearby pool and visit a music studio to continue producing a hip-hop record. Allegations have already been made that both New Zealand and American authorities have botched paperwork in the case.

– Whether he’s convicted or not, the Reporter spoke to peers who believe the oft-prosecuted Dotcom will re-emerge somehow in the tech world. “He’s been able to figure how to aggregate large audiences, and for me, that is of the utmost importance in this business, to be able to connect with the consumer,” said Logan Mulvey, head of video-on-demand distribution company GoDigital. “He may have done it in an illegal way, but he was still able to do it.”

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A pair of cryptic court filings surfaced in Virginia this week that suggest Google is in a fight with the federal government over Megaupload, the file-sharing site that was shut down in a dramatic raid in January.

It appears that the FBI likely demanded that Google turn over Kim Dotcom’s email account and any related information, and then forbid the company to notify him of the investigation. In the past, companies — notably Twitter — have been aggressive in challenging gag orders so that they can notify customers about government searches. Such notification gives subscribers the option of challenging the searches in court.

The new filings are two orders in which U.S. Magistrate Judge Thomas Jones Jr. refuses to extend a gag order that the government has imposed upon Google.

The gag order forbids Google from telling a subscriber that an account has been the target of a search warrant and subject to a § 2703(d) investigation — a controversial search procedure that gained attention when the Justice Department used it to obtain the Twitter accounts of people tied to WikiLeaks.

The judge does not identify the Google subscriber but there is strong circumstantial evidence to suggest the case is tied to Megaupload and its controversial founder, Kim Dotcom who is currently facing extradition charges in New Zealand.

First, the orders came from the US District Court for the Eastern District of Virginia which is where an indictment was unsealed against Dotcom and Megaupload in January. Secondly, the two-page orders refer to recent events to explain why the government’s investigation will not be compromised by a disclosure:

The sole potential problem that notification might create that was raised by the government with specificity in its unredacted brief has now been eliminated by subsequent events. [...]

The existence of the investigation in issue and the government’s wide use of § 2703(d) orders and other investigative tools has been widely publicized now. It is difficult to imagine circumstances in which this Google subscriber, as described by the government in its brief, has not assumed government access to this account and acted accordingly

A connection between the Google court orders and Megaupload is for now entirely speculative, but it is hard to think of another secret investigation that has recently been “widely publicized.”

Christine Chen, Senior Manager for Global Communications and Public Policy, said by email that Google does not comment on specific cases.

The court papers also show that federal agents began their search of the suspect’s Google accounts in July of 2011. The Megaupload investigation reportedly began in 2010.

The seizure of Megaupload’s servers and the arrest of Kim Dotcom and other company executives made global headlines in January. The case received additional attention due to the outlandish character of Dotcom, an enormous man nicknamed Dr. Evil who was reportedly found in a panic room clutching a shotgun at time of his arrest in New Zealand (there are conflicting reports about the gun). The Megaupload episode also led the hacking collective Anonymous to launch a wave of retaliatory attacks that temporarily took down the websites of the FBI and the Justice Department.

Today’s orders also states that Google may notify its subscriber unless the government appeals within 14 days. The rest of the case for now remains under seal.

Here is a copy of one of the orders:

Court Order Lifting Google Gag Order

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