Security is one of the most often-cited objections to cloud computing; analysts and skeptical companies ask "who would trust their essential data 'out there' somewhere?" We didn't focus on security extensively in our paper, and we wanted to offer our analysis of what the major security concerns are with cloud computing, and what might be done about them. These are preliminary thoughts; we welcome comments and criticism. Security is not our primary area of interest, and we'd love to hear from people with operational experience.
The security issues involved in protecting clouds from outside threats are similar to those already facing large datacenters, except that responsibility is divided between the cloud user and the cloud operator. The cloud user is responsible for application-level security. The cloud provider is responsible for physical security, and likely for enforcing external firewall policies. Security for intermediate layers of the software stack is a shared between the user and the operator; the lower the level of abstraction exposed to the user, the more responsibility goes with it. Amazon EC2 users have more responsibility for their security than do Azure users, who in turn have more responsibilities than AppEngine customers. This user responsibility, in turn, can be outsourced to third parties who sell specialty security services. The homogeneity and standardized interfaces of platforms like EC2 makes it possible for a company to offer, say, configuration management or firewall rule analysis as value-added services. Outsourced IT is familiar in the enterprise world; there is nothing intrinsicaly infeasible about trusting third parties with essential corporate infrastructure.
While cloud computing may make external-facing security easier, it does pose the new problem of internal-facing security. Cloud providers need to guard against theft or denial of service attacks by users. Users need to be protected against one another.
The primary security mechanism in today's clouds is virtualization. This is a powerful defense, and protects against most attempts by users to attack one another or the underlying cloud infrastructure. However, not all resources are virtualized and not all virtualizion environments are bug-free. Virtualization software has been known to contain bugs that allow virtualized code to "break loose" to some extent.  Incorrect network virtualization may allow user code access to sensitive portions of the provider's infrastructure, or to the resources of other users. These challenges, though, are similar to those involved in mangaging large non-cloud datacenters, where different applications need to be protected from one another. Any large internet service will need to ensure that one buggy service doesn't take down the entire datacenter, or that a single security hole doesn't compromise everything else.
One last security concern is protecting the cloud user against the provider. The provider will by definition control the "bottom layer" of the software stack, which effectively circumvents most known security techniques. Absent radical changes in security technology, we expect that users will use contracts and courts, rather than clever security engineering, to guard against provider malfeasence. The one important exception is the risk of inadvertent data loss. It's hard to imagine Amazon spying on the contents of virtual machine memory; it's easy to imagine a hard disk being disposed of without being wiped, or a permissions bug making data visible improperly.
There's an obvious defense, namely user-level encryption of storage. This is already common for high-value data outside the cloud, and both tools and expertise are readily available. The catch is that key management is still challenging: users would need to be careful that the keys are never stored on permanent storage or handled improperly. Providers could make this simpler by exposing APIs for things like curtained memory or security sensive storage that should never be paged out.
 Indeed, even correct VM environments can allow the virtualized software to "escape" in the presence of hardware errors. See Sudhakar Govindavajhala and Andrew W. Appel, Using Memory Errors to Attack a Virtual Machine. 2003 IEEE Symposium on Security and Privacy, pp. 154-165, May 2003.