Other discussions involved performing the
encryption inside the VMs, but as I mentioned earlier, if the content in
the VM that is being manipulated is untrustworthy...then is the VM's
internal encryption really trustworthy?

This is a good point which I hadn't thought of. Forgive me I still haven't read the whole discussion, I was just coming up with some ideas for the OP. For networked VMs, it's a moot point because malware could just as easily send the data to instead of breaking encryption. But for non-networked VMs, it's a very good point.

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