This system is provided by the CSP, but controlled and even hosted by the customer:

The correct choice is the Client-Side KMS. This refers to a Key Management System (KMS) where the infrastructure is controlled by the customer, though the service itself is offered by the Cloud Service Provider (CSP). In a Client-Side KMS, while the CSP may provide the tools or resources for managing encryption keys, the customer retains control over how and where those keys are used, effectively allowing them to maintain a larger degree of governance over their security posture.

This model provides customers with more flexibility and control over their data security, since they can implement and manage their own encryption protocols and key management practices based on their specific needs and compliance requirements. For instance, they can choose to implement stronger security measures, rotation policies, and access controls that fit their organizational structure and policies.

Understanding this arrangement is crucial for organizations that prioritize data privacy and regulatory compliance, as it allows them to tailor their security measures in accordance with the legal and operational standards they must meet. Other options, such as Customer-Side KMS, Remote KMS, and Internal KMS might imply different levels of control or hosting scenarios that do not align with the definition of a Client-Side KMS as it is utilized in cloud environments.