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Global Roundup

Protests spell trouble for Iranian government and JCPOA. Over the week beginning Jan. 1, Iran was been wracked by a series of anti-government protests in cities across the country. In the weeks ahead, Iran’s official response to these demonstrations will ultimately determine the durability of protestors’ claims of economic stagnation and failure of leadership. An unstable domestic political environment in Iran does not bode well for the continued success of the Joint Comprehensive Plan of Action (JCPOA). (Global Risk Inisghts)

Malaysia faces higher rates, currency risks and an election battle. Malaysia faces higher interest rates, currency risks and a contentious election battle in 2018 that will test Prime Minister Najib Razak’s grip on power. (Bloomberg)

Markets take EU’s new financial rules in their stride. The rollout of new rules on Jan. 3 that aim to make European Union (EU) financial markets safer and more transparent has been glitch-free so far, though disruptions cannot be ruled out, the EU’s markets watchdog said. (HSN)

Is the U.K. really interested in joining TPP? The government of the United Kingdom has explored the possibility of jointing the Trans-Pacific Partnership (TPP), the Financial Times has reported. It’s an unusual move in that the U.K. does not border the Pacific. But it could be part of a larger strategy to grow British exports after it leaves the European Union. (Global Trade Magazine)

China’s small banks dumped; more policy pain looming. China’s smaller banks started the new year with a double whammy from regulators and investors, and more pain may be looming. A policy announcement Dec. 29 highlighted China’s tough stance toward smaller banks, which are already a target of government efforts to reduce leverage in the financial system. (Bloomberg)

This could be the beginning of the end of China’s dominance in bitcoin mining. Fresh reports have emerged about a crackdown—though not an outright ban—on bitcoin mining operations in China. Bloomberg reported Jan. 3 that the nation’s central bank has outlined plans to curb the power supply to some bitcoin miners, citing unnamed sources. (Quartz)

India and Thailand risk being added to U.S. currency watch list. India and Thailand may have to give freer rein to the rupee and baht this year to avoid triggering United States accusations that they’re manipulating their currencies to support exports. (Bloomberg)

U.S. suspends at least $900 million in security aid to Pakistan. The United States said on Jan. 4 it was suspending at least $900 million in security assistance to Pakistan until it takes action against the Afghan Taliban and the Haqqani network militant groups. (Reuters)

Merrill Lynch bans its clients, advisors from trading bitcoin-related investments. Merrill Lynch financial advisors cannot buy bitcoin-related investments for their clients, The Wall Street Journal reported Jan. 3. The ban prevents the financial giant’s roughly 17,000 advisors from pitching investments related to bitcoin and executing client requests to trade Grayscale’s bitcoin investment trust (GBTC). (HSN)

North Koreans hijack computers to mine cryptocurrencies. North Korean hackers are hijacking computers to mine cryptocurrencies as the regime in Pyongyang widens its hunt for cash under tougher international sanctions. (Bloomberg)

North Korea agrees to talks after U.S., South Korea postpone military drills. North Korea agreed on Jan. 5 to hold official talks with the South this week, the first in more than two years, hours after the United States and South Korea delayed a military exercise amid a standoff over the North’s nuclear and missile programs. (Reuters)

Will the North Korea crisis hit boiling point in 2018? With Obama’s policy of  “strategic patience” effectively replaced by Trump’s policy of “limited patience,” GRI’s Alex MacLeod explores whether the Korean crisis will hit a tipping point in 2018. (Global Risk Insights)

European Budget Battles to Commence

The budget process in Europe is always tense and controversial—that is a given. When it comes to priorities, there are always major differences. Inherent conflicts exist between nations that are the biggest contributors and those that stand to gain the most.

Germany and France are the big players as far the budget size is concerned. Both countries are sensitive to how much money is being requested and its intended use. This time around, the challenge will be more daunting than usual because there has been a call for a much larger budget in the next 10 years. The conversation has just started, and the divisions are already very wide.

At least three issues will present a bigger challenge than usual. The first and most pressing is that Britain’s leaving the EU has created a 10 billion euro gap every year starting in 2021. This reduction in contributions from the U.K. has put immense pressure on France and Germany given that the U.K. had once been one of those major contributors. Demands on the budget had already been accelerating—that was apart from missing the money from the U.K. The long and the short of it is that Germany and France will have to make up the bulk of that gap. There is not much enthusiasm for this in Berlin or Paris.

The second issue is the need for an expanded budget to handle the expenses associated with the waves of immigrants and refugees streaming from Africa, the Middle East and South Asia. No matter what the solution might be, the costs will be extremely high.

Trying to stem the tide means stepped up naval presences and attempts at interdiction. It will mean more border guards and more intervention in the countries that have been contributing the migrant population and refugees. If the decision is made to try to accommodate the flow, the costs will be just as high in terms of handling a massive swell of displaced people who will need all of the necessities of life.

This feeds into the third issue: The countries that have been taking the brunt of the migrant population are the same countries that contribute the most to the eurozone. There is a great deal of resentment expressed toward those nations that are neither willing to take on responsibility for the migrants or the greater financial burden.

The worst offenders are the populist regimes in Poland, Hungary and elsewhere in Eastern Europe. These are the countries that are currently getting the lion’s share of the eurozone budget (along with the states on the southern tier). They have been anything but grateful for that distribution—at least from the perspective of the Germans and the French.

There is a strong desire to tie further EU aid to the willingness to cooperate on goals set by the EU. That would force the nations of Eastern Europe to either agree to take their share of refugees or lose access to that EU largesse. This is likely to be a very intense battle and an emotional one.

2018 Predictions for Blockchain

Blockchain and distributed ledger technology continued to make headlines last year, but where is it headed this year?

Last year, “the number of real-world [blockchain] applications that entered the market was far less than anticipated,” says economist and researcher, Carlo R.W. De Meijer, in a Dec. 31 Finextra blog, Blockchain: Predictions for 2018.

De Meijer, however, notes several unexpected ones. “This year the concept of blockchain also started to capture people’s attention. But that was triggered by the specular and unexpected rise of the Bitcoin and other cryptocurrencies. And also, the ICO [initial coin offering] boom came out of the blue.”

According to The Guardian, an ICO “is a relatively recent innovation for cryptocurrency developers, and involves selling a number of cryptographic tokens to investors at the launch of the project.”

De Meijer outlines 20 predictions for blockchain and distributed ledger technology in the new year. He does not expect Bitcoin or other cryptocurrencies to “emerge as a payment network. It will just be used as a speculative asset and store of value.” He also anticipates “increasing regulation in a growing number of countries. … In 2018, legislators and regulators worldwide will intensify their watchdog role on both blockchain and cryptocurrencies. As a result, we will see a growing number of regulators come with regulatory measures to close the gaps where blockchain and cryptocurrencies were violating existing law.”

Other expectations include a wider application of blockchain across the financial sector. “In fintech, the two most promising short-term-use cases remain payments and trade finance,” he finds. “Larger banks, including correspondent banks, will increasingly be interested in the blockchain payment systems because they are tempted by the advantages blockchain may bring in terms of real-time processing, lower risk profiles, lower costs and transparency.”

In addition, De Meijer believes 2018 will be the year that central banks embrace blockchain. “Blockchain-based payment systems using fiat-backed digital currency will allow central banks to interoperate more easily and partner with retail banks to process cross-border payments with immediate settlement finality.”

Visit FCIB’s Facebook page to read De Meijer’s blog in its entirety or access it here.

 

Cyber Risk Rises to Top of Corporate Agenda

The upcoming implementation of the European Union’s General Data Protection Regulation (GDPR), which takes effect in May 2018, has elevated cyber risk to the top of the corporate agenda for organizations doing business in Europe, according to a survey conducted by Marsh, an insurance broking and risk solutions provider. 

In the global survey of more than 1,300 senior executives, 65% of respondents whose organizations offer products or services in the EU said that they now consider cyber as a top risk. In a similar survey, Marsh conducted in Continental Europe last year, only 32% of responding organizations rated cyber as a top risk. 

GDPR-impacted organizations are already feeling the effect of cyber threats, with 23% of respondents stating that their European organizations were subject to a successful cyber-attack in the past year. 

Organizations responded that they intend to spend more on cyber risk management. Of those respondents whose organizations have plans for GDPR implementation, 78% said they would increase spending on addressing cyber risk over the next 12 months, including spending on cyber insurance. Notably, 52% of those who do not have a plan for GDPR indicated that their investment in cyber risk management would increase. 

GDPR readiness will require additional attention in the immediate future. Just 8% of respondents at GDPR-affected organizations asserted that their firms were fully compliant; 57% of respondents indicated that their organizations were developing compliance plans; and 11% said they had yet to start. Smaller organizations were more likely not to have a plan for GDPR with 19% of respondents from businesses with less than $50m annual revenue replying that no plan was in place. 

“Given the effort needed to comply, organizations that have yet to make plans are likely to face challenges to meet all the requirements when GDPR takes effect in May 2018,” said Thomas Reagan, Marsh’s cyber practice leader. “Focusing leadership attention on complying with GDPR is critical. Increased management attention on this issue can also be leveraged to strengthen a firm’s overall cyber risk management, broadening a regulatory compliance effort into a source of cybersecurity resilience.”

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations