Daily Update: The Rapid Unraveling of FTX

Today is Monday, November 14, 2022, and here’s your curated selection of essential intelligence on financial markets and the global economy from S&P Global. Subscribe to be notified of each new Daily Update. 

In February 1637, Dutch tulip bulb prices collapsed from their previous highs — as much as $750,000 per bulb in today’s money — to a few cents per bulb. Overleveraged investors who borrowed heavily to play in the tulip bulb market were wiped out. Speculation in unregulated markets is still with us today. Cryptocurrency exchange FTX is in crisis this week as customers were barred from withdrawing their money due to liquidity issues at the exchange. FTX founder Sam Bankman-Fried resigned and apologized for unspecified mistakes, and the company filed for Chapter 11 bankruptcy.

Reconstructing the circumstances that led to the bankruptcy of one of the world’s largest cryptocurrency exchanges may take some time, but it appears FTX tokens, also known as FTT, were involved. FTT is a cryptocurrency that could be used as collateral for leveraged trades on FTX. The value of the tokens was tied to market perceptions of the value of the platform. 

Bankman-Fried, known as SBF in cryptocurrency circles, also managed a trading company called Alameda Research. Rumors recently surfaced that Alameda was using FTT as collateral on liabilities, which seems to indicate liquidity issues within Bankman-Fried’s cryptocurrency empire. On Nov. 6, Binance, a competitor to FTX, announced it was liquidating its $580 million position in FTT, which spooked the market and led many customers to try to withdraw their money from FTX. Thereafter, FTX suspended redemptions and attempted a sale to Binance, only filing for bankruptcy when Binance withdrew from negotiations.

While this story appears complex, it’s really quite simple. According to S&P Global Ratings, FTX and Alameda Research are privately owned companies that do not provide the same type of transparency and disclosure as publicly owned companies. (Neither company is rated by S&P Global Ratings.) Cryptocurrency companies are not heavily regulated. Although this is part of their appeal to some investors, it means these companies’ governance practices are underdeveloped. Cryptocurrency investors tend to invest in multiple cryptocurrencies or in crypto-related industries, exposing them to contagion risk. Ignoring best practices for financial risk management in a low-transparency, unregulated market with a high risk of contagion may be inadvisable. 

Analysts at S&P Global Ratings anticipate four outcomes from the collapse of FTX. Firstly, strong governance and transparency may grow in importance as the cryptocurrency industry attempts to reassure investors and customers. Secondly, regulation of cryptocurrency markets, which was already a matter of serious debate, could accelerate. Thirdly, valuations in other areas of the decentralized finance market may be affected. And lastly, these contagion effects are unlikely to ripple into traditional finance.

As regulators dig in to see if customer funds have been misused, a final accounting of the collapse of FTX and its ripple effects on the wider cryptocurrency market may take months.

Today is Monday, November 14, 2022, and here is today’s essential intelligence. 

Written by Nathan Hunt.

Economy

Economic Research: China's Trend Growth To Slow Even As Catchup Continues

The working-age population is shrinking, rebalancing needs call for lower investment, geopolitical strife is set to slow productivity-enhancing economic ties with developed economies. These are well-known features that will inevitably decelerate China's trend growth beyond the easing of trend growth due to "convergence" to higher income levels. Yet China's trend growth continues to benefit from relatively solid productivity growth and capital accumulation. Indeed, S&P Global Ratings' baseline scenario sees China continuing to significantly outpace major developed economies, including the U.S., in the coming decades.

—Read the report from S&P Global Ratings

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Capital Markets

Listen: The Essential Podcast, Episode 71 Bretton Woods 2.0 – A New Model For A Changing World

Dr. Ajay Chhibber returns to S&P Global's Essential Podcast to discuss the current state of Bretton Woods institutions like the IMF, the World Bank, and GATT. He covers the ways in which each of these institutions can be re-directed and re-conceived for a post-colonial order. The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets.

—Listen and subscribe to the Essential Podcast from S&P Global

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Global Trade

Infographic: Oil Price Cap, EU Sanctions On Russia Poised To Further Shake Up Global Oil Flows

EU sanctions and the G7's price cap on Russian oil could upend some 2.5 million b/d of seaborne oil trade to Europe as Russian crude and oil products struggle to find new buyers outside the trade bloc, according to analysts at S&P Global Commodity Insights. But global oil markets remain in the dark over how the U.S.-led attempt to slash Russia's oil revenues will play out even as the deadline for the G7 price cap and an EU ban on imports approaches on Dec. 5 for crude and Feb. 5 for products.

—Read the article from S&P Global Commodity Insights

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Sustainability

Listen: Why Collaboration Is Critical To Cutting Supply Chain Emissions

The UN climate conference known as COP27 is underway, and Nov. 11 was Decarbonization Day. In this episode of the ESG Insider podcast, hosts Lindsey Hall and Esther Whieldon explore how companies are setting decarbonization targets in their operations and across their supply chains. To understand how companies are engaging with suppliers, they talk with Simon Fischweicher, who is head of corporations and supply chains for CDP North America. CDP is a nonprofit environmental disclosure platform that has a program aimed at helping companies gather concrete details from suppliers about their emissions and other climate-related activities.

—Listen and subscribe to ESG Insider, a podcast from S&P Global Sustainable1

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Energy & Commodities

Listen: What Is Happening To Russian Oil Flows Ahead Of EU Sanctions?

How has the Ukraine war already impacted Russian crude oil and refined products flows? What will happen once EU and U.K. sanctions fully kick in? How will European countries replace the missing supply from Russia? In this episode of the Platts Oil Markets podcast, S&P Global Commodity Insights editors Robert Perkins, Virginie Malicier and David Lewis discuss with John Morley what has already changed in the oil markets since Feb. 24 and the expected impact of upcoming sanctions, from the ban on exports of Russian crude oil to Europe and the U.S. for any loading after Dec. 5, to the ban on exports of oil products into Europe from Feb. 5 and the shipping insurance ban from December as well.

—Listen and subscribe to Oil Markets, a podcast from S&P Global Commodity Insights

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Technology & Media

Deal Tracker: Private Equity, Cybersecurity Hold M&A Line Amid October Slump

U.S. information technology M&A activity remained muted in October, despite continued interest in cybersecurity targets. Overall, sector deal volume was down 32.4% year over year in October. At 192 transaction announcements, the month also had eight fewer deals than September, extending 2022's tech M&A downturn.

—Read the article from S&P Global Market Intelligence

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