A new report points to a sizeable exodus of cryptocurrency from digital wallets sited in China over the past year, in a sign that the medium has emerged as an increasingly popular means for Chinese investors to flout the country’s strict capital controls.
The report from cryptocurrency software firm Chainalysis found that in the past twelve months “over $50 billion worth of cryptocurrency move[d] from China-based to overseas addresses.”
Chainalysis pointed to the long-standing imposition of currency controls as a key motivation for the mass movement of cryptocurrency, given that Chinese nationals are only permitted to purchase USD$50,000 of foreign currency a year from financial institutions.
While wealthy Chinese citizens had previously employed investment in real estate and other assets to circumvent these controls, the report points out that Beijing has recently targeted these methods.
“Cryptocurrency could be picking up some of the slack,” said the Report. “Obviously, not al of this is capital flight, but we can think of $50 billion as the absolute ceiling for capital flight via cryptocurrency from East Asia to other regions”
In order dodge to China’s strict controls on both cross-border capital movement and cryptocurrency trading, citizens are employing Stablecoins Tether to transfer their digital assets.
“In total, over $18 billion worth of Tether has moved from East Asia addresses to those based in other regions over the last 12 months,” said the Report.
The Report sees economic fluctuations in the wake of the COVID-19 pandemic as a key driving factor behind much of this capital flight, particularly in the month of March when bitcoin prices began to stage a recovery.
“Equities in both the U.S. and China were still losing value at this time, as was the yuan itself,” said the Report.
“It’s possible that the economic tumult may have prompted some capital flight from China, though much of the Tether movement could have been East Asia-based cryptocurrency traders moving their holdings to international exchanges in order to trade at a time when cryptocurrency price volatility was high.”
In addition to strict capital controls, China has imposed strict curbs on cryptocurrency trading and usage for the past three years.
The Chinese central bank first the cracked down on the Chinese cryptocurrency sector in September 2017, with issuance of the “Public Notice Concerning the Prevention of Cryptocurrency Issuance Financial Risk” (关于防范代币发行融资风险的公告).
The Notice prohibited individuals and organisations from engaging in ICO’s, called for the immediate suspension of all cryptocurrency financial activities, and for individuals and organisations that had raised funds via cryptocurrency issuance to make arrangements for repayments to investors.
The Notice also stated that “so-called cryptocurrency financing and transaction platforms” are prohibited from engaging in transactions involving virtual currency, the conversion of virtual currencies into fiat money, and the provision of services including pricing and information intermediation in relation to virtual currencies.