• The People's Bank of China argues that its ban on cryptocurrencies is to curtail fiscal crime and prevent economic instability.
  • However, China's cryptocurrency ban comes amid fears that cryptocurrencies were facilitating capital letter flight from its markets, bypassing conventional restrictions.
  • China's cryptocurrency ban is office of a new trend in Chinese economic policy toward greater state intervention, epitomized in the "common prosperity" campaign.

In late September 2021, the People'southward Bank of China (PBOC) banned all cryptocurrency transactions. The PBOC cited the role of cryptocurrencies in facilitating financial crime equally well as posing a growing risk to Communist china'southward financial arrangement owing to their highly speculative nature. However, one other possible reason behind the cryptocurrency ban is an attempt to gainsay capital flight from China.

Co-ordinate to the Chainalysis Blockchain information platform, more than $50 billion worth of cryptocurrency left East Asian accounts to areas outside the region betwixt 2019 and 2020. Equally China has an outsized presence in East Asian cryptocurrency exchanges, Chainalysis staff believe that much of this net outflow of cryptocurrency was actually uppercase flight from China. Although Chainalysis does not have a definitive figure for how much capital fled China between 2019 and 2020, they judge that it could be as high equally $50 billion.

Upper-case letter controls and cryptocurrency exchanges

China places an annual limit of $50,000 for the buy of foreign currencies as role of its already strict capital controls. As such, the capital flying facilitated past cryptocurrency is especially notable.

Previously, the rich in China got around capital controls by purchasing strange real estate, creative invoicing for international merchandise and even coercing their employees to transfer coin to strange banking concern accounts. With Bitcoin, residents in Mainland china have been able to learn strange assets more than easily, free from the scrutiny of Chinese regime. Given the decentralized nature of Bitcoin and many other blockchain-based cryptocurrencies, they can be used to circumvent capital letter controls far more than easily than a conventional currency substitution that uses the banking system.

Despite the strict capital controls in place, Chinese regime take ever been wary of uppercase flight. The effectiveness of these upper-case letter controls is somewhat debatable, as some commentators argue that capital flight grew significantly betwixt 2009 and 2018. Meanwhile, in 2017, the PBOC banned the operations of cryptocurrency exchanges inside China. (The 2017 ban did non go and then far every bit to forbid the ownership or mining of cryptocurrency, which the 2021 ban finally prohibits.) Although Cathay did not cite uppercase flying as a reason for its cryptocurrency restrictions in 2017, Chinese government did place boosted restrictions on overseas investments by Chinese companies that same yr. In some ways, the 2017 restrictions on cryptocurrency exchanges in China can be seen every bit the straw of the subsequent tightening of outward investment of Chinese companies that year.

Chainalysis besides notes that much of the majuscule flight out of Eastern asia is facilitated by the stablecoin, Tether (USDT), a cryptocurrency notionally pegged to the value of the Us dollar (USD). Tether became more popular in 2017 post-obit the PBOC's restrictions on crypto exchanges in Communist china. Trading Bitcoin for Tether was already made illegal by the PBOC's 2017 prohibition on cryptocurrency exchanges, but information technology was nevertheless possible for Chinese cryptocurrency traders to larn Tether from discreet merchandise with over-the-counter brokers or through the use of strange bank accounts. According to old Grayscale Director of Inquiry Philip Bonello, Tether is especially popular in China because its value is stable from being hypothetically pegged to the US Dollar, making it easier to commutation to the fiat currency of a user's pick.

Currencies included: BTC, DAI, USDC, USDT.

Currencies included: BTC, DAI, USDC, USDT.

Image: Kaiko

Common prosperity and capital controls

The threat of majuscule flying remains a priority for the PBOC every bit the Chinese economy recovers from the COVID-nineteen pandemic, especially as China launches its "common prosperity" campaign. Former PBOC advisor Li Daokui has warned that the relatively fast economic recovery of the US could fuel greater capital flying, equally Chinese residents may exist inclined to purchase avails in the US for greater fiscal security.

Moreover, the common prosperity drive emphasizes a heavier statist arroyo to managing China's economy, as well as a more than in-looking economical strategy. Notably, the outlawing of cryptocurrency transactions happened but a month after the announcement of the common prosperity program. This cryptocurrency ban may have also been brought in to curtail outward investments and instead encourage the rich in China to accept higher income taxes and to contribute their wealth domestically.

Altogether, at that place is potent evidence to suggest that the cryptocurrency prohibition was a response to the perennial problem of capital flight from China. Given that a huge amount of capital flight already occurred through cryptocurrency exchanges, the PBOC will have been aware that cryptocurrency was exacerbating China'southward chronic event of capital flight.

With the common prosperity programme, China aims to curb capital flight and encourage the domestic circulation of people's wealth. China's attempts at wealth redistribution would be far more difficult to accomplish if the rich circumvented Red china'south already strict capital controls through offshore cryptocurrency exchanges and caused overseas avails.

Nonetheless, in spite of the political imperative, such a strict ban on cryptocurrency transactions volition exist very difficult to enforce. Capital flight, enabled by cryptocurrency transactions, is probable to continue. Time volition tell how seriously the eventual economical impact will be.