Evading Capital Controls via Cryptocurrencies: Evidence from the Blockchain

Abstract

How pervasive is the use of cryptocurrencies to evade capital controls? We develop a new method that exploits blockchain data to identify cross-border flows that circumvent controls via cryptocurrencies. Applying the method to China, we find that capital flight volume is over one-quarter of Chinese Bitcoin exchange volume. Capital flight from China is positively associated with Chinese economic policy uncertainty and the Bitcoin premium in Chinese Yuan, inconsistent with triangular arbitrage. Individuals engaging in capital flight are less likely to use Bitcoin to trade illegal goods or services, suggesting that capital flight has different motivations to other criminal activity.

Keywords: bitcoin, blockchain, capital flight, cryptocurrency

JEL Classification: G15, G18