Evading Capital Controls via Cryptocurrencies: Evidence from the Blockchain

Abstract

To what extent are cryptocurrencies used to evade cross-border capital controls? We develop a new method that exploits blockchain data to identify such activities. We find that capital flight out of China is economically meaningful, accounting for over one-quarter of Chinese Bitcoin exchange volume. Capital flight increases with economic policy uncertainty and results in a Bitcoin price premium against the Chinese Yuan, ruling out alternative explanations such as 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 activities.

Keywords: bitcoin, blockchain, capital flight, cryptocurrency, capital control

JEL Classification: G15, G18