Chinese shift $6bn in bitcoin trading, research indicates

Bitcoin traders in China could be using the cryptocurrency to take some $US4.6bn ($6.41bn) out of the country in a circumvention of Beijing’s controls.

A research report by Australian and Chinese academics says almost 8.78 million bitcoins were traded by Chinese nationals between September 2011 and February 2018 in a bid to circumvent capital controls. Picture: AFP

Bitcoin traders in China could be using the cryptocurrency to take some $US4.6bn ($6.41bn) out of the country in a circumvention of Beijing’s strict capital controls.

A research paper published by academics in Australia and China estimates that at least $US1.5bn in bitcoin purchased in China has been cashed out overseas – including some $US2.8m through trading platforms in Australia.

The vast majority of the money – from 2011 to 2017 – has been processed through bitcoin exchanges in the US, Finland and Luxembourg.

Beijing’s capital restrictions cover amounts above $US50,000 a year, and are intended to control the value of the yuan.

The report says almost 8.78 million bitcoin were traded by Chinese nationals between September 2011 and February 2018.

The research was prepared by Maggie Hu, at the Chinese University of Hong Kong, Adrian Lee at Deakin University and Talis Putnins, of the University of Technology Sydney.

Of the outflows through overseas platforms, $US577m went through the US, $US321m came through those based in Finland, and $US179m was processed in Luxembourg.

“Over one-quarter of trading volume in Chinese bitcoin exchanges is estimated to be involved in circumventing China’s capital controls,” the researchers concluded in their paper.

“It is likely that capital flight contributes to the congestion on the blockchain that then results in higher fees for all users, not just those engaged in capital flight.”

Outside the US, the most popular bitcoin exchange with Chinese traders – Bitstamp – was located in Luxembourg, while another favourite – LocalBitcoins – was in Finland.

Late last year Professor Putnins briefed the Australian Securities & Investments Com­mission on groups within Australia that pump up the prices of cryptocurrencies and shares.

Professor Putnins had highlighted to ASIC pump and dump schemes involving 23 million participants using social media or encrypted messaging platforms such as Telegram.

Mr Putnins and his colleague, Anirudh Dhawan at the Stockholm School of Economics in Riga, concluded the schemes created “extreme price distortions of 65 per cent on average, abnormal trading volumes in the millions of dollars, and large wealth transfers between participants”.

“These manipulation schemes are likely to persist as long as regulators and exchanges turn a blind eye,” their paper said.

Mr Putnins’ latest research, published in December 2021, finds Chinese traders are willing to incur a loss on trade “in order to take their domestic assets offshore in a way that is more difficult for authorities to trace”.

“Consistent with investors’ motive of seeking a safe haven for their domestic assets in China, we find that the intensity of capital flight out of China via bitcoin is greater when Chinese economic policy uncertainty becomes higher,” the paper notes.

Chinese capital flight using bitcoin peaked in 2015. The research details several ways Chinese businesses and citizens circumvent capital controls to export funds from the country.

These include fake invoices for purchases, and using UnionPay cards for overseas purchases.

In November global payments platform Stripe implemented UnionPay access for its UK and European Union customers.

In April 2021 buy now, pay later platform Splitit partnered with UnionPay to allow it to finance purchases through monthly interest-free instalments.

Professor Putnins and his colleagues conclude that the volumes of bitcoin traded to circumvent Chinese capital controls declined as the Chinese government moved to shut down exchanges in the country in September 2017.

China restricted financial institutions from engaging in any crypto transactions in May last year, before banning mining in June, and finally outlawing cryptocurrencies in September.

Professor Putnins’ research concludes that people who circumvent Chinese capital controls with bitcoin are “less likely” to use the cryptocurrency for “illegal goods or services”.

“Converting fiat currencies via a cryptocurrency to evade capital controls has similarities with money laundering in that it involves transactions conducted in a manner that deliberately conceal the origin and destination of the funds,” the paper reads.

“To mitigate money laundering in cryptocurrencies, a potential avenue for future research or the development of global surveillance tools is to use the concept of ‘uneconomic trades’ underlying our identification strategy to track suspicious fund flows involved in money laundering