Cryptocurrencies appear to be emerging as the latest means for Chinese citizens to move their assets overseas and evade the nation’s strict capital controls amid escalating tensions in US-China relations.
The Chinese government allows its citizens to transfer the equivalent of only US$50,000 or less out of the country each year. Historically, wealthy citizens have dodged this rule through foreign investments in real estate and other assets – sometimes even using shell companies to disguise the purchases of foreign currencies as legitimate business transactions.
But as Beijing has cracked down on some of these methods to circumvent capital controls, the use of cryptocurrencies may be picking up some of the slack as investors seek to protect their wealth in a global economy that is suffering from the trade war and the coronavirus pandemic, according to a recent report by New York-based blockchain analytic company, Chainalysis.
More than US$50 billion in cryptocurrency assets have been moved from China-based addresses to other regions over the last 12 months, according to the report. In particular, Tether, known as a “stablecoin” because its value is pegged to the US dollar, could be playing a key role in the recent capital flight from China, Chainalysis said.
In countries where “safe-haven fiat currencies” such as the US dollar are restricted, stablecoins are particularly attractive because they can be sold on exchanges without losing much of their value. This has caused Tether’s market capitalisation to grow massively, accounting for 93 per cent of stablecoin use in East Asia in recent years.
“Stablecoins such as Tether have always been sought after in countries with tight capital and currency controls,” said Wayne Chen, CEO of fintech firm Interlapse. “With the political uncertainty between the US-China trade war and the existing capital and exchange controls in China, this can drive people to adopt stablecoins.”