Is Bitcoin used for Bypassing Capital Controls in China? (Part 1)

As Bitcoin prices started steadily rising in Q3 of 2016, there’s been a common theme in the industry media that one of the main factors is the increasing usage of Bitcoin in China, as a work-around to evade the strict capital controls. The talking point is that many Chinese people are now using Bitcoin as a means to transfer large amounts of their RMB abroad, into other foreign currencies.

Well, I’m here to tell you that from everything I’ve seen on the ground here, running one of the largest Bitcoin exchanges in China, this is simply not the case.

Yes, many people have been talking about this idea, to use Bitcoin to circumvent China’s capital controls on the RMB. But that’s just media stories feeding the frenzy! Don’t get me wrong: there is indeed a frenzy around the topic of capital controls in China. Starting in 2016, enforcement of capital controls has been much stricter than in previous years. Many loopholes and traditional methods to bypass capital controls have been closed off. And people are turning to ever increasingly creative ways to move RMB offshore, including the idea of using Bitcoin!

Over the past 12 months, I’ve had over a dozen people come to me, to ask me about how to use Bitcoin to move RMB offshore. (These people come from all walks of life: business owners, deputies sent by their boss, private wealth, people with secret income sources, and even salarymen.) In each case, I explain to them the theoretical way in which it work, but I tell them that I cannot directly help them to do it. I also outline the various difficulties and traps, such as:

  • identification and KYC requirements for both the local and offshore Bitcoin exchanges
  • buying Bitcoin in China could cause prices to rise, increasing average purchase price
  • selling Bitcoin abroad could cause prices to fall, decreasing proceeds
  • uncontrollable nature of timing, between buying and selling, and the risk of Bitcoin prices falling in the interim
  • difficulties and expertise necessary to use Bitcoin derivatives, to properly hedge against price changes
  • natural price difference of Bitcoin in China compared to USD prices abroad, which does not often follow the official CNY/USD exchange rate
  • technical skills necessary for newcomers, when it comes to transferring Bitcoins between wallets and exchanges, and the risk of loss through hacking, theft, or just beginner mistakes

After explaining this to lots of people, my conclusion is that the very people who come to me for this advice, are the ones who cannot successfully pull it off. If they actually possessed the skills, the experience, and the risk appetite to do this successfully, then they wouldn’t be asking me about this. Such is the irony!

(This paragraph was added ~2 hours after original publishing.) The biggest problem today with using Bitcoin to evade Chinese capital controls is that there’s just no good guarantee on the eventual effective exchange rate. For those who have a lot of RMB to move offshore, advanced guarantee of the exchange rate is very important to them. Otherwise, they will prefer another channel, even if the guaranteed rate of exchange is worse than the official rate.

In the end, despite the tightening of capital controls in China, there are still simply other better ways to move RMB abroad, that’s better financially and more efficient than the method involving buying/selling Bitcoin. Those other methods may have quotas, limitations, challenges, and most may not even be legal, but nonetheless, the people who need them still utilize them.

I suspect that the only people today who are using Bitcoin to bypass China’s capital controls are the ones doing it at a small scale, maybe a few thousand dollars worth. The big players, the ones who really want a Faster, Better, Cheaper, method for evading capital controls, are dissappointed that Bitcoin still cannot deliver that today.

I expect that one day, China will actually loosen its capital controls on the RMB, as it progresses to internationalize the RMB for global use. When that day comes, I expect that Bitcoin will be mature enough to support the large transfers of capital, both inbound and outbound. Until then, the arena of transferring Bitcoins around the world remains an area for the professionals, the players who arbitrage prices between Bitcoin exchanges worldwide.

P.S. Here’s one more anecdote as to why I strongly suspect the Chinese are not successfully using Bitcoin to transfer their RMB abroad: of all the people who have come to me for this advice this past year, none have actually come back to open an account at BTCChina, to buy bitcoin, and test out the process. Maybe I scared them off? Or maybe the Bitcoin method is just not competitive enough, compared to the other secret channels which they already have been using to move RMB offshore. What do you think?

To the media: If you’re tempted to write more stories about how Bitcoin is being used to bypass capital controls in China, I would just ask you for one favor: Please go research and find real evidence of people doing this, rather than just speculate endlessly, while ignoring the real difficulties as I’ve outlined above. (Remember, in theory, I can arrange to go to the moon, but in reality, don’t expect that I’ll be there anytime soon.)

Come back for my next post: Part 2, Whether Bitcoin is being used for bypassing capital controls in China.