More than $50 billion in cryptocurrency moved from China-based addresses to overseas addresses in the past year, according to an excerpt from a soon-to-be-released report authored by Chainalysis.
While this mass movement of wealth indicates that it might be an example of capital flight, the report suggests that Chinese merchants and miners living abroad could be responsible for the bulk of these cryptocurrency transactions.
The Chinese government caps the total funds that citizens are allowed to transfer out of the country each year at $50,000. Wealthy citizens have evaded these rules by funneling the money through foreign investments, real estate, and even shell companies.
However, government crackdowns on some of these methods have forced Chinese citizens to consider alternative methods of financial transferring of assets, including cryptocurrency.
The report finds that East Asian cryptocurrency investors trade more frequently than investors in North America. This suggests that North American is generally more of a “buy and hold” region than East Asia.
Overall trade activity in East Asia has been in decline since October 2019, which the report attributes to the PlusToken Ponzi Scheme that swindled $2 billion worth of cryptocurrency. Most of the victims of the scam lived in China.
The Rise of Tether in China
Stablecoins, which are a type of cryptocurrency crafted to minimize volatility by pegging it to a more stable asset, account for 33% of all of the value transacted in East Asia in the year.
More than 93% of the stablecoin value transferred by addresses in East Asia was into Tether, a popular digital asset that is pegged to the U.S. dollar.
Tether is one of the most controversial cryptocurrencies because the company behind the asset has failed to produce any evidence showing that it is supported by adequate reserves.
A 2017 decision from the Chinese government to ban direct exchanges of yuan for cryptocurrency fueled the rise of Tether in the country. Chinese cryptocurrency users have relied on buying Tether from under the table through brokers as a means of on-ramping to Bitcoin or other digital currencies.
Since Tether is supposedly pegged to the U.S. dollar, some people in China use this digital currency as a replacement for the USD.
The report attributes $18 billion out of the $50 billion in cryptocurrency moved out of China in the past year to Tether, and it pinpoints two news events to spikes in Tether trading volume.
First, after President Xi Jinping said on October 25 that China might launch its own national cryptocurrency with its own blockchain, this indicated that opportunities for entrepreneurs to launch new coins or to own private coins would be diminished. As a result, there was a spike in Tether trading out of China.
The second event that caused a spike was around March 17 when Bitcoin’s price started to increase and global equities fell due to the initial impact from the pandemic.