Bitcoin and Stablecoins Rising as Solutions for Capital Control Evasion and Remittances – BIS Report

# Cryptocurrency Redefines Global Capital Flows, Challenges Traditional Finance Cryptocurrencies are breaking the boundaries of traditional financial systems and redefining global capital flows, based on a recent analysis. The Bank for International Settlements (BIS), in a May report, described cryptocurrencies as a "new international financial network" that operates without geographic or regulatory constraints. The report reviewed the movement of assets like Bitcoin(BTC), Ethereum(ETH), TetherUS(USDT), and USDC(USDC) across 184 countries from 2017 to 2024, using a quantitative research approach. Cryptocurrencies serve various roles, from remittances to investments and as tools to bypass capital controls, though their usage patterns vary by asset type. # Bitcoin Fuels Speculation, Stablecoins Dominate Remittances According to the BIS report, cryptocurrency trading volumes peaked at $2.6 trillion in 2021, with stablecoins making up half of this volume. Bitcoin and Ethereum, known for their high volatility, mainly serve as speculative investments. Bitcoin's trading volume surged during increases in the VIX, a measure of stock market volatility, highlighting its role in risk-sensitive investments. Conversely, stablecoins like USDT and USDC are preferred for remittances, especially in high-inflation countries. Cryptocurrencies are increasingly used for cross-border transfers as traditional remittance fees rise. For instance, USDT remittances increased by 25% when fees rose by just 1%. This is particularly evident in small transactions (under $200) sent from developed to emerging economies. # Cryptocurrency Sidesteps Regulatory Barriers, Challenges Capital Controls A significant finding is cryptocurrencies' ability to bypass capital control measures (CFMs). While traditional systems regulate capital flows, cryptocurrency activity often spikes in response to stricter regulations. Bitcoin transactions, for example, increased by up to 25% per quarter following tighter capital controls. This aligns with observations of cryptocurrencies being used in areas like China to evade restrictions. Interestingly, Ethereum, USDT, and USDC show little correlation with capital controls, demonstrating how different cryptocurrencies react differently to policy restrictions. # Cryptocurrency Networks Outpace Traditional Finance in Density and Reach Cryptocurrency transactions largely ignore traditional barriers like national borders, physical distance, or language. While these factors may affect trade and interbank transactions, they have minimal impact on Bitcoin trading patterns. The BIS stated, "cryptocurrency networks are denser than global trade networks and span a broader range of countries compared to traditional financial systems." Though the U.S. and U.K. remain key network hubs, emerging economies like India, Indonesia, and Türkiye have become significant nodes following regulatory crackdowns in China. In 2023-2024, Türkiye and Russia ranked second and third in USDT trading volumes, reflecting strong demand for stablecoins in economies facing high inflation and currency instability. # Policy Implications: Targeted Approaches and Enhanced Oversight Are Needed The BIS emphasized that cryptocurrencies have evolved into a crucial part of the global financial network. The report noted the inefficiency of blanket regulatory approaches due to the distinct roles and pathways of cryptocurrencies. Key insights include: - Macroeconomic policies have limited impact on cryptocurrencies. - Cryptocurrencies facilitate financial inclusion in high-remittance-fee countries. - Cryptocurrencies act as capital flight vehicles in strictly regulated jurisdictions. "With cryptocurrencies increasingly interfacing with traditional finance, the risk of vulnerabilities spilling into the mainstream financial system becomes more pronounced," warned the BIS. It called for targeted policy measures, enhanced on-chain data monitoring, and strengthened international cooperation to address the challenges posed by the growing integration of cryptocurrencies into traditional financial systems.