Crypto as a Marketplace for Capital Flight

IMF Working Papers, June 28, 2024

Source details

The paper shows how cryptocurrency markets can fuel cross-border capital flight by serving as marketplaces that match counterparts with and without (illicit) access to FX.
In countries where international transactions are restricted, crypto exchanges effectively allow domestic agents to pay a premium to buy foreign currency.
The counterparts to these transactions are agents with access to FX, who sell crypto holdings purchased abroad.
A stylized model illustrates that restricted foreign currency amid economic imbalances incentivizes these transactions via persistent crypto premia in local relative to global markets.
Empirical analysis of relative crypto pricing data in several country case studies provides support that crypto markets serve as marketplaces for capital flight that already took place, rather than a novel channel for capital flight.
The authors make available a novel dataset on crypto market premia, proposed as indicators of excess demand for foreign currency and capital control intensity; the dataset will be posted along with this paper and updated periodically.

Crypto markets can function as marketplaces that match agents without access to FX to agents with access to FX, enabling premium-priced conversion into foreign currency.
Persistent crypto premia in local relative to global markets are linked to restricted foreign currency amid economic imbalances.
Empirical support comes from relative crypto pricing data across several country case studies (case details are contained in the paper).

A novel dataset on crypto market premia is produced and will be posted along with the paper and updated periodically.
The dataset is proposed as indicators of:
- excess demand for foreign currency, and
- capital control intensity.