Why Capital Controls Usually Fail, China Versus Bitcoin Edition

In September 2015, we first brought the world's attention to the quasi-capital controls being implemented by Chinese authorities, and more importantly, the way in which Chinese citizens were skirting those controls... using Bitcoin:

Yes, bitcoin may be slowly but surely leaving the domain of the libertarian fringe, but in exchange it is about to be embraced as the most lucrative and commercial "blockchained" way to capitalize on what may soon become the largest capital outflow in history.

And Bitcoin's inexorable rise since then suggests China (and Venezuela, and Zimbabwe, and Spain, for example) are losing the fight to beat capital flight.

 

This 'flight control' is nothing new of course. As DollarCollapse.com's John Rubino notes, one of the recurring themes of financial history is government over-reach leading citizens to mistrust the local currency and move money overseas, prompting the government to try to trap that wealth within its borders.

This nearly always fails because rich people are clever and borders are really hard to seal.

The latest chapter in this story involves China – which has engineered an epic debt binge in the past decade, and bitcoin – which has emerged as a highly efficient way to move capital across national borders.

The following chart shows that between 2009 and 2016 China’s debt soared to levels comparable as a percentage of GDP to that of the US leading up to the Great Recession:

This explosion of credit produced thousands of new paper millionaires, many of whom correctly understood that bad things tend to follow huge increases in financial leverage. They began moving their money to places like Vancouver and San Francisco, which prompted Beijing to respond with capital controls. See:

China’s New Capital Controls Expected To Slow Real Estate, But Improve Country’s Economic Health

China’s Yuan Outflows Plummet, Showing Capital Controls Pay Off

China Is Said to Ban Bitcoin Exchanges While Allowing OTC

Score one, apparently, for repressive government.

But cyberspace doesn’t recognize national borders, and the rise of cryptocurrencies has changed the game for both dictators and the capital they hope to control.

China’s Liquid Injection Could be Bitcoin’s Delight

(Coin Telegraph) – In an attempt to lift market sentiment, China has dumped cash totaling over 810 bln Chinese yuan – about $130 bln – into its economy over five days. This is a move to solidify the economy of the country and boost the nation’s supply, but they may have just helped their biggest enemy.

 

The Chinese government, since its shock ban on Bitcoin exchanges and ICOs, has been concerned with trying to keep capital in the country and thus seen it prudent to quash Bitcoin and other cryptocurrencies.

 

However, the cryptomarket in the Asian country has found ways to stave off the killing blow from regulators, and this most recent move could actually benefit the hungry Bitcoin investors still prevalent in China.

 

Trickle-down effect

The extra liquidity came about thanks to repurchase deals. This sees the Central Bank buying securities from commercial banks as they agree to sell them again in the future. This capital is now floating around, quite liquid, in the economy, and there is no doubting it will join the Bitcoin revenue stream.

 

Nomura analysts said in a note, adding that the market is pricing in maintenance of a prudent monetary policy stance:

 

“We read this as a sign that financial deleveraging will be a multi-year theme and that deepening financial reforms are underway.”

 

Because Bitcoin continues to live in China, behind a black market-style wall, there is still a demand as the public find new and innovative ways to secure cryptocurrency.

 

Thus, it seems that China may well be shooting themselves in the foot with this latest move as it will no doubt have a trickle-down effect, leaving more capital to flow into cryptocurrency. From there, the extra liquidity could very easily siphon out of the country, unregulated and against the wishes of the regulators.

The moral?

If you screw up your country’s finances, people will get their money off the sinking ship one way or another. Bitcoin is just a new way to play an ancient game that governments almost always lose.

Comments

38BWD22 Sun, 11/26/2017 - 13:27 Permalink

  Just bought a little bit of gold with BTC.  Still have "enough" BTC to play with...And like the article says, it's a GREAT way to move some capital around. 

Antifaschistische Two-bits Sun, 11/26/2017 - 13:43 Permalink

you can take your cash to Best Buy and buy a gift certificate.The money you paid is not destroyed.  But now you have a $100 gift cert that is 'like' money.  What you have really done is added $100 to the pile of fiat money in the world with the expectation that someone will exchange that fiat for something of value....some day.crypto's are the exact same phenom...NO ONE I know in the crypto game is there to hedge against .gov stupidity.  They are there for capital appreciation.   However, the big money out of asia is just a technique for money laundering.  I get that.So we've added 150 billion to the worlds pile of fiat.  I have no problem with that.  Just know...this fiat, like ALL fiats, one day wants to find a home and exchange itself for something of value.

In reply to by Two-bits

shitshitshit tmosley Sun, 11/26/2017 - 14:34 Permalink

people in crypto are there to speculate, which is fair given we can't say whether BTC or any other crypto will be around in 10 years considering the fundamental risks at stake (and that not so many people know about): 1- logical security rests on:  a- elliptic curve crypto (one curve that could be backdoored) for wallet priv+pub keys: it has been demonstrated that ECC is more prone to attack by quantum computing than RSA. How fast will these become obsolete?  b- SHA-2 hash for wallet ID: with SHA-1 on the eve of being broken for good, all efforts will concentrate on SHA-2.I would put the life expectancy of BTC to around 10-20 years from now. These risks are fundamental and must be dealt with by anyone who wants something more time proof. 2- theft of crypto on computers is becoming more and more sophisticated, leading to real concerns about wealth preservation, not talking about people not backing up their wallets and losing their drives etc. 3- we do not know where does the injected money come from (people speak about zimbabwe, ghana, venezuela, etc. which laughable):  a- there are high chances that indeed it's a bit of a pyramid scheme given that some old cryptos are used to inflate newer ones, allowing whales to stay, well, whales in all known crytos.  b- there are also high chances that some intermediary tokens are plain fraud, e.g.: tether 4- 95% of the coins are owned by 5% of the wallets (therefore even less people in all likelyhood) 5- the final destination of the coins is to this date always to make $$ after some time, thereby propping the $$ as the real underlying rserve currency for all cryptos. Whenever fiat currencies will start being converted in BTC the situation may very well change for good. 6- exchanges come and go, often at their clients' expense In general, if crypto is a genuinely interesting concept, the maturity of the industry is still low. Take for instance the fact that you never be 100% sure that your hard earned coins will be secure for another 10-20 years from now. This is what people tend to forget when they bet the farm on it. Despite what most people say, pretending that wealth could be preserved in crypto is wrong because the technological risk is simply too high to be ignored.Let's see how things evolve within a few years from now. 

In reply to by tmosley

38BWD22 shitshitshit Sun, 11/26/2017 - 14:37 Permalink

@ shit^3

+ 1

It is impossible to predict the future, especially in advanced technology that may have flaws we don’t know about.

Diversification has been my favorite word since coming to ZH many moons ago, even under my old DoChen... handle.

CAUTION is proper in dealing with BTC and other cryptos. I still have not seen EVEN ONE person here at ZH who has said that they’ve read the BTC (or any other) code at github......

In reply to by shitshitshit

zxbkajbs91bckz… 38BWD22 Sun, 11/26/2017 - 16:20 Permalink

I"m not a C++ guy, but I did start making my own crypto from scratch in Python using the same specs as Bitcoin. It was a few dozen hours spent with the Bitcoin technical reference and dev guide.I'm not sure that knowing the low-level mechanisms is useful from an 'investment' perspective. It seems like information security and operational security are more helpful.Anyway, the breakdown by shitshitshit is quite good.edit: in addition to infosec etc... a Taleb-style antifragile dispersion of crypto ownership appears to be the way to go, obviating the need to 'predict the future' as you put it. Anyone betting the farm is just begging for trouble, and most will receive it.

In reply to by 38BWD22

x86cowboy shitshitshit Sun, 11/26/2017 - 17:57 Permalink

>>> 1- logical security rests on:  a- elliptic curve crypto (one curve that could be backdoored) for wallet priv+pub keys: it has been demonstrated that ECC is more prone to attack by quantum computing than RSA. How fast will these become obsolete?  b- SHA-2 hash for wallet ID: with SHA-1 on the eve of being broken for good, all efforts will concentrate on SHA-2.I would put the life expectancy of BTC to around 10-20 years from now. These risks are fundamental and must be dealt with by anyone who wants something more time proof.

That's what software upgrades and blockchain forks are for. If there's a perceived threat to a blockchain, like Quantum Computing, rest assured, quantum resistant upgrades will be put in place. Even if upgrades were late, you can fork at any point in time, IE: rewind blockchain before the "black swan" event and move those balances off to a more secure network.

>>> 2- theft of crypto on computers is becoming more and more sophisticated, leading to real concerns about wealth preservation, not talking about people not backing up their wallets and losing their drives etc.

Use a crypto-wallet with a mnemonic recovery seed (BIP39). If your wallet is lost, you can recover the wallet with the same seed and move your "stolen coins" to a different wallet with a different seed that you control.

 

In reply to by shitshitshit

Gead tmosley Sun, 11/26/2017 - 14:18 Permalink

For your sake, I hope you make some money/profit. I really do. I've not a thing against you. But... you're so wrong. Crypto-currencies are about as stable as MySpace was. Right now, incredibly popular, novel, everyone rushing into them. A benefit is derived for all that do.... for a time. Then, something new comes along and the "look squirrel!!!" shout comes along and it all comes crashing down. I predict it will be like Facebook. Billions of people have jumped onboard, giving up their privacy, security and worse - time - to let the world know how their dinner just departed their bottoms. And now? It's becoming the province of the adults, the old folks. More and more young people are migrating to other venues. And why is that so easy to do? Because simply put - nothing digital is real in terms of 'reach out and touch something' real. So? Enjoy your increase in wealth. But, be among the first to cash-out. Crypto-currency is a fart in the wind.

In reply to by tmosley

Number 9 Gead Sun, 11/26/2017 - 14:25 Permalink

you still refuse to acknowledge the debasing of currency around the world..and you still refuse to check history and see how long a debased fiat currency lasts..what you are witnessing is the death of fiat currencies..we could pave the world over 100 times with dead money..so now ffs..it is step right up. put your money down..take a chance on the fvkin ring toss..sad we are here..but never the less here we are..

In reply to by Gead

kamikun 38BWD22 Sun, 11/26/2017 - 15:02 Permalink

>>Just bought a little bit of gold with BTC.  Still have "enough" BTC to play with... Yep, me too. Only problem is, I've been hedging this BTC ride all the way uo from $80.  Bought myself a mess of the crypto back in 2013 - and every time there was a significant pop thought to myself, "Sure, I believe in the vision and the concept - but daddy's still gotta put food on the table," so went and swapped some for Au. Now, as it gets ready to hit 10k, I have only a handful of BTC left... and a pile of stupid, shiny rocks.They're worth something, but if I had held on to just half of the BTC, I would be a millionaire.... Still, any profit you can walk away with is a good one.

In reply to by 38BWD22

JibjeResearch Sun, 11/26/2017 - 13:27 Permalink

China (BRICS) is trying to bring back the Gold standard... it'll be painful for them... ahahhaCryptocurrency's blockchain tech is like the beginning of the internet during the 1950's

Tom Green Swedish Sun, 11/26/2017 - 13:34 Permalink

Everybody throws their money into "nothing" ie blockchain, then be sure the market collapses along with the digital coins people bought as "protection". It will fundamentally screw up all markets if people continue to invest in a digital network of computers creating "assets".

GooseShtepping Moron Sun, 11/26/2017 - 13:56 Permalink

Bitcoin is just a new way to play an ancient game that governments almost always lose.What the hell are you smoking, Tyler? Governments don't "almost always" lose this game; in fact, they almost never lose it. How many governments in the history of the world can you name that collapsed due to capital flight? The fact of the matter is that government has an almost limitless ability to prevent people from moving money outside the country if it really wants to. But besides that, blood is thicker than Bitcoin. A nation is much more than just an organized economy, and it answers to primordial needs that go much deeper than the mere desire to be rich and sassy (which is what Bitcoin speculation is all about). In times of crisis most people will be patriotic; they will stand with the nation rather than seek individual opportunity.All that really needs to be said about Bitcoin is this: It is not a source of fiscal legitimacy and rectitude. It is the very symptom and highest expression of the age of bubble finance. We live in a time when massive, systemic economic weaknesses are beginning to shake the very foundations of civilization, and the hottest game going is an algorithm that consumes as much electricity as a small country in order to produce blocks of encrypted digits. This is madness.What if that effort had been expended to repair our crumbling infrastructure or to build affordable housing for young families? Then we would have actually produced something, but that would have required real work, sacrifice, and foresight. Investing in Bitcoin produces nothing. It is just the expression of the desire to "get mine" and to hell with the public weal.Governments have every right to repress this insanity. And when the shit hits the fan, they will.

38BWD22 GooseShtepping Moron Sun, 11/26/2017 - 14:28 Permalink

+ 1 for an interesting comment, Shtepper.

But, the government would/will do very little for our crumbling infrastructure and poor families.

They are more likely to raise taxes and seize assets instead.

We who own gold and Bitcoin have little trust in .gov.

Agreed they may try to seize or otherwise block cryptos, but then it becomes a naked dictatorial power grab.

EDIT:

Anyone taking a profit in cryptos better keep good records for our pals at the IRS. They now have and use advanced blockchain tracking software. I am done with recording such CapGains info for 2016 and for amending our 2015 returns.

In reply to by GooseShtepping Moron

Number 9 Sun, 11/26/2017 - 14:10 Permalink

How many governments in the history of the world can you name that collapsed due to capital flight the biggie is Rome..they debased their money and collapsed..me thinks you are ignorant of the history of fiat paper currency..

RedDwarf Sun, 11/26/2017 - 14:17 Permalink

Capital controls do not work becaue prices are signals used by the market to efficiently price goods and services and to stimulate efficient response.  Higher prices signal the need for more supply, which then drives research, factories, education, distribution, and so on for whatever X is.  Lower prices signal the opposite.In other words, prices are information.  Capital controls are literally lies to the market, resulting in capital misallocation, waste, and inefficiency.  Capital controls to having a strong economy makes as much sense as voluntarily telling your own generals and soldiers lies about enemy troop numbers, deployment, logistics, goals, equipment, and tactics and expecting to win the war.Capital controls are an example of extreme magical thinking and irrationality.  The fact that the majority of people do not understand this and accept price controls as normal and valid does not make it any less so.

FreeShitter Sun, 11/26/2017 - 14:44 Permalink

Im a huge BTC fan, as I trade it..in a few weeks CME comes onboard...here's the moneyshot question..... GLD can be settled in cash as we know, and banks have access to CTRl-P 24/7. So tail can wag the dog. They can short infintum, like GLD, hard currency,  must follow paper price. Will the Party days will be over for bitcoin? When GLD was first formed goldbugs were ecstatic, as they thought that the CME would need to buy hard gold,and drive up price, which happened initially, then the shorting started in sizes that were outlandish. Time to watch the charts carefully. This will be the biggest threat to BTC ever. Right now Im glad to own a few...

kamikun tropicthunder Sun, 11/26/2017 - 15:30 Permalink

>>DaBoyz with the full backing of TPTB are going to FUCKING MURDER BTC...I wouldn't be so quick to pronounce BTC dead. Unlike gold, there is next to no cost in storing BTC securely in your possession - and beyond that - there is REAL VALUE in holding your BTC yourself (as oppossed to a custodian doing it for you)... trading in the crypto market.Without the actual BTC, you can't trade. No exchange is going to accept a made-up IOU for actual 'coins'. (Yeah, I know how ironic that sounds.) But investors will lose out on one of the main hedges / income flows of having crypto if they lock themselves into a contract that exposes them only to the USD value of one crypto.I think the ETF is for the sophisticated legacy investor / crypto noob only. Don't think a lot of retail traders are gonna be interested.

In reply to by tropicthunder