How Chinese Use Bitcoin to Funnel Money Out of the Country

November 4, 2015 Updated: December 7, 2015

In the fall of 2015, we know that all is not well with the Chinese economy. People are trying to get their money out as fast as they can. 

Some of these methods, like using underground banks or hiring people to carry physical cash out of the country are hard to do for ordinary Chinese savers.

Bitcoin can be made completely untraceable so the authorities won’t catch the person who transferred money out of the country.

Instead, they may be using the digital currency bitcoin to funnel money out of the country. 

“Some Chinese traders are expressing a view on the yuan exchange rate after the last devaluation and you have interest by mainland speculators to move to other assets after the stock market fallout,”  Jack C. Liu, the Head of International at OKCoin told Bitcoin Magazine. 

As a result, bitcoin has roughly doubled since the Chinese stock market started to unwind in the middle of July 2015 and hit overdrive after the currency devaluation of August 2015. 

Price of Bitcoin in U.S. Dollars over the past three months. (Google FInance)
Price of Bitcoin in U.S. Dollars over the past three months. (Google FInance)

Bitcoin can be made completely untraceable so the authorities won’t catch the person who transferred money out of the country.

This is how it works:

A Chinese saver who is scared to lose his life savings invested in real estate, the stock market, or bank deposits takes cash to an underground money exchange. 

The underground exchange then provides the saver with an anonymous bitcoin wallet. IP addresses, the only thing linking the bitcoins to the owner, can be hidden using Virtual Private Networks or the TOR network. 

The saver can then exchange bitcoin for dollars at any of the global bitcoin exchanges without anyone ever knowing his identity.

The only tricky part is getting the dollars out of the bitcoin wallet outside China. That would require a connection to a bank account overseas but at least the Chinese authorities cannot meddle with that process. 

The underground exchanges have more traditional ways to get money out of the country, using different channels to get foreign currency.

Ultimately, they will have to use that foreign currency to buy bitcoin to pass on to their local Chinese customers. This is why the price has gone ballistic recently in all major currencies. 

The underground exchange can also procure bitcoin directly from so-called bitcoin miners, many of which operate in China and need to pay utilities in yuan.

Because of the anonymity of the transactions it’s almost impossible to quantify how much money has been moved using this method.

Over the last year, almost 31 million bitcoin have been traded on China’s largest exchange, BTC China. At current prices, that’s worth almost $15 billion and dwarfs the $1.4 billion exchanged over the same period on the biggest U.S. dollar exchange BitStamp.  

However, Chinese don’t have to use this secret process. BTC China announced on Nov. 4 it will now accept direct deposits from Chinese citizens, which can then be exchanged for bitcoin.

The digital currency is up more than 20 percent on the news on Nov. 4, trading at $487. 

To gauge how much it could rise in total, it is interesting to look at the Cyprus of 2013. Deposits on the small Mediterranean island were frozen in the wake of a sovereign debt crisis. So Russian oligarchs used bitcoin to get their money out. 

In 2013, bitcoin rallied from $13 to $121 just after the crisis and before a speculative mania pushed it as high as $1,127. In Cyprus we were talking about billions of dollars of deposits. In China we are talking about trillions.

How much can the $5 billion pool of bitcoins absorb? The answer is all of it, it just depends on the price.