Crypto as a Marketplace for Capital Flight

Crypto as a Marketplace for Capital Flight
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Volume/Issue: Volume 2024 Issue 133
Publication date: June 2024
ISBN: 9798400279348
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Topics covered in this book

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Exports and Imports , Money and Monetary Policy , Capital flows , digital money , capital controls , cryptocurrency market , cross-border capital flight , crypto market , trading illicit capital flight , IMF working paper 24/133 , Capital outflows , Currencies , Global

Summary

This 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. We analyze relative crypto pricing data in several country case studies, providing empirical support that crypto markets serve as marketplaces for capital flight that already took place, rather than a novel channel for capital flight. We make available a novel dataset on crypto market premia, which we propose as indicators of excess demand for foreign currency and capital control intensity. The dataset will be posted along with this paper and updated periodically.