Do The Chinese Use Bitcoin To Get Pass Its Foreign Exchange Control?

[RooseveltOah]

The short answer is no, but they do use crypto, and here’s how

Due to China’s foreign exchange control, foreigners who work in China, Chinese residents who are exposed to political risks, and those who wish to make investment (either for tax evasion or not) or large sum payments abroad are limited to a quota of only 50,000 USD foreign exchange per year, government regulations are much more strict in 2019, but crypto has given some room for international transfers, we are hoping to understand how stable coins is playing a role in this.



China Government Policies & Past Examples

2019 Feb Chinese government declared new rules on foreign exchange control, in previous years, individuals buys foreign currency in various ways, if seller profit above 100K CNY or total exchange amount beyond 5 million CNY, it’s considered criminal activities, other than fines, individual could be sentenced to jail up to 5 years, the bigger the amount, the longer the sentence..

Individual quota for foreign exchange is 50,000 USD per year.
In China, transaction beyond 50,000 CNY, bank transfer beyond 200,000 CNY will be directly monitored by People’s Bank Of China, the central bank.

2018 first half there were 13544 violations, fines amounted to 345 million CNY, starting this year with the new rules, making these fund transfers will only be harder.

Before Crypto

Some examples include individuals use children’s bank accounts when they’re studying abroad, pay for goods with Alipay, WeChat, and as for refunds in foreign currencies, some do this through travel agencies, and myriads of different ways, now mostly under Chinese government’s supervision.

Corporations also have their ways, with almost all of them have bank accounts in Hong Kong, they send CNY to a dealer within China, and the dealer sends them USD in Hong Kong, this is so far most prominent, and least risky too, yet other ways include price manipulations on import export, making loans, invest through offshore funds, etc.

Chinese Government Analyze Patterns

The Chinese government also have countless counter measures, including detecting bank transfer & account opening patterns, matching transaction pattern to company activities, tracing criminal accounts, and limiting company’s abilities to for example, making loans offshore.

The Crypto Way

The advantage of cryptocurrency is that it provides a perfect “gap” to cut off tracking, which is what all the old ways are trying to get at, other advantages include speed (faster than international transfers), trustless (If one chooses to hold crypto by themselves) and simpler (than using trades to cover up or using deposit and loans to cover up)

But the key for most, is still the cost of such transfers, which crypto actually doesn’t have much of an edge, some old ways has on par or lower fees depending on the amount.

We’ve been told by some sources that traditional financial services have been suggesting clients to talk to USDT OTC dealers for transfers under the table, but this is not yet proven on a scalable way.

So as you can see, Bitcoin is not mentioned here, these fund transfers are mostly being done in USDT (dominantly) because of stability, individual or companies do not want to lose value in the process of the transfer.

Basically all of the OTCs quote Huobi for the prices, individuals because of the smaller amount, usually go through OTCs, corporations on the other hand go directly through Huobi’s own OTC.

Private OTC desks do work, but requires much trust, and now the money mostly only go to Hong Kong.

Pricing Breakdown

Because individuals and corporations take very different paths here, we talk about them separately here

For individuals who mostly go through private OTCs, buying USDT with CNY costs approximately 1.5~2%, converting USDT to USD on the other side usually takes 0.5%~1%, total cost around 2~4%, which is not subject to taxes under current law, comparing to underground transfers which are usually 5~8%, this is considered a pretty good deal. These individuals find OTCs from personal connections, nothing public or advertised.

For corporates who usually go through Huobi OTC directly, it costs around 0.5% to buy USDT, and 0.2% to convert back to USD offshore (or in Hong Kong), but is often subject to business taxes, HK 16.5%, Singapore 24%, Taiwan 22%, US 27.5%.

There isn’t much to say about Huobi OTCs, it’s quite straightforward, the private OTCs are more interesting. For Chinese corporations or individuals seeking USD in Hong Kong, these private OTC desks has a partner who are both incorporated in Beijing and Hong Kong, they simply transfer CNY to this partner in China, and partner transfers USD to client account, with a 2% fee, they often compare this to USDT solution considering the rate of USD and USDT of that day, for well established OTCs, former has a higher chance to be cheaper, for smaller ones, latter is usually cheaper. Decision of which route to go is made by clients. A lot of these transfers are still being made in the old way, however if the fund source is considered illegal under Chinese laws, then they usually go to the crypto way.

[figmentofmyass]

For individuals who mostly go through private OTCs, buying USDT with CNY costs approximately 1.5~2%, converting USDT to USD on the other side usually takes 0.5%~1%, total cost around 2~4%, which is not subject to taxes under current law, comparing to underground transfers which are usually 5~8%, this is considered a pretty good deal. These individuals find OTCs from personal connections, nothing public or advertised.

For corporates who usually go through Huobi OTC directly, it costs around 0.5% to buy USDT, and 0.2% to convert back to USD offshore (or in Hong Kong), but is often subject to business taxes, HK 16.5%, Singapore 24%, Taiwan 22%, US 27.5%.

There isn’t much to say about Huobi OTCs, it’s quite straightforward, the private OTCs are more interesting. For Chinese corporations or individuals seeking USD in Hong Kong, these private OTC desks has a partner who are both incorporated in Beijing and Hong Kong, they simply transfer CNY to this partner in China, and partner transfers USD to client account, with a 2% fee, they often compare this to USDT solution considering the rate of USD and USDT of that day, for well established OTCs, former has a higher chance to be cheaper, for smaller ones, latter is usually cheaper. Decision of which route to go is made by clients. A lot of these transfers are still being made in the old way, however if the fund source is considered illegal under Chinese laws, then they usually go to the crypto way.

i'm beginning to see why the tether market is booming in china. the crypto markets have provided USDT with enough liquidity to attract chinese interest as a capital flight mechanism. and apparently also as a means for tax evasion and money laundering too in the case of these private OTC brokers.

all of this must be attracting the ire of the chinese government. i hope bitfinex and tether are well insulated from their reach.

[countryfree]

Of course, they do. Just as all the people who live in a country with stringent currency controls.
I would do it too, under those conditions.

[dothebeats]

Yes of course. Knowing how well the controls are from their government, they would need something to bypass these strict controls and do whatever they want with their money. Though that's the situation that we see on the outside, Tether and ETH remains to be the most sought after cryptocurrency tools for the Chinese. I don't know much about how the market in there works, but I know for certain that it's something related to fees and availability of the brokers and/or entities dealing with them.

[squatter]

Of course, they do. Just as all the people who live in a country with stringent currency controls.
I would do it too, under those conditions.

I'm sure it's used on a small scale, but it sounds like volatility is a major deterrent for those looking to move capital offshore. The real winner here appears to be Tether. Since Tether leverages blockchains to cut off government tracking and third party meddling but also retains price stability, the Chinese are taking to it.

[eddie13]

all of this must be attracting the ire of the chinese government. i hope bitfinex and tether are well insulated from their reach.

Not so much.. Bitfinex is in Hong Kong..
And are you aware of what is happening in HK right now because of China?

Search for "Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation Bill 2019"..

[bitmover]

I'm sure it's used on a small scale, but it sounds like volatility is a major deterrent for those looking to move capital offshore. The real winner here appears to be Tether. Since Tether leverages blockchains to cut off government tracking and third party meddling but also retains price stability, the Chinese are taking to it.

I believe bitcoin can be sometimes easier than tether.
There are much more local fiat pairs against bitcoin than tether.

Nowadays tether is more common than a few years ago, however bitcoin is still the most common cryptocurrency and the easier one to exchange back to fiat.

[CryptoBry]

Although I am not really a big fan of China but there is no question that things are happening in there according to the design and overall vision of the government. In other words, they wanted to have their own cakes and have the chance to eat them too. The government has been working day and night for economic progress to raise as many people out of poverty as fast as they can, but they wanted to have controls on everything they can think of. And for now, people are not complaining that much. Financial control is always on the table and yes the government will be using all the tools they can including the blockchain and cryptocurrency. In extension, the government has an adamant disdain on Bitcoin and cryptocurrency that is beyond their own control. This is China and it is doing things with a lot of sense, and we may not like them but that the reality is that China is following what can be on its best interest.

[pooya87]

i'm beginning to see why the tether market is booming in china. the crypto markets have provided USDT with enough liquidity to attract chinese interest as a capital flight mechanism. and apparently also as a means for tax evasion and money laundering too in the case of these private OTC brokers.

that is just the tip of the iceberg of reasons that has led to Tether becoming this big. people keep asking why they keep printing more USDT but they miss all these people who have no other option but to use USDT!
that's not all, basically anyone else in any other country who wants to avoid KYC and the shenanigans of the banks while transferring fiat between cryptocurrency exchanges, is going to pretty much have to use USDT. not to mention that exchanges themselves don't want to add fiat because of all the bank related headaches (eg. banks closing down Bitfinex's accounts a couple of years ago before they went full Tether) are adopting Tether.

[Murat]

I think it's a common scenario in China. Since a lot of Chinese people are doing in this blockchain system so they are doing something like this without any doubt. another important thing is that China is trying to take the lead all the aspect of the current situation, so they are working on a various perspective, Not only that but also China has taken a step regarding the blockchain system, though China is really in a hard position against Bitcoin and Cryptocurrency, but a lot of people from China are working for the flourishment of this system, so who knows what will happen in the coming days.

[squatter]

I'm sure it's used on a small scale, but it sounds like volatility is a major deterrent for those looking to move capital offshore. The real winner here appears to be Tether. Since Tether leverages blockchains to cut off government tracking and third party meddling but also retains price stability, the Chinese are taking to it.

I believe bitcoin can be sometimes easier than tether.
There are much more local fiat pairs against bitcoin than tether.

But in China, Tether is actually used in 99% of Bitcoin spot trades, according to Chainalysis.

Tether isn't just a base pair for cryptocurrency markets anymore, either. Like the OP points out, it's becoming a robust remittance vehicle and is becoming the preferred option over Bitcoin for that:

Business is brisk thanks to a constant flow of Chinese merchants who come in daily with heavy bags of cash. Oleg said his OTC desk sells about $3 million worth of crypto every day. Most of it usually goes to China. But what’s perhaps most surprising is which crypto.

Only 20 percent of Oleg’s sales are in bitcoin, the oldest cryptocurrency with the largest market capitalization. The other 80 percent is in the dollar-pegged token known as tether, or USDT.

Tether’s best-known application is allowing crypto traders to move money between exchanges quickly to take advantage of arbitrage opportunities. But according to several Moscow OTC traders, it has at least one real-world use case – as the go-to remittance service for local Chinese importers.

The total volume of USDT purchased by Chinese businesses can reach $10 million to $30 million daily, these traders said.

“They accumulate a lot of cash in Moscow and need tether to transfer it to China,” said Maya Shakhnazarova, head of OTC trading at Huobi Russia, the Moscow office serving high-roller clients of Singapore-based exchange Huobi Global.

The tether-for-rubles purchases often take place in offices like Huobi’s in the steel-and-glass skyscraper district of Moscow City.

“There are a lot of OTCs here in Moscow City, a bunch of offices in every building, and the volumes for them all can reach several dozens of millions of dollars a day. It’s all paid for in cash,” Shakhnazarova said.

Chinese grey-market importers used to rely on bitcoin before the 2018 bear market, another OTC dealer, Roman Dobrynin, told CoinDesk. As the price was ever-growing, merchants and the intermediaries helping them buy crypto could make some extra money along the way.

But since the beginning of 2018, hoping that your bitcoin will still be worth the same or more at the end of the transfer became too risky.

“As the price was going down, tether became much more convenient to use,” said Dobrynin. “China is totally reliant on USDT, they trust in it a lot, plus it’s very liquid.” His own clients are mostly Chinese, and they usually find him by word of mouth, connecting via Telegram.

Nowadays tether is more common than a few years ago, however bitcoin is still the most common cryptocurrency and the easier one to exchange back to fiat.

In China, I believe it's very easy to exchange either Bitcoin or Tether to fiat. For remittance, the market is showing a preference for Tether, though. That has obvious implications for capital flight.

[Upgrade00]

I believe bitcoin can be sometimes easier than tether.
There are much more local fiat pairs against bitcoin than tether...

The volatility in bitcoin makes it unsuitable as a means of conversion, especially one that will not be completed instantly but will go through so many processes.
It would also create a hassle as to how much it was when every transaction was made during the conversion especially when it's being done through, private over the counter trades.
Stable currencies are the most suitable solution in this case and is one of the reasons why it has become so popular in countries like China.

[Duzter]

Users always term volatility as a feature that restricts in such conversion process. If the core value is understood they'll never attribute volatility anymore. Not only Chinese, even other country people does it when they're kept under control to use their own money. Some stated stablecoin a solution, this is purely for people who want to stay away from risk.

[Kprawn]

Capital Control has always been a contentious issue, with most people saying it is their wealth and asking why they should get permission from a

government to transfer any amount of money out of the country. Bitcoin is not controlled by a country and it is borderless, so you can transfer any

amount to anyone as often as you like. This is just one more reason why people should use bitcoins and not government controlled fiat currencies.

What is going to happen when you want to leave your country, do you need permission in your country to take your wealth with you.  

Example : https://www.forbes.com/sites/richardgrant/2013/08/25/it-cost-mark-shuttleworth-more-to-leave-south-africa-than-it-did-to-leave-the-earth/#15c2739a76c9

[alani123]

Some must do it for sure. But I'm wondering how easy that would be for large amounts of money. As we know, China has tough controls on payments. Most happen electronically through government approved applications. If somebody was dealing too much with cash, it'd might be expensive and also suspicious. Maybe getting money out of china is either a small time thing or mostly accessible to those with access to elite grey market services.

[bitmover]

But in China, Tether is actually used in 99% of Bitcoin spot trades, according to Chainalysis.

I know this is true however you need the fiat x tether pair in the other Fiat currency as well, otherwise you cannot do the remittance.
This makes things not so easy. Maybe even avoid the biggest exchanges which may have more strict kyc and countries restrictions.
It can be done with tether but I believe it is less convenient in most cases. U less you have two exchanges with 2 fiat pairs against tether.

The volatility in bitcoin makes it unsuitable as a means of conversion, especially one that will not be completed instantly but will go through so many processes.
It would also create a hassle as to how much it was when every transaction was made during the conversion especially when it's being done through, private over the counter trades.
Stable currencies are the most suitable solution in this case and is one of the reasons why it has become so popular in countries like China.

Volatility is irrelevant here, as a bitcoin transaction can be done in less than 30minutes. In 30minutes btc volatility is basically zero as exchange fees plays a bigger role.

[squatter]

But in China, Tether is actually used in 99% of Bitcoin spot trades, according to Chainalysis.

I know this is true however you need the fiat x tether pair in the other Fiat currency as well, otherwise you cannot do the remittance.
This makes things not so easy.

Why do you assume that makes things difficult? That's actually what the OP was talking about, how there are robust OTC Tether/fiat markets emerging.

We are used to focusing on Tether's banking problems, but that only pertains to the primary Tether market -- the actual redemption of USDT directly by Tether.

Chinese (and Russian) liquidity is being built on secondary markets. It's based around OTC liquidity providers that don't need to mandate Tether's KYC requirements and who don't require constant USDT issuance/redemption. The vast majority of this economic activity requires no banking at all. Brokers are buying and selling USDT for cash at high volumes.

Volatility is irrelevant here, as a bitcoin transaction can be done in less than 30minutes. In 30minutes btc volatility is basically zero as exchange fees plays a bigger role.

Volatility is not irrelevant at all. We're not talking about exchanges either. The Chinese don't have access to liquid, centralized exchanges with banking.

We're talking about high volume OTC transactions in cash, and moving value across borders. If a Chinese importer in Moscow buys bitcoins from a Moscow OTC broker, he can't immediately liquidate those bitcoins for cash on the other side of the border. In the meantime, the price of Bitcoin could drop 10% a day. Why take that risk?

That's what Chinese Tether users seem to be asking themselves.

[Artemis3]

Capital Control has always been a contentious issue, with most people saying it is their wealth and asking why they should get permission from a government to transfer any amount of money out of the country. Bitcoin is not controlled by a country and it is borderless, so you can transfer any amount to anyone as often as you like. This is just one more reason why people should use bitcoins and not government controlled fiat currencies.

What is going to happen when you want to leave your country, do you need permission in your country to take your wealth with you.  

Well this is one good reason to use Bitcoin. Tether is dangerous, but people don't understand that. Some are too lazy for converting things on the fly, those lazy people who have never lived hyperinflation. For starters Tether practices fractional reserve, its a bomb waiting to happen. And its "pegged" to a fiat, that is already unsafe by itself. They also use various blockchains, but not theirs. And they create tokens on a whim. If people think Tether is Bitcoin without the fluctuation, they are going to be getting a nasty surprise someday.

Any coin that claims to be backed in "anything" is a bomb waiting to explode, you will lose your money. Your only "hope" is it doesn't implode the day you are transacting with it. Those that manage it have already shown irregularities in the past...

[Lottoshi]

This is how gambling platforms in China move money as well

[RooseveltOah]

Some must do it for sure. But I'm wondering how easy that would be for large amounts of money. As we know, China has tough controls on payments. Most happen electronically through government approved applications. If somebody was dealing too much with cash, it'd might be expensive and also suspicious. Maybe getting money out of china is either a small time thing or mostly accessible to those with access to elite grey market services.

Yea it is mostly accessible only to the elite class, as far as I understand they only get their hands on this service through introductions, the transfer isn’t as limited due to it a company transfer mostly