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Tether Could Be Enabling Capital Flight From China, Says Chainalysis

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Cryptocurrencies — and Tether (USDT) in particular — could be playing a key role in recent capital flight from China, according to a new report from blockchain analytics firm Chainalysis.

The report states that over 44% of crypto transactions in East Asia are conducted with counter-parties within the region, making it “the closest we have to a self-sustaining market” in the industry.

However, over the past 12 months, East Asia’s relative share of global crypto activity has begun to decline, with over $50 billion worth of cryptocurrency leaving China. Grayscale director of research Philip Bonello said: 

“It appears that users in many regions use stablecoins to access U.S. dollars for cross-border payroll, remittance, and capital flight from local currencies.” 

Since Beijing’s 2017 ban on direct conversions of yuan for cryptocurrency, the U.S. dollar-pegged stablecoin Tether has served as a popular stand-in for fiat for traders in the Chinese market. 

Relative to other regions, East Asia has the lowest share of on-chain volume devoted to Bitcoin (BTC), at 51% of transfers by volume. The rest consists of stablecoins, 93% of which is USDT.

While yuan-USDT trades are, strictly speaking, also prohibited, OTC brokers continue to sell the stablecoin to enable traders to lock in their gains from crypto trades without worrying about price volatility. In June of this year, Tether outflanked Bitcoin to become the most-received digital asset by East Asian addresses. 

In the East Asian market, over $18 billion worth of Tether was moved to addresses based in foreign jurisdictions over the past year. How much of this reflects capital flight remains difficult to conclusively establish.

Analysts claim that the yuan’s fluctuating valuation over this year and tensions amid the ongoing U.S.–China trade war could be spurring local investors to evade capital controls. Beijing bars citizens from moving more than the equivalent of $50,000 out of the country each year.  

The government has meanwhile cracked down on routes for offshoring capital via foreign real estate investments and other assets, leaving cryptocurrency as a possible alternative.

Other contributing factors include uncertainty as to how Beijing’s forthcoming national cryptocurrency will impact the private digital asset market. Chainalysis suggests this may be driving China’s cryptocurrency community “to move portions of their holdings overseas.” 

Primitive Ventures founding partner and regional expert Dovey Wan said that when it comes to Beijing’s approach to new technologies, “undertones matter”: 

“It’s important that [President] Xi talked about ‘the blockchain’ but not ‘Bitcoin.’ It implies that the digital yuan will be the only official, state-sanctioned cryptocurrency and dampens the view of crypto as a private asset.”

Chinese state policy toward crypto has long been shaping which assets traders use and why. 

In commentary earlier this month, American broadcaster Max Keiser also claimed that geopolitical tensions were spurring capital flight out of Asia — though he cast the spotlight on Bitcoin, rather than stablecoins like Tether. “Capital flight out of Asia taking the Bitcoin express,” he said, as the asset rallied to hit $12,000.



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Palestine monetary authority mulls digital currency as ‘political signal‘

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Palestinian Monetary Authority (PMA) Governor Feras Milhem has revealed that the proto-central bank — which does not issue a domestic currency and operates under highly restrictive political and economic conditions — is exploring the idea of issuing a Palestinian digital currency.

Raja Khalidi, director of the Palestine Economic Policy Research Institute, told Bloomberg that “the macroeconomic conditions don’t exist to allow a Palestinian currency — digital or otherwise — to exist as a means of exchange.”

Khalidi argued, however, that the PMA’s issuance of some form of digital currency may “send a political signal to show apparent appearance of monetary autonomy from Israel.” Khalidi’s view has been echoed by Barry Topf, former senior adviser to the Bank of Israel’s governor, who has claimed that any Palestinian digital currency is “not going to replace the shekel or the dinar or the dollar. It’s certainly not going to be a store of value or a unit of accounting.”

The occupied territories of the West Bank and Gaza may not seem to be the most propitious place to launch a centrally issued digital currency. The former has been subject to a 14-years blockade that has brought its economy to near collapse, subjected to severe Israeli restrictions and enduring four wars since 2008. 

The latter is under the jurisdiction of the Palestinian Authority (PA), which has only limited — administrative but not military — powers of governance in under 40% of the West Bank. The PMA’s jurisdiction is distinct from that of the PA’s, extending to Gaza and West Bank areas under full Israeli control.

Under the terms of the Paris Protocol of 1994, the PMA has central bank-like powers but cannot issue its own currency. The West Bank and Gaza remain primarily reliant on the Israeli shekel, alongside the Jordanian dinar and the U.S. dollar. 

In an interview with Bloomberg Television on June 24, Milhem said that the PMA was now studying the issue of digital currencies, in line with central banks worldwide, but that no decision has been taken to proceed to issuance. Asked about the potential benefits of such a move, Milhem addressed the specific challenges faced by the institution:

“We aim to limit the use of cash, especially Israeli cash. We have excessive Israeli cash in our market that we have problems transferring to the Israeli side […] our strategy is to use a digital currency for payments systems in our country and hopefully […] to use it for cross-border payments.”

The shekels glut in Palestinian banks is due to Israeli restrictions on large cash transactions, which were imposed citing Anti-Money Laundering concerns. Israel also restricts how many Palestinian banks are able to transfer back into Israel each month, presenting a significant difficulty given that both economies overlap in extensive and complex ways.

At various junctures, Israeli banks have also threatened to suspend correspondent services to Palestinian banks. With shekels in overabundance, Palestinian banks are sometimes forced to take on additional loans to meet their foreign exchange liabilities to third parties.

Israel also manages the Palestinians’ taxes, and belatedly released $1.14 billion in revenue collected on the PA’s behalf in December 2020, after a seven-month-long political crisis surrounding Israel’s bid for further illegal annexations of West Bank territories that would be de jure and not only de facto, as now.

Related: Palestinian Authority Considering Crypto to Replace Israeli Shekel

In this fraught political, institutional and macroeconomic context, with the occupied territories still heavily reliant on aid donations and Israeli remittances and the economy strained by both Israeli actions and the impact of the global pandemic, analysts have noted that digital currency issuance may be more a question of political symbolism than monetary pragmatism.

Back in 2019, then Palestinian Prime Minister Mohammad Shtayyeh Raif said that, in a bid to try to better insulate the Palestinian economy from Israeli restrictions and political threats, he would consider using cryptocurrency as an alternative to the shekel. 

Then as now, however, analysts argued that “the problem of the Palestinian economy is not the currency but rather a complex economic and political reliance on Israel,” noting that a different currency could lift neither import/export blockades nor the withholding of tax clearance funds.