Recently, the International Monetary Fund (IMF) has made a big reversal in its stance on Bitcoin, from opposing it in the past to supporting it now. This is a bit confusing.
According to the latest IMF report "A Preliminary Study on Cross-Border Flows of Bitcoin", residents of countries with strict financial regulation are turning to Bitcoin to transfer capital across borders more freely. In countries such as Argentina and Venezuela, Bitcoin has become a necessary financial tool for preserving wealth and entering global markets, rather than just a speculative investment.
You know, in December 2023, IMF Managing Director Kristalina Georgie said in her opening speech at an industry summit in Seoul, South Korea that "the large-scale adoption of crypto assets could undermine macro-financial stability." She also said that the large-scale adoption of crypto assets could affect the effectiveness of monetary policy transmission, capital flow management measures, and fiscal sustainability caused by tax fluctuations.
Even on April 12, the IMF asked El Salvador to amend its pro-Bitcoin law because the law was hindering El Salvador’s efforts to obtain a $1.4 billion credit line.
El Salvador adopted Bitcoin as its legal tender in 2021 under the leadership of President Bukele. Since then, the country has invested heavily in Bitcoin, built up Bitcoin reserves, mined Bitcoin, and launched educational programs. However, the IMF opposed the Bitcoin law in its loan negotiations with El Salvador, which needs more financing to repay its debts. The negotiations have been deadlocked for nearly two years due to the IMF's calls to limit the scope of Bitcoin in the country.
Through the latest report "A Preliminary Study on Cross-border Flows of Bitcoin", we found that the IMF's position on Bitcoin has changed, which can be said to be a reversal of position. What does it mean? It is not difficult to see from the report that with the approval of Bitcoin spot ETFs, it has gradually been accepted and adopted by mainstream financial institutions around the world, and the scale of free cross-border capital transfers on and off the Bitcoin chain continues to expand. Bitcoin has become an asset target that the IMF has to pay attention to and study.
In its report, “A Preliminary Study of Cross-Border Flows of Bitcoin,” the IMF reveals how Bitcoin’s decentralized nature is being used to bypass traditional banking systems, particularly in regions experiencing economic difficulties or strict capital controls.
The IMF said that residents of countries with strict financial regulations are turning to Bitcoin to transfer capital more freely across borders. "Off-chain cross-border flows appear to be related to the motivation to avoid restrictions on capital flows," the report wrote.
The report highlights large volumes of transactions from countries such as Argentina and Venezuela, where citizens face hyperinflation and tight financial controls. In these regions, Bitcoin has become a necessary financial tool for preserving wealth and accessing global markets, rather than just a speculative investment.
However, the IMF report also warned of the potential risks of widespread use of Bitcoin for cross-border flows. The lack of supervision and anonymity of cryptocurrencies can complicate regulators' work to monitor and control financial transactions to prevent illegal activities such as money laundering.
The study examined on-chain and off-chain transaction data to explore the trends behind Bitcoin's cross-border use. The study found that Bitcoin transactions are not only huge in volume, but also exhibit unique characteristics compared to traditional capital flows.
Unlike typical foreign investments, which are sensitive to economic indicators such as currency strength, Bitcoin flows are more correlated with cryptocurrency-specific sentiment such as market volatility and user sentiment indices such as the Fear and Greed Index.
The analysis also pointed out that on-chain Bitcoin transactions are recorded on the blockchain, which has higher security and is often larger than off-chain transactions. This shows that the powerful security features of blockchain technology often protect greater financial interests.
The IMF called for international cooperation to establish a regulatory framework that covers the unique aspects of digital assets. These measures will help reduce risks while leveraging the benefits of digital currencies, especially as a tool to promote economic freedom in countries with restrictive financial environments.
Carbon Chain Value has extracted some of the highlights from the full report for readers’ reference, hoping that it will inspire and inspire readers.
Since its launch in 2009, Bitcoin's rapid growth has increased its potential macroeconomic impact. Bitcoin is a publicly accessible unit of account for a decentralized global digital ecosystem. The technological innovation behind it - a sustainable blockchain consisting of a distributed ledger that operates and exists without any trusted party. Despite Bitcoin's high price volatility and the fact that it is not backed by any real asset or government claim, its price and number of active users have increased significantly over the past decade. The global nature of Bitcoin's underlying technology means that a large portion of transactions may be conducted across borders. However, identifying Bitcoin transactions across borders is far from easy.
A key question is the extent to which Bitcoin is used for cross-border transactions. Our findings reveal not only the relative importance and characteristics of Bitcoin cross-border flows, but also its heterogeneity, particularly with respect to on-chain and off-chain transactions. The use of Bitcoin for cross-border transactions is geographically widespread, with relatively high intensities of on-chain and off-chain flows across regions, but also some temporal variation due to data coverage and underlying estimation assumptions. Using both on-chain and off-chain raw data, we can determine that the average size of on-chain transactions is much larger than that of off-chain transactions. This pattern may reflect the security features provided by blockchains and the fee structure of the Bitcoin blockchain. The estimated size of Bitcoin cross-border flows is substantial compared to the GDP of some countries, particularly in those with relatively small capital flows.
The analysis of the drivers of cross-border flows shows that the cross-border use of Bitcoin is not consistent with the factors driving capital flows, and there may be some differences between on-chain and off-chain Bitcoin cross-border flows. Although the level of capital flows is not directly comparable to the estimated level of Bitcoin cross-border flows due to methodological differences, we have obtained four important insights: i) Bitcoin on-chain cross-border flows respond differently to traditional inflow drivers than capital flows. They appear to be negatively correlated with broad dollar appreciation events, but unlike capital flows, they respond positively to changes in risk aversion reflected by the VIX (Chicago Board Options Exchange Volatility Index); ii) On-chain cross-border flows are positively correlated with improvements in specific cryptocurrency sentiment (cryptocurrency fear and greed)3; iii) However, neither traditional global capital flow drivers nor sentiment towards Bitcoin affect off-chain Bitcoin cross-border flows; iv) Although domestic factors do not play a prominent role in Bitcoin cross-border flows and capital flows in our sample, inflation and Bitcoin-based parallel exchange rate premiums are positively correlated with on-chain cross-border flows and off-chain cross-border flows, respectively.
Second, we add to the small but growing literature analyzing the drivers of cryptoassets and their relationship to traditional financial assets. Bitcoin prices are positively correlated with all intraday macro news (except CPI) and are slow to react to unexpected changes in short-term interest rates and are not robust to news about the future policy path. Does Bitcoin act as a hedge against global uncertainty? Uncertainty is measured by the first principal component of the VIX index for 14 developed and developing equity markets. Their study shows that Bitcoin prices react positively to uncertainty both at higher magnitudes and at shorter frequency movements in Bitcoin returns. In contrast, cryptoasset prices show strong correlations with equity prices and the VIX index, suggesting that cryptoassets behave like risky assets. Our cross-border results show that Bitcoin’s on-chain flows are positively correlated with the VIX (inversely to the reaction of capital flows).
Third, by distinguishing between on-chain and off-chain flows, we provide a nuanced perspective on Bitcoin and the regulation of capital flows. Analyses of Bitcoin’s cross-border use highlight diverse activities ranging from e-commerce to funds associated with illicit activities. However, independent of the underlying activity, the motivation for cross-border transfers via Bitcoin is argued to be the high costs or government regulations that hinder transfers through traditional financial institutions. In this context, the role of capital controls has been widely emphasized in the literature. In a recent study, underlying capital flows still proceed through traditional channels and provide liquidity to cryptocurrency exchanges. The relative prices of crypto-assets in an economy provide insightful information about the intensity of demand for capital flight. We contribute to this debate by providing cross-country panel evidence that off-chain cross-border outflows are positively correlated with the Bitcoin parallel premium, which we interpret as a broader proxy for exchange rate pressures, reflecting macroeconomic imbalances.
Overall, our analysis suggests that cross-border Bitcoin flows respond differently than capital flows to traditional drivers. That is, we find that increases in risk aversion and a stronger USD lead to reduced inflows. Unlike capital flows, Chainalysis flows respond positively to changes in the VIX. This result is consistent with the positive correlation between the VIX and Bitcoin returns that is widely highlighted in the literature. Chainalysis flows are also positively correlated with cryptocurrency sentiment. While global fundamentals appear to have a limited role in local Bitcoin flows, we find that outflows increase significantly as the Bitcoin parallel exchange rate premium increases.
Conclusion
Bitcoin’s adoption has grown rapidly over the past decade. The global nature of Bitcoin raises questions about the relative importance and characteristics of Bitcoin’s cross-border flows. The task of studying cross-border flows facilitated by Bitcoin is further complicated by the sheer volume and anonymity of Bitcoin transactions both on and off the blockchain.
Our analysis highlights several differences between on-chain and off-chain cross-border flows of Bitcoin. On average, cross-border on-chain transactions are much larger than off-chain transactions. Off-chain data also suggest that increases in the Bitcoin-based parallel exchange rate premium are associated with higher outflows. These findings are consistent with a large body of recent research showing that Bitcoin helps circumvent capital flow restrictions. As the IMF has emphasized, policymakers seeking to manage capital flows should ensure that capital flow management regulations cover crypto assets. From a more structural perspective, it is of course also important to address the underlying imbalances that manifest themselves as exchange rate pressures, as the use of crypto assets is only a symptom of these imbalances.
We also find that countries with relatively large capital inflows tend to have lower Bitcoin inflows, and vice versa. Moreover, Bitcoin cross-border flows do not respond the same way as capital flows to traditional drivers. On-chain flows appear to be negatively correlated with broad USD appreciation episodes, but unlike capital flows, they respond positively to changes in the VIX. Capital flows and Bitcoin cross-border flows cannot be directly compared due to methodological differences, but we speculate that Bitcoin cross-border flows have not yet replaced existing capital flows. Therefore, capital flows remain the most important quantitative channel for the spread of global risk aversion and/or flight-to-safety trigger spikes. However, the cryptocurrency market is evolving rapidly. The recent authorization of a spot Bitcoin ETF in the United States suggests that Bitcoin may be increasingly used by mainstream financial operators - even if indirectly. As the average user base of Bitcoin and traditional assets gets closer, the response of Bitcoin cross-border flows may become more similar to that of traditional capital flows. This user convergence will certainly complicate policy responses.
Since Bitcoin is a decentralized and anonymous cryptographic transaction technology, measuring cross-border flows of Bitcoin is challenging and can currently only be achieved through a series of non-simple assumptions. Although we provide a comprehensive approach to explore on-chain and off-chain flows to study global cross-border flows, our dataset does not capture the full scope of Bitcoin cross-border transactions. Therefore, improving the measurement of flows based on transaction-level data and determining the residence of on-chain and off-chain cross-border flows is key to gaining a deeper understanding of Bitcoin's cross-border dynamics, assessing future policy needs, and designing appropriate countermeasures.
