In its 2017 National Drug Threat Assessment, which was released this month, the Drug Enforcement Administration (DEA) states that bitcoin has been used for the purposes of “circumventing China’s capital controls.”
Various officials and agencies within the Chinese government, possibly motivated by the threat of capital flight, have issued statements and directives relating to virtual currency over the past year, including some that could serve to inhibit its transfer out of the country. From February 2017 until the beginning of June, Chinese cryptocurrency exchanges complied with a People’s Bank of China directive to freeze all cryptocurrency withdrawals. After trading resumed, Chinese authorities released a notice ordering that “All trading exchanges must by midnight of Sept. 15 publish a notice to make clear when they will stop all cryptocurrency trading and announce a stop to new user registrations.” In the wake of the order, several exchanges have already ceased operations.
The DEA report also claims that in addition to enabling capital flight, cryptocurrencies’ “anonymizing nature and ease of use” make them an attractive money laundering tool for transnational criminal organizations. The document alleges that there are two primary ways in which these groups collaborate with Chinese actors to use bitcoin (which it mentions by name) to mask the source of their wealth.
According to the first scheme, they “purchase large shipments of ‘made-in-China’ goods” via bitcoin. These wares are then “shipped to businessmen in Mexico and South America who reimburse the [organizations] in local currency.”
The second technique involves money brokers affiliated with Chinese underground banking systems that sell “Bitcoin to drug traffickers for cash earned from drug sales in the United States, Australia, and Europe. This drug cash is then sold to Chinese nationals in exchange for Bitcoin the Chinese nationals use to transfer the value of their assets outside of China,” meaning that the virtual currency is implicated in both laundering money and transporting capital out of the Chinese economy.
The report warns that “The increasing use of [over-the-counter] Bitcoin brokers, who are capable of transferring millions of dollars in Bitcoin across international borders, as part of a capital flight scheme is expected to continue to intertwine criminal money laundering networks with capital flight.”