23 Mar 2018

The internationally traded cryptocurrency Bitcoin is being used to circumvent manipulated exchange rates and restrictions on international financial flows (capital controls). According to new research by Gina Pieters to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018, this provides researchers with the opportunity to use deviations between a country''s Bitcoin-based and official exchange rates to detect exchange rate manipulations and reveal the existence of capital controls.

Her study notes that many countries manipulate the value of their currency or restrict financial flows to foreign countries (capital controls). The standard data used to detect these manipulations have several shortcomings: they are expensive to obtain, they can be two or three years old, and, depending on the source, they may be unreliable or infrequent.

The new research demonstrates that the price data of Bitcoin can detect exchange rate manipulations and the existence of capital controls, circumventing these shortcomings.

Bitcoin exchange rates can be constructed at the seconds-interval, revealing transitory interventions that cannot be detected by coarser data. At the same time, the research documents that Bitcoin-based exchange rates contain distorting Bitcoin-market-specific elements, which must be normalised before being used.

The Bitcoin-based exchange rate between two currencies is the ratio of the price for 1 Bitcoin in a currency, B^c, to the price of a Bitcoin in US dollars, B^USD sourced from the same market:

Bitcoin-Based Exchange Rate=B^C/B^USD

It is not obvious that the Bitcoin-based exchange rate should be informative: Bitcoin prices are extremely volatile; the markets are more speculative and considerably smaller than formal international exchange rate markets. There are large deviations in prices across Bitcoin exchanges, indicating a lack of liquidity for even the most popular state-issued currency (USD) within the crypto-markets (Pieters and Vivanco, 2017).

The new study confirms that these concerns are relevant and correct, but that these distortions can be corrected. While the study itself uses statistical analysis, the intuition can be communicated in a few figures.

Argentina had a long-time official exchange-rate peg to the US dollar that was removed in December 2015. It is unusual to have access to the daily unofficial exchange rate for an economy with a pegged exchange rate, but Argentinian newspapers printed the unofficial exchange rate between the US dollar and the Argentinian Peso, known as the Dólar Blue.

Figure 1 below shows the official exchange rate, the unofficial exchange rate (the Dólar Blue) and the Bitcoin-based exchange rate.

As expected, the Dólar Blue deviates considerably from the official exchange rate under the peg. The Bitcoin exchange rate – constructed using Bitcoin price data – clearly moves with the behaviour of the Dólar Blue exchange rate, though at an offset.

The offset becomes negligible in Figure 2, once Bitcoin- and market-specific deviations are accounted for. This is accomplished by using the deviations between the Bitcoin-based EUR-USD exchange rate (constructed using data from the same source) and the official EUR-USD exchange rate. The few deviations that remain between the two exchange rates are statistically insignificant.

The shift between Figure 1 and Figure 2 demonstrates the necessity of adjusting for Bitcoin- and market-specific elements when using Bitcoin-based exchange rates.

This methodology can be applied to other economies where the unofficial exchange rate is not known. China''s official and bitcoin-based exchange rate is shown in Figure 3.

The difference between the two exchange rates is less than during Argentina''s pegged regime in Figure 2, indicating that China''s currency manipulation is less extreme than Argentina. China''s official exchange and the Bitcoin-based exchange show a sustained deviation between September 2014 and March 2015, however, suggesting an episode of manipulation or intensified capital controls.

Before access to Bitcoin-pricing data such results would be slow, difficult or impossible to construct. The results of this study provide a new tool with which to detect the presence of capital controls.

Pieters, G.C., 2017. Bitcoin Reveals Exchange Rate Manipulation and Detects Capital Controls. Available on SSRN:

Pieters, G.C., Vivanco, S., 2017. Financial Regulations and Price Inconsistencies across Bitcoin Markets. Information Economics and Policy, June 2017, Vol. 39, pages 1-14.

Dr. G.C. Pieters