A Primer on Bitcoin Cross-Border Flows: Measurement and Drivers

APrimeronBitcoinCross-BorderFlows MeasurementandDrivers EugenioCerutti,JiaqianChen,andMartinaHengge WP/24/85 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2024 APR ©2024InternationalMonetaryFundWP/24/85 IMFWorkingPaper Strategy,Policy,andReviewDepartment APrimeronBitcoinCross-BorderFlows:MeasurementandDriversPreparedbyEugenioCerutti,JiaqianChen,andMartinaHengge* AuthorizedfordistributionbyKennethKangApril2024 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Therapidgrowthofcryptoassetsraisesimportantquestionsabouttheircross-borderusage.Togainabetterunderstandingofcross-borderBitcoinflows,weuserawdatacoveringbothon-chain(ontheBitcoinblockchain)andoff-chain(outsidetheBitcoinblockchain)transactionsglobally.Weprovideadetaileddescriptionofavailablemethodologiesanddatasets,anddiscussthecrucialassumptionsbehindthequantificationofcross-borderflows.WethenpresentnovelstylizedfactsaboutBitcoincross-borderflowsandstudytheirglobalanddomesticdrivers.Bitcoincross-borderflowsresponddifferentlythancapitalflowstotraditionaldriversofcapitalflows,anddifferencesappearbetweenon-chainandoff-chainBitcoincross-borderflows.Off-chaincross-borderflowsseemcorrelatedwithincentivestoavoidcapitalflowrestrictions. JELClassificationNumbers: E42;E51;E58;F21;F32;F38 Keywords: Cryptoassets;Bitcoin;Cross-borderflows;Capitalflows Author’sE-MailAddress: ecerutti@imf.org,jchen@imf.org,mhengge@imf.org *WethankPamelaCardozo,AndrésFernández,ClemensGrafvonLuckner,MaggieHu,KennethKang,AdrianLee,andconferenceandseminarparticipantsatthe4thCryptoAssetLabConference,theIMFMacrofinancialSeminar,andtheIMFEmergingMarketForumforusefulcommentsandsuggestions. 1Introduction TherapidgrowthofBitcoinsinceitslaunchin2009hasincreaseditspotentialmacroeconomicimplications.Bitcoinistheunitofaccountofadecentralizedglobaldigitalecosystemwithpublicaccess.Thetechnologicalinnovationbehindit—asustainableblockchainconsistingofadistributedledgerthatoperatesandexistswithoutanytrustedparties(Halaburdaetal.,2022)—hasfacilitatedaverylargenumberoftransactionsandreceivedtheattentionofprivateandpublicagents.Despiteitspricevolatilityandthefactthatitisnotbackedbyanyrealassetoranygovernmentalclaim,thepriceofBitcoinandthenumberofactiveusershasincreasedmarkedlyoverthepastdecade(Aueretal.,2023).Theglobalnatureoftheunderlyingtechnologiesimpliesthatalargeproportionofthetransactionsarelikelyperformedacrossnationalborders.Nonetheless,identifyingBitcoincross-bordertransactionsisfarfromstraightforward. WhileaccesstotheBitcoinnetworkispublic,itprovidesalargedegreeofpseudonymitybe-causetheindividualusersarenotwellidentified.Thispseudonymityoftheusers,combinedwiththesegmentationoftheBitcoinmarketintoon-chain(recordedontheBitcoinblockchain)andoff-chain(notrecordedontheBitcoinblockchain)transactions,haslimitedacomprehensiveun-derstandingofglobalBitcoincross-borderflows.1Inthispaper,wetacklethischallengebyusingthreecomplementaryandworkabledatasetstostudyBitcointransactionsandcross-borderflows.WediscusstheprosandconsofthedifferentapproachestoestimatingBitcoincross-borderflows,presentnovelstylizedfactsusingrawdatathatcoverbothon-chainandoff-chaintransactions,andanalysethedriversofBitcoincross-borderflowsincomparisontocapitalflowsforalargepanelofcountries.OurfindingssuggestthatBitcoincross-borderflowsresponddifferentlythancapitalflowstotraditionalglobaldrivers.Moreover,differencesappearbetweenon-chainandoff-chainBitcoincross-borderflows. WestartbyconstructingdatasetsonBitcoinflows.First,webuildadatasetofon-chainflows 1Anon-chainBitcoinuser(i.e.,anypersontransactingBitcoinsthroughtheBitcoinnetwork)doesnothaveanaccountbutawallet,whichisthecombinationofaBitcoinaddress(i.e.,“anaccountnumber”,alsocalledapublickey)andaprivatekey(i.e.,apassword).Ashighlightedintheliterature,walletsarerelativelyeasytocreate,usersoftenhavemorethanonewallet,andthewaytheBitcoinsystemdefinesanaddressimpliesthatthereispotentiallyanearlyinfinitenumberofwallets.InthewordsofHalaburdaetal.(2022),whilethereisroomfor2160different addressesintheBitcoinsystem,theestimatednumberofgrainsofsandonEarthis“only”263.Pseudonymityofthe off-chainBitcoinuser(i.e.,anypersontransactingBitcoinsoutsidetheBitcoinnetwork)isgivenbytheprivacyand characteristicsoftheavailableBitcoinexchanges.SeeSection2.1. acrosscryptoexchanges.Second,wecomplementthisdatasetwithon-chaincross-countryflowsestimatedbyChainalysis.Thisdatasetusesinformationonwebtrafficonthecryptoexchangesthroughwhichthetransactionsoccurtoidentifytheresidencyoftheusers.Third,weconstructadatasetofoff-chaincross-borderflowsrecordedintheoperationsoftheexchangeLocalBitcoinsfollowingGrafvonLuckneretal.(202