Market Turmoil Can Bring Capital Controls Back But They’ll Be Good for Crypto
Last month, the coronavirus outbreak and the collapse of oil prices had stock markets crashing and economies come to a standstill with countries in lockdown. In response, central banks have announced stimulus programs.
The coronavirus crisis also affected the capital flows and raised the question of whether currency control would be back too, especially in emerging markets.
In February and March, about $80 billion got wiped out from emerging stocks and bonds.
“There is some early evidence of an unprecedented collapse in global capital mobility which, if sustained, will make it tempting for countries to conserve their FX resources by imposing restrictions on capital outflows,” said David Lubin, head of emerging markets economics at Citi.
This would certainly be the case if the governments offered full compensation for losses inflicted by lockdowns.
Capital Controls could be back
The Fed and IMF have backed the use of capital controls in certain situations while the US has opposed them since Bretton Woods. Back in December, Bilal Hafeez, the CEO of financial strategy firm Macro Hive said US capital controls could be the grey swan, which is basically significant events that are considered unlikely to happen but are still possible.
China has been implementing capital controls, last year it rolled out a new set of currency controls to curb down on a capital flight from the country.
In emerging markets (EMs), the issue of investment flow is especially important because when capital inflows disappear, those that rely on that capital “suffer big demand collapses.”
Last week’s sell-off in emerging market currencies have been on pace with that during the 2008 global financial crisis, as per JP Morgan. Fiat currencies have fallen 10 to 20%.
Coronavirus and EM
=> supply and demand shock, money outflows
=> expansionary monetary/fiscal policy
=> local currency ⬇️
=> debt servicing trouble, money outflows
=> local currency ⬇️
=> negative feedback loop
=> capital controls to minimize money outflows & currency weakness
— Alex Krüger (@krugermacro) April 10, 2020
As such capital control could be a reality, however, for now, currency pressures have eased following massive cash injections by the Fed to weaken the dollar.
Cryptos ideal conduit to bypass them
Back in 2008 and 2015, Iceland and Greece respectively resorted to them. Emerging markets see capital controls as a measure of the last resort.
Nigeria introduced capital curbs in late 2014 after an oil price shock ravaged its economy.
Last month, Lebanon held meetings to discuss capital control aimed at the regulation and setting exceptional temporary controls on some operations and banking services, as per the National News Agency.
Argentina imposed curbs in September to conserve its diminishing dollar reserves and stop a peso run. This saw the demand for stablecoin DAI explode in the country.
The implementation of capital controls is good for crypto and gold. One can purchase the bullion and store it offshore and legally circumvent the control.
“Capital controls are relevant for crypto, as the imposition of capital controls generates demand to bypass capital controls … and crypto assets can be an ideal conduit for doing so,” said economist and trader Alex Kruger.