Since it’s introduction to the world in 2009, Bitcoin proponents have been consistent in pointing out the many advantages it has over fiat currency. One such advantage that should have received more attention came in 2017, and suggests how BTC markets could be a means of detecting and revealing currency controls, and exchange rate manipulation.
In a research document that was published by University of Chicago professor of economics, Gina C Pieters, the regional price differences in BTC could be an indication of exchange rates that are being artificially adjusted.
Unofficial Exchange Rates
“Many countries manipulate the value of their currency or use some form of capital control, yet the data usually used to detect these manipulations are low frequency, expensive, lagged, and potentially mis-measured.” Pietes wrote.
Governments usually engage exchange rate manipulation as a means of subsidising their exports. In so doing, governments undermine the doctrines of free trade by obscuring the interplay between supply and demand.
Governments who unfairly adjust their exchange rates do so by selling off their own currency to buy others – usually the US dollar. This results in lessened demand for their own currencies, and simultaneously increases demand for foreign currency, thus reducing the cost of their exports.
As it stands now, the detection of these practices is limited to a three point test based on the International Monetary Fund’s (IMF) principles. The test is made up of three observations. To assess whether or not a country’s foreign exchange reserves are more than what is necessary, did the country’s exports outweigh imports in an in balanced manner, and checking if the country increased its foreign reserves during that same period.
However, there are some obvious limitations to this approach, like plain old dishonesty from the officials involved. Nevertheless, Pieters’ work suggests that Bitcoin might do a better job.
“Bitcoin can approximate unofficial exchange rates which, in turn, can be used to detect both the existence and the magnitude of the distortion caused by capital controls and exchange rate manipulations.” Noted Pieters.
Bitcoin Policing Exchange Rates
Though Pieters herself concedes that Bitcoin markets tend to respond to other regional factors that cause differences in the exchange rate – and thus have to be adjusted to in order to perform this task, she is confident of how BTC exchange rates could serve as a more robust means of identifying manipulation and exchange controls.
This can be seen in the BTC price activity in countries like Nigeria and Argentina. As a result of strict controls that reduced Argentinian citizens’ US dollar buy/hold limit to $200, the foreign exchange black market saw an increase in trading volume – in turn weakening the Argentine peso further than official exchange rates. Simultaneously, the price of BTC in peso went as high as $98 000 (using the official exchange rate).
A similar situation seems to be playing out in Nigeria. After reports of a US dollar shortage late last year, and crypto ban this year, the price of Bitcoin in Nigeria went through the roof, while the Nira plummeted on the local informal markets – giving a more accurate picture of domestic demand for foreign currency.
However, due to the informal nature of these roadside forex markets, it can become very difficult to get an accurate reading of the exchange rate on these markets. This is where Bitcoin conversions could do a better job.
“As bitcoin exchange rates exist at a daily frequency, they reveal transitory interventions that would otherwise go undetected. This result also serves as verification that Bitcoin is used to circumvent capital controls and manipulated exchange rates.” G.C.Pieters
