Return Of The Wild East As Cryptocurrencies Gain A Hold In Moscow-China Trading Malls

China’s strict capital controls are involuntarily supporting illicit transfers  

Chinese importers in Russia are buying up to US$30 million a day of tether (USDT) from Moscow’s over-the-counter trading desks, according to the website Coindesk

They use the cryptocurrency to send large sums back to their home country, which has strict capital controls.Previously the merchants used Bitcoin for this, but when the market crashed in 2018 they switched to Tether, which is designed to maintain parity with the U.S. dollar. 

Tether’s own description of the currency is as follows: “Tether is a cryptocurrency token that claims be backed by 1 dollar for each token issued. Tether may be explained as a hybrid between a cryptocurrency and fiat money, as its “tethered” to the value of fiat currencies. Tether usually uses a USDT currency, which is supposed to be worth exactly what USD is worth at the same period of time. Tether can’t be an investment because the US dollar’s price is decreasing over time due to inflation, but neither it can be a speculative interest, because it most certainly would be around the same price for a long time.
Still, there are a few things about Tether that make it very suitable for crypto investors to use. Tether transactions mostly take a few minutes to complete, Tether charges no transaction fees for moving funds between Tether wallets, and it is a stable and fast resource to cash out and cash in when there is a difficult situation in the market.”

Business is brisk thanks to a constant flow of Chinese merchants who come in daily with heavy bags of cash, with one Russian OTC desk apparently selling about US$3 million worth of crypto every day. Most of it usually goes to China. However, only about 20 percent of Russian sales are in bitcoin, the oldest cryptocurrency with the largest market capitalization. The other 80 percent is in the dollar-pegged token known as tether, or USDT.

Tether’s best-known application is allowing crypto traders to move money between exchanges quickly to take advantage of arbitrage opportunities. But according to several Moscow OTC traders, it has at least one real-world use case – as the go-to remittance service for local Chinese importers. The total volume of USDT purchased by Chinese businesses in Russia can reach US$10 million to US$30 million daily, Russian traders have said. “They accumulate a lot of cash in Moscow and need tether to transfer it to China” said on dealer.

It’s a simple process.

Why tether? It has the usual advantages of crypto – no limits on how much money can be sent or where – without the volatility that makes most coins infeasible for moving millions across the border daily. Tether usually trades around $1, while the Tether-for-Rubles purchases often take place in offices in Moscow’s CBD. “There are a lot of OTCs here in Moscow City, a bunch of offices in every building, and the volumes for them all can reach several dozens of millions of dollars a day. It’s all paid for in cash.” one dealer said. “A client comes with cash, we register the price at exchanges, when we agree on a price, we make a deal. The client hands over cash and a wallet address, the seller sends USDT to the wallet.”

The Decline of Bitcoin In China-Russian Trade

Chinese Grey-Market importers used to rely on Bitcoin before the 2018 Bitcoin bear market. As the price was ever-growing, merchants and the intermediaries helping them buy crypto could make some extra money along the way. But since the beginning of 2018, hoping that your bitcoin will still be worth the same or more at the end of the transfer became too risky. But as the price was going down, tether became much more convenient to use.

One trader said “Chinese small traders are totally reliant on USDT, they trust in it a lot, plus it’s very liquid.” Back in China, the merchants can exchange USDT for fiat easily, even though the People’s Bank of China banned fiat-to-crypto spot trading in September 2017, forcing the exchanges to move out of the country and limiting trading to crypto-to-crypto pairs. Chinese traders who need to liquidate crypto assets into Chinese yuan can still go to an OTC market maker, such as those registered on exchanges like Huobi and OKEx, to get matched with buyers and send them crypto after receiving a wire transfer via a bank, AliPay or WeChat Pay.

Critics of Tether have long questioned whether the stablecoin was fully backed 1:1 with dollars, as the company long insisted. The NYAG case revealed that Tether had loaned a big chunk of its capital reserves to Bitfinex, an exchange with overlapping management and owners, leaving the coin only 74 percent collateralized by cash and equivalents.

None of this seems to faze the Moscow traders or their Chinese clients. “Nobody actually cares if tether is backed or not.” said a trader, pointing out that confidence in Tether’s solvency relies on long-time habit and convenience: this market needs tether, so tether is trusted. OTC traders also point out that USDT’s daily volume exceeds its supply in circulation several times over, which indicates that people turn the token around multiple times during the day. For example, on July 29th, the 24-hour volume of USDT was recorded at US$17.5 billion, while the total supply was just around US$4 billion.

The turnaround of tether is fast, so for the merchants using the token for remittances, whether it’s worth something or not matters only within one day. Large batches of USDT get transferred to China overnight and then exchanged for RMB yuan.

“USDT will stay propped by the power of habit and trust of its users” is a common opinion amongst Russian and Chinese using it.

Getting Around China’s Capital Controls

The Chinese government maintains strict capital controls, limiting the amount of foreign currency anyone can buy or sell to US$50,000 a year. This impacts both on Chinese traders as well as families trying to support relatives in different countries; such as students overseas or elderly relatives in China. In this situation, some Chinese have opted to use crypto to move money across the border.

The fact that Chinese merchants bringing cheap goods to Moscow’s shopping malls use crypto to move money around was all but officially recognized by the Russian authorities last year.

Several large malls in the city account for around US$9.5 billion of unregulated cash flow monthly, and most of the merchants are from China, said Yuri Polupanov, the Bank of Russia’s head of financial monitoring and currency control. “We see most of the revenue turned into cryptocurrency, which is not reported in any way at the moment.” Polupanov has said. “We see simultaneous transfers of that cryptocurrency via email to the homeland of those merchants and producers, and the following exchange of it for the local currency there.”

According to a March 2019 report in the Russian newspaper Novaya Gazeta, cash would be received at places like hotels close to shopping malls in Moscow.  This cash would be swapped for crypto and sent to Hong Kong. The wholesale trade offices at near Moscow’s Chinese malls could be turning around US$10 million to US$12 million daily, Novaya Gazeta’s sources estimated.

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