Bitcoin Reveals Unofficial Exchange Rates and Detects Capital Controls

Managed exchange rates and capital controls impact international trade and finance flows, yet data used to detect these manipulations are of low frequency, expensive, lagged, and potentially mis-measured. The timely, high frequency, free-of-charge prices of Bitcoin offer a solution to this problem. I demonstrate that the internationally traded crypto-currency can estimate unofficial exchange rates, detect exchange rate regimes; and detect capital controls at a daily frequency. However, Bitcoin prices may contain bitcoin-specific dynamics that must be removed prior to being used for this purpose, and Bitcoin-based exchange rates approximate the dynamics, but not the level, of unofficial exchange rates.