Capital control is any type of measurements taken by government with the purpose to restrict individual’s financial freedom. The major aspect of capital control is prohibiting individuals from freely transfer money in and out the country. This is done usually by forcing them to get the approval of authorities before making any transfer. Other types of capital controls includes Withdrawal limits, transactions taxes such as the Tobin tax, all kinds of tariffs (on import and export) and last but not least, exchange controls which restricts individuals from freely purchasing and selling foreign currencies.
Capital control throughout history has been massively used by totalitarian regimes to control the population. In 1931, Weimar Republic in Germany has implemented a tax called the flight tax in order to restrict any transfer of wealth out of the country. After the coming of the Nazis 1933, this tax shifted from targeting wealthy Germans trying to transfer money abroad, to Jews trying to flee Germany.
Many countries throughout the world are still practicing capital control. In developing countries capital controls are very strict and brutal; these countries often suffer from very high inflation rates and governments use exchange control to prohibit the people from dropping the official currency. Here’s a list of countries that still apply exchange control.
Thankfully western countries seems to have abandon the exchange control, nevertheless capital control still exists but in different forms. The recently enacted Foreign Account Tax Compliance Act (FATCA) 2010 in the US, forces all the banks anywhere in the world serving US citizens, to disclose their balances, receipts, and withdrawals to the US tax authorities. In Europe the situation is not better, Cyprus implemented capital control during the banking crises that hit the country in March 2013. The European commission is now working on its own version of the FATCA. Western countries are trying to make money accessible to governments anywhere on the planet.
Bitcoin and cryptocurrencies are the most powerful tools invented to get around capital control. Bitcoin has no borders, it is a currency that exists everywhere the internet is accessible and extends beyond any state and any government. Once Bitcoins are encrypted in a digital wallet, it becomes impossible to anybody, including government officials to have access to those Bitcoins, only the owner of the private key may make a withdraw.
Many people in developing countries have been trying for years to avoid holding or using their national currency which due to high inflation, have lost all legitimacy. Exchange control prohibits these populations from sending or receiving money from abroad, and excludes them from using the internet to trade with other countries. Exchange control is condemning the populations of developing countries to scarcity and poverty. Bitcoin gives back financial freedom to those populations by allowing them to transfer money all over the world without any restriction or government approval. Bitcoin is giving the opportunity to a large portion of the world’s population to freely have access to the international trade. Even more important, Bitcoin is considered as the best hedge against inflation in some countries. Usually countries that have high inflation rate also have exchange control, such as Argentina where Bitcoin is gaining more and more importance and attractiveness. . In Argentina Bitcoins are traded with a 60% premium above the regular spot price.
Capitol controls are expected to increase in western countries as the economy will get worse. UK already plans to restrict the flow of money in and out of the country in the event of a full-blown euro break-up. In the US some senators from the Democratic Party are already working on tnationalization of the private pension plan and 401ks & Retirement Accounts, in the case of a major crash in the financial markets. Bitcoin and cryptocurrencies are certainly going to play a major role in the future, to help individuals protecting their wealth form the government confiscation and to get it out of the current financial system, that one day or another is going to collapse.