Bourse and Bazaar | Maziar Motamedi: For decades, Iranians have had to contend with almost complete isolation from international payment systems due to US sanctions. The situation has only worsened following President Donald Trump’s decision to withdraw from the Iran nuclear deal and embark on a “maximum pressure” campaign that targets average Iranians.
Given these restrictions on traditional banking, it should come as little surprise that Iran is home to a vibrant and passionate cryptocurrency community. Iranians are increasingly turning to bitcoin and other cryptocurrencies to transact with the outside world. Soheil Nikzad, a board member of the Iran Blockchain Community, recently estimated that USD 10 million worth of bitcoin transactions are conducted in Iran on a daily basis.
The decentralized and anonymous nature of cryptocurrency payments means that the Iranian government has so far proven unable to stop adoption of the new technology. But regulators are trying to exert greater control as made clear when the Central Bank of Iran (CBI) published its draft regulatory framework on cryptocurrencies in late January.
The “version 0.0” framework asserts that “using global cryptocurrencies as methods of payment inside the country is forbidden.” Even though the framework recognizes global cryptocurrencies and allows them to be traded in official exchanges in accordance with the country’s foreign currency rules, the proposed ban on their use for payments has disappointed many in the local “crypto” community.
“I don’t view CBI’s framework as remotely adequate because they’ve forbidden many things and in doing so, they’ve created barriers for people trying to develop valuable projects,” blockchain researcher Hamid Babalhavaeji told Bourse & Bazaar, referring to CBI’s ban on the issuance of rial-backed tokens as an example.
Babalhavaeji’s frustration is shared by many in the community. Twitter feeds and Telegram channels are abuzz with debates and sharp criticism of the CBI framework. But there are nuances at play.
“Within the existing legal frameworks, including sensitive rules concerning foreign currencies and money laundering, it was perhaps the best that could be proposed at the moment,” Babalhavaeji acknowledged.
In this vein, many in the community believe it would be unproductive to simply dismiss the proposed framework as just another instance of overbearing regulations. The community understands the pressures faced by the government, which is grappling with what senior Iranian officials have referred to as an “economic war” being waged on Iran by the U.S.
Reimposed US sanctions have contributed to the rial losing more than 60 percent of its value in 2018. Naturally, at a time when public trust in the national currency is at a low, CBI wishes to keep a tight leash on the currency markets.
Authorizing several dozen global cryptocurrencies as methods of payment inside the country, some of which are pegged to global currencies, could further weaken the rial, threatening the livelihoods of millions of Iranians as inflation worsens due to currency volatility.
On one hand, businesses would be tempted to establish payment gateways to accept cryptocurrencies pegged to the US dollar or other stable globally currencies. As wealthier Iranians begin to earn and spend cryptocurrencies, those in the working class, still paid in rials, would see their meager wages lose even more purchasing power.
On the other hand, fully eliminating the prospect of using global cryptocurrencies as a local method of payment could hurt Iran in other ways. It would create a stigma around a promising new technology, stalling innovation and deterring would-be enthusiasts from employing cryptocurrencies to meet Iran’s need for robust and legitimate payment solutions.
The central bank has given the community one month to offer feedback and has vowed to review and reevaluate its framework in six-months. The crypto community is hard at work trying to devise practical solutions.
One proposal would see cryptocurrency payments connected to the rial, meaning that certified gateways would accept cryptocurrency payments, but the actual clearance would be made in rials. Another proposal would see the payments cleared using Iran’s forthcoming official rial-backed cryptocurrency. Community members aim to arrive at a consensus soon, which they will present to the central bank.
“At the end of the day, it’s about coming up with creative ideas to make the best out of a restrictive framework. We don’t want to create any potential legal challenges for the central bank,” Babalhavaeji said.
Despite the payments dilemma, some have welcomed CBI’s draft framework as a step forward. The proposed regulations recognize cryptocurrency mining as a legitimate industry, authorize digital wallets and cryptocurrency exchanges, and allow issuance of tokens that are not backed by rials, foreign currencies, or gold and other precious metals. Furthermore, the new framework is slated to replace the blanket ban on cryptocurrencies that was issued in April 2018 in the early days of the currency crisis.
“In 2017 when cryptocurrency prices were soaring and new investors were pouring into markets, strange rumors circulated that purchasing and holding cryptocurrencies is illegal in Iran and at times the central bank would be referenced as the source,” explained Tina Kheiri, a young crypto and blockchain educator with Iran Blockchain Academy.
“At least people active in this field now have the reassurance that their activities don’t violate any laws, and this alone should encourage more newcomers to enter the industry,” she added.
But Kheiri also believes the proposed framework ought to be more flexible. She would like to see more straightforward initial coin offerings (ICOs) for businesses and greater use of cryptocurrencies for routine transactions—such as when selling tickets for her courses.
Kheiri also thinks she might have a solution for the threat posed by cryptocurrencies to Iran’s currency markets. “Boosting the mining industry could encourage major players to invest in Iran due to its cheap electricity, something that could actually attract foreign currencies and increase the value of the rial,” she explained.
The community is not short of innovative ideas, but it remains to be seen whether it will achieve a policy breakthrough with the central bank.