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Iran and cryptocurrency: Opportunities and obstacles for the regime

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On Nov. 4, amidst another United States Department of Justice investigation into illegal activities involving cryptocurrency, a report surfaced that Iranian firms, including some affiliated with the Islamic Revolutionary Guard Corps (IRGC), bypassed U.S. sanctions by processing $8 billion worth of transactions since 2018 through the crypto exchange Binance. Three months earlier, on Aug. 9, Iran made its first import order in the amount of $10 million using an unspecified cryptocurrency in a move designed to circumvent the sanctions. The transaction was part of a broader strategy to trade through digital assets and smart contracts outside the confines of a global financial system dominated by the U.S. dollar. It was also intended to facilitate bilateral trade between Iran and countries like Russia that have been subjected to similar sanctions by the United States and international community. To this end, Iran and Russia signed a bilateral agreement on cryptocurrency cooperation in November 2018. Two months later, in January 2019, Iran’s Trade Promotion Organization conducted negotiations on using cryptocurrency for financial transactions with Russia and seven other countries, including Austria, Bosnia-Herzegovina, England, France, Germany, Switzerland, and South Africa. While cryptocurrency may offer Iran and other countries the opportunity to bypass sanctions and boost trade, it is by no means a panacea for such outcomes and comes with a host of obstacles, such as price volatility, economic uncertainty, energy consumption, and evolving regulation.

The promise and pitfalls of digital currency

In 2008, cryptocurrencies like bitcoin were first introduced as a payment tool and a means of constraining and challenging government control of financial transactions. For this reason, the Iranian government initially cracked down on cryptocurrency and its miners who sought to exploit the country’s subsidized energy. Over time, Tehran embraced cryptocurrency after realizing its economic potential and ability to circumvent economic sanctions, banking restrictions, and legal barriers. Since Sept. 16, 2022, the Iranian regime’s need to bypass sanctions through cryptocurrency and other channels has likely grown. As it struggles to quell protests that have already lasted over three months, Iran faces additional Western financial penalties for brutally repressing its citizenry — not to mention for increasing uranium enrichment levels at home and providing military assistance to Russia in Ukraine.

Between July and August of 2018, after the United States unilaterally withdrew from the Joint Comprehensive Plan of Action (JCPOA) and reimposed sanctions against Iran’s oil, shipping, and banking sectors, the Central Bank of Iran announced plans to launch a national cryptocurrency backed by the Iranian rial. Similarly, Russia and China — which signed a 25-year cooperation agreement with Iran in March 2021 — have explored the possibility of issuing digital currencies like the Chinese sovereign coin or digital yuan through their central banks. The purpose of this policy would be to facilitate financial transactions and bilateral trade by evading economic sanctions imposed by the United States and bypassing the global financial system dominated by the dollar.

Despite the financial and trade-related advantages that a digital currency could offer, Iran’s, Russia’s, and China’s plans to issue one have been put on hold ostensibly due to the challenges and controversies confronted by other countries in the Global South that had already done so.

On September 7, 2021, El Salvador became the first country to adopt bitcoin as legal tender and allow it to be used in all transactions, including product purchases, tax payments, and ATM withdrawals. President Nayib Bukele (2019-present) promoted the policy by arguing it would help attract foreign direct investment, formalize the economy, facilitate remittances, and free the country from the debt and other constraints of the global financial system. However, he and his government received sharp domestic and international criticism over the economic instability and uncertainty that such a highly volatile currency could bring. With dramatic price swings, bitcoin could significantly reduce or wipe out the pensions and savings of citizens. It could also subject them to pronounced exchange rate fluctuations that would offset the gains in this area achieved by the country’s adoption of the dollar in 2001.

Following in El Salvador’s footsteps between April and July 2022, the Central African Republic (CAR) became the first African country to make bitcoin legal tender and launch a national digital currency called SANGO Coin. The launch was largely unsuccessful, with few initial buyers amid transparency issues and plummeting prices. For the global cryptocurrency movement and its activists, these currency adoptions and coin issuances by the governments of El Salvador and CAR — semi-authoritarian and authoritarian states, respectively — have been contradictory given that the original purpose of cryptocurrency was to circumvent and challenge government control of monetary and fiscal policy.

Crypto mining and its challenges

Although Iran has momentarily refrained from legally or officially adopting cryptocurrency and issuing a digital coin like El Salvador and the CAR, it has increasingly supported the industry, albeit in a controlled manner, as a potential revenue source and sanctions-busting apparatus. In August 2019, Iran issued a regulation that recognized crypto mining as a legal economic sector and became the first country to use cryptocurrency as reserves to pay for imports and exports. Based on estimates from the blockchain analytics firm Elliptic, mining in Iran has allowed it to access hundreds of millions of dollars per year to buy imports of authorized goods and bypass sanctions on payments through Iranian financial institutions. Beyond Iran’s government, its citizens have utilized cryptocurrency with greater frequency to earn money and move it out of the country.

While the Iranian state and society have increasingly used cryptocurrency to generate revenue and evade sanctions, they have confronted several challenges involving volatility, energy, and regulation. First, and as indicated above, cryptocurrency prices have continued to be highly volatile, making them risky for Iran or any country to utilize for large-scale payments on imports and exports. Second, crypto mining expends enormous amounts of energy, surpassing even the annual usage of Finland and other countries. Bitcoin and other cryptocurrencies are created through mining in which powerful computers compete to solve complex mathematical problems. It is an energy-intensive process that relies on electricity usually generated by fossil fuels — which Iran possesses in abundance. A study conducted in 2021 found that 4.5% of all bitcoin mining occurred in Iran due to the country’s cheap electricity, not to mention the devaluation of its currency. According to the study, the annual electricity used for mining as of 2021 amounted to around 10 million barrels of crude oil or 4% of Iran’s petroleum exports in 2020.

Iran’s sizeable fossil fuel reserves and energy subsidies have positioned it to be a prime location for crypto mining. At the same time and alongside economic sanctions, the process could further increase the country’s already bloated budget deficits. In 2020, Iran was the largest provider of energy subsidies, at 16% of the world total or almost $30 billion per year — a figure that precipitously rose to $100 billion in 2021. Moreover, and regardless of the Ministry of Energy’s consumption ceiling on miners, their activities, alongside climate change and capacity constraints, have exacerbated the electricity outages that have regularly occurred in Iran and provoked popular discontent inside the country. It should be noted, however, that their energy consumption compared with other sectors of the Iranian economy has remained a subject of conjecture and debate.

Third, Iran and other so-called pariah or rogue states like Venezuela that are under sanctions will likely face tighter restrictions from international regulators on cryptocurrency usage and mining. Countries like the U.S. and multilateral organizations like the World Bank and International Monetary Fund (IMF) have expressed concern about such states using and mining cryptocurrency due to its involvement in or facilitation of money laundering and other illicit financial activities. They have been particularly concerned in this regard about Iran. As of February 2020, it and North Korea were the only two countries to have been blacklisted by the Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog. In November 2018, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) designated two Iranian individuals and their bitcoin addresses for allegedly conducting 7,000 transactions worth millions of dollars on behalf of actors accused of launching cyberattacks against over 200 targets in the U.S., United Kingdom, and Canada since 2015. From 2019 onward, national and international compliance regulations, including those issued by the FATF, have made it more difficult for individuals and entities engaged in cryptocurrency transactions and services to remain anonymous. Financial firms that offer the United States and other countries services related to cryptocurrencies mined in Iran could be subjected to sanctions-related fines and penalties. To avoid these punitive measures, Binance and its U.S. subsidiary have limited their exposure to the Iranian marketplace, but perhaps more so in rhetoric than practice.

Alongside these regulations, legal restrictions imposed by Iran could create additional challenges for crypto miners inside the country. In the past, they could exchange their bitcoins and other cryptocurrencies for dollars, rials, and other currencies at market prices. But since 2020, and in exchange for providing cheap power to over a thousand locally based licensed miners from Iran, Turkey, China, and elsewhere, the Iranian government has required them to sell their cryptocurrencies to the central bank, which in turn uses this digital money to fund imports and exports. While such an arrangement may make sense for the Iranian state and although it provides subsidized energy for miners, the idiosyncratic law requiring them to produce and sell a fixed supply of cryptocurrency to the central bank may reduce their profit margins and make the industry less attractive inside of Iran in the future. In addition, the central bank prohibits the trading of bitcoin and other cryptocurrencies that are mined overseas, even if they are apparently available on the black market. Despite Iran’s low energy costs, its increasingly stringent regulations may erode its comparative advantage in the industry by imposing higher operating and transaction costs that are further inflated by its tariffs and sanctions and its exclusion from international cryptocurrency exchanges.

Aside from the abovementioned regulations and restrictions against crypto miners, the Iranian crypto sector has likely been further hampered by the regime’s curtailing of internet freedoms, as part of its crackdown against the current protests and previous ones. Tech-savvy youth have become disillusioned and angered by the anti-tech policies of an increasingly authoritarian and repressive regime, with some becoming more determined to leave the country. As with Iran’s IT industry, this heightened human capital flight or brain drain, which that has in fact predated the protests, will presumably undermine the country’s ability to develop and sustain a viable and robust crypto sector moving forward.

Conclusion

In conclusion, cryptocurrency offers Iran an opportunity to evade sanctions, increase reserves, and boost trade, particularly with countries that confront similar sanctions and isolation. Consequently, the Iranian government has moved from cracking down on crypto miners inside the country to providing them with legal and energy-based support in a controlled fashion. By the same token, Iran faces three obstacles that inhibit cryptocurrency from becoming a silver bullet for sanctions busting, capital accumulation, and trade expansion. The first obstacle is the price volatility of cryptocurrency that renders it risky for import orders and other large-scale transactions — which likely explains Iran’s reluctance to issue a national currency. The second one is the exorbitant energy consumption of crypto mining that has strained Iran’s national budget and power grid, irrespective of the vast fossil fuel reserves in its possession. The third and final obstacle is the intensified regulations at the international and national levels, accompanied by rising authoritarianism and repression, that have constrained the growth and competitiveness of the industry inside of Iran. While cryptocurrency was initially intended to restrict state power, the Iranian government may try to continue using cryptocurrencies to its advantage while navigating the challenges that accompany the technology, especially in the face of elevated internal and external pressures.

 

Eric Lob is an associate professor in the Department of Politics and International Relations at Florida International University and a non-resident scholar with MEI’s Iran Program.

Photo by Mehmet Ali Ozcan/Anadolu Agency/Getty Images


The Middle East Institute (MEI) is an independent, non-partisan, non-for-profit, educational organization. It does not engage in advocacy and its scholars’ opinions are their own. MEI welcomes financial donations, but retains sole editorial control over its work and its publications reflect only the authors’ views. For a listing of MEI donors, please click here.

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