Iranian Cryptocurrency Restriction

by Soleil Ozols

On account of the prohibition of the handling of cryptocurrencies among all Iranian financial institutions, the form of online currency took a hit towards a national progression in Iran, but progress with the emerging currency has not been ultimately banned and forgotten by Iranian financial institutions. As Iran continues to maneuver conflicts, both foreign and domestic, one focus of local financial institutions is cryptocurrencies, or moreover, the benefits and conflicts they pose. A major contributor to foreign and domestic disagreements relies on the country’s overwhelming Shiite allegiance.

Historically, Iran has been involved in conflicts both internally and internationally. The Iranian Revolution, in addition to ensuing events, set up a political structure of Islam as an ideology to be reckoned with. Being that Iran is largely Shiite-dominant, regional conflicts have arisen, leading to foreign tensions and the repetitive need to stabilize protests and radicalized groups. (2) Clearly, the ideological tensions between countries in the Middle East are not solely related to Iran, but Iran has had its share of intrastate rebel groups, as well as Iranian-born groups. As Iran is the dominant Shiite power, Saudi Arabia is the dominant Sunni power; consequently, as regional conflicts arise, both countries tend to take opposing sides. These politically and ideologically-backed tensions have the abilities to create great unrest, particularly in countries that have a Shiite-dominated government with a Sunni-majority community, or the adverse. For example, in Iraq, the Shiite government is facing a large divide with the Sunni communities, which has aided in victories led by the Islamic State against those in power. (2)

The Iranian oil boom of the 1970s drastically contributed to the country’s catapult into the premier league of nations, with a growing industrial base, a generous welfare system, highly developed armed forces and a nuclear program. (10) As Iran grew to become one of the most advanced economies of the Middle East just before 1979, the State became corrupted by mismanagement, international sanctions and systemic graft. (1) This emergence of corruption was led by the Shia cleric Ayatollah Ruhollah Khomeini, who used Iran’s Islamic Revolution in 2979 as an opportunity to implement this vision for an Islamic government that was ruled by the “guardianship of the jurist.” (3) Khomeini worked under his belief that as a cleric, he had to rule to properly implement Islam as God had intended: the mandate of the Shia Imams. As a result, Iran began to experiment in Islamic rule through his efforts to inspire a continued Islamic revival and by preaching Muslim unity. Supported groups in Lebanon, Iraq, Afghanistan Bahrain, and Pakistan (all who had specific Shia agendas), Sunni Islamists admired Khomeini’s success. (3) However, these groups did not accept the leadership of Khomeini, ultimately underscoring the depth of sectarian suspicions. (3)

The first decentralized cryptocurrency was bitcoin, which was made available to the public in 2009. (11) Since then, alternative cryptocurrencies have emerged, promising greater speed, anonymity or some other advantage. In 2016, one cryptocurrency became a close contender to Bitcoin: Ethereum. Ethereum facilitated the promise of blockchain-based smart contracts and apps in compatibility of Initial Coin Offerings (ICO), which are fundraising platforms that allow investors, essentially, to trade stocks or shares in startup ventures in the same way that the investor could invest and trade cryptocurrencies. (11) However, the anonymity of cryptocurrencies combined with the technology of blockchain and Initial Coin Offerings have the potential to give way to the rapid emergence of scams and ponzi schemes disguised as legitimate investments through ICOs. The anonymity that cryptocurrency forums advertise pose problematic issues that concerned Iranian banking officials under the premise that no one clearly knows which people or entities are behind a certain blockchain-based smart contracts and apps. (6) The loss of crypto capital is increasingly likely when multilevel marketing and pyramid schemes are present, due to the complete anonymity of cryptocurrencies that allow for little to no accountability for the investee.

Under the assumption that scammers and radical groups could use cryptocurrencies and ICOs as a way to gain funding and support for their efforts, many countries, including Iran, restricted or banned the use of cryptocurrencies. As an unregulated forum, the online currencies have the capability to be misused or taken advantage of by groups that intend to harm or steal from others. Cryptocurrencies are still a relatively new technology that has not been fully developed to ensure confidentiality, safety, and impenetrability from hackers. To countries such as Iran, it is also important that the cryptocurrency and Initial Coin Offerings technology is not used by radical groups to gain funds for their cause.

In 2017 Iran made strides towards addressing deficiencies in its policies on ani-money laundering and combatting the financing of terrorism with the overall goal of complying with the plan of the Financial Action Task Force (FATF) on Money-Laundering. In an effort to be compliant with the FATF, Iran’s Central Bank announced in 2018 the ban of handling cryptocurrencies among all Iranian financial institutions, including banks, credit institutions and currency exchanges. At the gathering of the FATF in June of 2019, the council decided to keep Iran on the FATF blacklist of countries viewed as uncooperative in global efforts against money laundering and terrorism financing.

Originally, the Central Bank of Iran planned on warning people of the potential risks associated with cybercurrencies, but the Money and Credit Council deemed non-physical and virtual transactions were against Iranian law. The Financial Action Task Force was a large driving force for the recent ban on cryptocurrencies in Iran. Despite this ban, however, there are ensuing efforts by Iranian banks and leaders to create their own cryptocurrency that fits in the current Iranian law. If Iran were to create their own cryptocurrency, Iran would be taking a part in a currency that many deem to be the future and an essential to future financial stability, an important factor in light of recent US financial sanctions. (6)

Despite its slow grow in popularity, cryptocurrencies continue to become more popular. Navroop Sahdev is a Fellow at MIT Connection Science and holds a host of leadership roles in the Distributed Ledger Technology space, both as a practitioner as well as a researcher. According to economist Navroop Sahdev, in order for cryptocurrency to be effective, a viable process of price discovers in currency markets and subsequent stability in price must occur. (5)

1. 1. Navroop Sahdev: Fellow at MIT Connection Science and holds a host of leadership roles in the Distributed Ledger Technology space, both as a practitioner as well as a researcher.
  2. According to economist Navroop Sahdev, in order for cryptocurrency to be effective, a viable process of price discovers in currency markets and subsequent stability in price must occur. (5)
    1. “One of the necessary preconditions for the success of a global cryptocurrency would be true decentralization with least susceptibility to centralized control. This is where the debate around concentrated mining power (in case of proof of stake consensus as in the bitcoin blockchain), challenges around scalability, liquidity, etc. come in. I think we are witnessing this right now with the current slump in cryptomarkets: the challenges inherent in a new technological infrastructure and the speed with which they can be addressed, become key determinants of market demand. Regulation can become a key barrier in mass adoption of cryptocurrencies as well, depending on how different governments choose to regulate the technology as well as how different market players interact with the technology. It is the complex interplay of these factors that would dictate whether or not we witness mass adoption of cryptocurrencies. Last year, I wrote an interview piece (http://cryptochartist.com/interview-economist-navroop-sahdev-bitcoin-blockchain-token-sales-cryptochartist/) explaining why cryptocurrencies are here to stay and the fact that greater regulation is good news for the crypto space. With more regulation comes greater protection for retail investors (but, in fact, all players in the market) which, in turn, drives greater adoption.” (5)

Previously, groups such as ISIS have generated most of their funding from its control of a commodity (such as territory, sale of natural resources like oil) in addition to money made from looting. But recently, funding sources have shifted towards (the al Qaeda way) illegal fundraising activities and home-grown sources of funding; Hezbollah increasingly relies on Iranian funding because its illegal revenue sources (such as drug smuggling) have been choked off. (8)

Cryptocurrencies might aid terrorists in the receipt of funding through various means. For example, although public support for these groups represents a minority view throughout much of the Muslim world, it is not inconsequential. Thus, if Sunni supporters are not donating as much to terrorist groups as they did in the past because of an increase in the legal and financial risks involved in doing so, it is plausible that a sufficiently robust, secure, and anonymous cryptocurrency could re-enable donations as a significant source of terrorist financing. Supporters might donate their own cryptocurrencies or use cryptocurrencies to transfer funds through broker intermediaries. Over the past decade, the dismantling of finance networks supporting al Qaeda has vastly reduced its funding. However, some support might have shifted to alternative methods of funding jihad, either through supporting ISIS or finding other outlets. The total amount of such donations to specific organizations is not fixed: Even if funding from so-called “deep-pocket donors” is somewhat fixed, the distribution of these funds varies over time. An economic approach to the question of how much support is given to terrorist groups would show that a giver’s willingness to donate can be reduced by an increase in the perceived level of risk to the giver. Conversely, this willingness can increase according to the perceived impact of the funds. (8)

“The sale of illegal goods and drug trafficking also may be critically assisted by cryptocurrencies, and the darknet markets that play a significant role in cryptocurrency economies already make this possibility plausible. It is currently unlikely that some types of trafficking of concern (such as in antiquities and weapons) would be conducted easily on these forums. Other trafficking, especially for drugs, is already occurring extensively on darknet markets, but it is unclear whether terrorist groups are involved, in part because these markets are not yet used heavily in the areas of the world where terrorist groups engage in drug trafficking. “(8)

1. 1. Have terrorist organizations used cryptoc in the past? (look above^)
    1. “Hezbollah historically relied heavily on state funding from Iran, supplemented by income from international illegal activities and fundraising from sympathizers. State funding waned during the heavy sanctions regime against Iran, but during the suspension of sanctions (until the end of 2018), state funding was restored. Of course, newer sources of funding are unlikely to be abandoned.” (8)
    2. “Although cryptocurrency is not yet a viable way for this funding mode to be syndicated widely, this could change if technical barriers to use diminish. The diminishing technical barriers in cryptographically secure communication have led to new strategies for remote direction and supervision of these “independent” attacks.32 Groups that currently attempt to direct attacks via secure conversations could instead pay for supplies remotely, or even order the supplies to be delivered to the would-be attacker, which would require much less initiative on the groups’ part.” (8)

Currently, there has not been much activity between terrorist groups and cryptocurrencies, but as both the groups and the technology evolve, it is a viable possibility that cryptocurrency systems may be common in the future. (8)

International community significance (are they taking part in international coalitions?)
What are other countries doing about cryptoc?

1. 1. Countries like the US, Canada, Australia and many in the EU have accepted bitcoin but, on the opposition, countries like China, Russia, Vietnam and more have restricted, regulated or explicitly banned bitcoin and other forms of cryptocurrency. (9)
    1. China: banned
    2. U.S.:
Is it actually an unsafe investment option?
1. Iranian officials are looking into a safe virtual currency since they believe that cryptocurrencies are “currently shaping the future of banking” and should be recognized and widely accepted. “Khatouni opposes imposing any limitations on the use of digital currencies so that they country’s businesses and players can employ them with more confidence and with higher levels of transparency. In his opinion, delaying the formal introduction of digital currencies into the country will result in damage to the country’s banking system, and the devising of “comprehensive, precise and transparent rules and regulations for the use of digital currencies” on the basis of global experience by a specialized group of CBI regulators is essential to prevent the many people in the country who buy and sell digital currencies from doing so secretly.” (6.6)
2. Bitcoin doesn’t need a middleman to control the flow of the currency. Also international transactions can be made in seconds. (7)
How will this impact Iran’s economy?
1. The Bank’s decision to ban cryptocurrencies by financial institutions is a blow for those in Iran who viewed virtual currencies as a means of overcoming problems related to the banking industry and international sanctions. Before the ban, the CBI’s Information Tech. Chief (Nasser Hakimi) had reported that in addition to a framework that should be adhered to for using cryptoc, the CBI was considering the adoption of a national virtual currency, either to be generated by the CBI or another entity. (6) “One of the motivations for developing such a currency was that it could potentially be used to replace the US dollar, an attractive prospect for Iran because US sanctions over Iran’s nuclear program bar Iran from using the US financial system. (6.4)
  1. This is a big deal since the global economy depends on the USD. It’s a reserve currency of the global economy. Bitcoin is giving the USD a challenge since cryptocurrencies hold the high ground with most of the transactions, and the USD is losing in this battle. (7)

The banning of cryptocurrencies and various tokens has unsettled the crypto community because they feel that the framework could severely restrict people and businesses operating in the quickly emerging field if the Iranian sanctions are implemented in its current form.

Due to the ability of cryptocurrencies to challenge exertion of extraterritorial restrictions, like with the US dollar, Iran’s Central bank is establishing a sovereign rial-backed cryptocurrency to expand digital operations. Navroop Sahdev, an economist that specializes in blockchain technologies, states, “cryptocurrencies can certainly be very valuable to the global economy, and to society in general. Money has always played a critical role in the evolution of society. In order to understand the role of cryptocurrencies can play in our future society, let’s look at what money does. Money provides four basic functions; it serves as a store of value, an exchange of value, a means of payments and a common measure of value.” (5)

One of the necessary preconditions for the success of a global cryptocurrency would be true decentralization with least susceptibility to centralized control. This is where the debate around concentrated mining power (in case of proof of stake consensus as in the bitcoin blockchain), challenges around scalability, liquidity, etc. come in.

Countries that are in the process of issuing their own rational or regional cryptocurrency are rare, but not unheard of; countries include (but are not limited to) China, Ireland, and Venezuela. (6)

How has cryptocurrency/bitcoin hurt/benefitted other countries?
1. Naouriel Roubini: 99% of cryptocurrencies are worth zero and that it is fintech, and not blockchain that will innovate the banking system

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College of Arts and Sciences

Iranian Cryptocurrency Restriction