Crypto Won't Save Iran from Sanctions
As fresh sanctions from the US loom over Iran and its trade partners, the Middle Eastern country is reportedly pushing the roll-out of its own state-backed cryptocurrency.
"We are trying to prepare the grounds to use a domestic digital currency in the country," said Alireza Daliri, a deputy at the Iranian government’s Directorate for Scientific and Technological Affairs, which is responsible for the country’s cryptocurrency project.
“This currency would facilitate the transfer of money (to and from) anywhere in the world. Besides, it can help us at the time of sanctions,” he added.
Specifically, Iran’s state-backed cryptocurrency wouldn’t depend on the international banking and settlement system or SWIFT (Society for Worldwide Interbank Financial Telecommunication), which will be barred from dealing with Iranian banks under US sanctions. Instead, transactions would be verified on Iran’s own blockchain ledger. This would appear to mean, in theory at least, that even those in the United States could send digital currency to Iran.
The idea of state-backed cryptocurrencies is not new. Venezuela, another country that has been under sanctions by the US, has developed its own Petro token. The Petro coin is also meant to stabilize Venezuela's own national currency, the Venezuelan bolivar, as the country's inflation rate is predicted to hit an unfathomable one million percent this year.
Other countries, like China and Sweden, are researching state-backed digital currencies and blockchain technology as a way to make their financial systems more efficient and cashless.
But rolling out a state-backed cryptocurrency, also known as a "central bank digital currency" (CBDC), probably won’t mute the blow of sanctions for Iran and its trade partners. The deadline for the first wave of US sanctions is August 6th -- just one week away -- and no concrete details about Iran’s proposed digital currency have been released.
Despite how easy it looks to launch a new token, designing and implementing a digital currency that’s compatible with the country’s current financial system is a lot more complex. There are a lot of factors to consider: the impact that a CBDC could have on the country’s cash reserves, government debt, commercial banks and private financial institutions. The pressure of sanctions and an already volatile national currency (the Iranian rial dropped more than 10% on Sunday) won't help.
“A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations,” states a report on CBDCs released in March by the Bank for International Settlements.
A digital currency backed by a central bank could also result in a less efficient system, the report notes, as the central bank would have to take on more responsibilities throughout the financial system -- responsibilities that the private sector might be better at handling.
Even if launched, an Iranian state-backed cryptocurrency might not be enough to circumvent US sanctions, though it’s difficult to evaluate with so few details released. While smaller transactions that happen peer-to-peer might not be easy to detect, crypto exchanges in the US could be subpoenaed for information about certain accounts and wallets. Likewise, platforms that facilitate peer-to-peer transactions with the CBDC could also come under pressure from the US government.
US President Donald Trump has already signed an executive order banning all US-based financial transactions with Venezuela’s Petro token -- there’s no reason why similar if not harsher actions could be taken against Iran’s state-backed digital currency. The US is also on high alert for any attempts to evade sanctions against Iran. Just last week, a group of US senators wrote a letter to British, French, and German ambassadors, warning them not to undermine Iran sanctions in any way.
To be sure, Iran could potentially use a state-backed cryptocurrency to trade with countries that are also under US sanctions, namely Russia (which was also involved in the design of Venezuela’s Petro). But it won’t change the fact that Iran is cut out from the US dollar, which is the most dominant currency in global trade and foreign exchange transactions.
While Iranian officials want to use crypto to avoid sanctions, ordinary citizens can use Bitcoin to get around the state. The decentralized digital currency has already moved an estimated US$2.5 billion out of the country. Unlike a CBDC, Bitcoin doesn’t have to plug into existing banking infrastructure in Iran. Most important, it’s already operational, liquid, and global.