From developing a clandestine banking system to seeking the help of third-party firms to conduct trade, Iran has been busy trying to evade United States (US)-led sanctions to protect its rapidly deteriorating economy. However, Washington has always found a way to disrupt Tehran’s efforts and prevent it from participating in a global economy dominated by the dollar. With its constant and tireless efforts repeatedly getting rebuffed, Iran has turned to a new potential solution—cryptocurrency.
Last week, Iran made its first official import, worth $10 million, using cryptocurrency. While it did not specify the type of cryptocurrency used or what was imported, officials proclaimed that this signalled the end of US sanctions on Iran. A senior official said Iran will use cryptocurrency to “bypass the dollar-dominated global financial system and trade with other countries similarly limited by US sanctions, such as Russia.”
Iran has long seen cryptocurrency as an option to sidestep sanctions, considering that it is an alternative to government currencies and allows two parties to conduct transactions by sidestepping financial institutions. In fact, the usage of digital coins has increased across the country. In 2021, Iran accounted for 4.5% of all Bitcoin mining globally, only behind the US, China, Kazakhstan, and Russia.
Keeping this in mind, the International Monetary Fund (IMF) recently warned that Iran has the capability to use cryptocurrencies to monetise its energy reserves and bypass sanctions. However, Iran has made several moves that have undermined its ability to fully explore such possibilities.
Given that virtual currencies can override government institutions, Tehran has kept close watch over the crypto market. In fact, the government banned the mining and trading of popular cryptocurrencies like Bitcoin in 2018. While it relaxed this mandate in 2020 and allowed mining, trading in cryptocurrencies can only be done by the government and is used exclusively to fund imports.
Moreover, apart from regulating the industry, Iran has proposed creating a centralised digital currency—the Crypto Rial—backed by the trust placed in the government and faith in Iran’s currency, both of which are running low due. Moreover, this runs counter to the idea behind the conception of cryptocurrencies, which is the elimination of third parties like banks from financial transactions. Contrary to the very purpose of cryptocurrencies, a government-backed e-coin would mean that transactions would be monitored by a central agency and linked with Iran’s hard currency. Such a move would make Iranians less willing to mine e-coins and the government cannot mine cryptocurrencies alone; mining is a collective process and requires tens of thousands of individual computer networks.
Therefore, creating a centralised digital currency and regulating the industry is sure to backfire. Venezuela is a case in point. In 2017, Venezuela announced the creation of a domestic digital currency called Petro to trade in the international market. However, the Petro was backed by the Venezuelan currency—the bolivar—and its gold and energy reserves. In 2018, inflation levels in Venezuela hit over 1,000,000% and the bolivar became worthless, at one point trading at 250,000 to the US dollar. As a result, many Venezuelans converted their bolivar holdings to Bitcoins and not Petro. People lost faith in the government and its currency and investors were reluctant to invest in Venezuela’s energy reserves, precipitating the failure of the Petro.
That being said, even if Iran were to remove restrictions on mining and trading popular currencies like Bitcoin, the move would not pay off. According to a study by the Baffi Carefin Centre for Applied Research on International Markets, evading sanctions using cryptocurrencies is not a realistic strategy, as cryptocurrencies are an emerging industry and the entire market value of the industry, which is around $2 trillion, would not be able to meet the financial needs of a nation, particularly of Iran’s billion-dollar economy.
The study also notes that cryptocurrency transactions are a cumbersome process and can sometimes take days to settle payments. On the other hand, the current global payment system, SWIFT, from which Iran is banned, handles around 42 million transactions per day. The waiting time alone for transacting in cryptocurrencies could lead to additional losses. Moreover, owing to its decentralised nature, cryptocurrency transactions can only be approved after multiple individual networks confirm their validity. This also means that, unlike bank payments, cryptocurrency transactions are always accessible on a shared database or blockchain by networks. This would leave every Iranian transaction traceable, a situation Tehran would be keen on avoiding.
Apart from this, mining cryptocurrencies is an energy-intensive process and consumes massive amounts of electricity. Global Bitcoin mining is estimated to consume 89 Terra Watt hours (TWh) per year, higher than the electricity consumed by Belgium and Finland. If ranked among countries with the highest electricity consumption rates, Bitcoin would grab the 36th spot. In fact, Bitcoin mining has led to blackouts and power shortages across Iran. Following massive protests, authorities cut electricity to crypto mining centres to address rising demand.
Finally, even if Iran were to address all cryptocurrency-related concerns and ease restrictions on mining, the sheer volatility of the crypto market still makes digital currency transactions an extremely risky affair. For instance, Bitcoin’s value was around $18,000 in 2018 and crashed to $3000 the following year. While Bitcoin’s value jumped to a record $65,000 in November 2021, today it is trading at around $24,000. The highly volatile nature of cryptocurrencies means that Iran cannot rely on them to pay for imports.
The case of El Salvador should prompt Iranian authorities to be cautious before adopting cryptocurrency for transactions. Last year, the El Salvador government made Bitcoin legal tender, a move that mandated economic agents to accept Bitcoin as a mode of payment and purchased over 2,000 Bitcoins worth over $103 million at the time. Today, Bitcoin’s plummeting value has reduced El Salvador’s Bitcoin purchases by over 50%. This means that Salvadorans who have accumulated their wealth in Bitcoins have been handed a major loss.
All things considered, the cost of using cryptocurrencies outweighs their advantages in Iran’s case and could add an extra burden on Iran’s struggling economy. While the value of cryptocurrencies could stabilise over a period of time, experts argue that this is unlikely to happen anytime soon, thereby limiting Iran’s ability to use them to evade sanctions.
Can Cryptocurrency Help Iran Evade Sanctions?
The cost of using cryptocurrencies outweighs their advantages and could add an extra burden on Iran’s already struggling economy.
August 18, 2022
IMAGE SOURCE: COINDESK