I.        Introduction

On Monday 18 April, in the last working days of tenth parliament of Iran, members of parliament approved a bill to add cryptocurrencies under the law of commodity and currency smuggling. As much as this enactment is clear in the scope of commodity and currency smuggling, but is vague in the sphere of cryptocurrencies.

It seems reasonable that passing the bill right on the last day of 10th Iranian Majlis is coming out of hastiness and lack of enough familiarity with current situation of cryptocurrency market in Iran and more broadly in the globe. Unfortunately, cryptocurrency area in Iran have not seen yet any specialized and research-based measures and accomplishments by government and policy makers. Viewpoints and interviews of members of central bank, government and parliament is same as well.

In February 2019, Central Bank of Iran published the requirements and principles act that faced to opposition from activists and cryptocurrency community. In July 2019, CBI announced that any activity in the area of cryptocurrencies is illegal which was in some way inconsistent with the requirements document. This two in addition to issues related to banning crypto mining and impeachment and prosecution of miners are mainly all the regulatory measures that have taken place in past years.

In the meantime, Majlis Research Center independently have done analytical studies as a progressing step, but this is far from a comprehensive and inclusive law. This article tends to propose some questions in this way and address ambiguity and uncertainties in this sphere. Moreover, we investigate the regulatory status of cryptocurrencies in Iran and some other countries around the world.

On an institutional level, Iranian policymakers are having a very difficult time understanding how the blockchain technology works. As a result, they are unable to take advantage of its benefits and mitigate its risks. For instance, wariness of its potential to facilitate capital flight and otherwise undermine the country’s vulnerable economic system led parliament to prohibit individuals from using cryptocurrency at all in May.

II.    Crypto events in Iran

The Central Bank of Iran (CBI) officially announced on April 22, 2018, that it has prohibited the handling of cryptocurrencies by all Iranian financial institutions, including banks, credit institutions and currency exchanges. The decree also bans crypto exchanges from trading virtual currencies or taking actions to promote them.

The decision was in line with their last efforts to deal with deficiencies in policies requires for complying with the action plan of FATF, which is an international organization founded to combat and eradicate money-laundering and terrorist financing. Some believes that AML/CFT was not the only reason behind of this decision and CBI aimed to prevent foreign currency outflow from the country as well as lay the foundations for developing its own sovereign cryptocurrency.

Table 1: Cryptocurrency regulation events and news (11/2017 – ۰۴/۲۰۲۰)

Source: News event collection of crypto events in Iran from Financial Tribune’s website (www.financialtribune.com)

Now, in 2020, Iranian Majlis have taken action against expansion of crypto exchanges

Now, in 2020, Iranian Majlis have taken action against expansion of crypto exchanges, so these exchanges must obtain a license from the CBI and comply with foreign currency exchange regulations, but it is still unclear how existing exchanges should apply for a license and adapt those fiat currencies’ regulation. Many believes this law will make the entrepreneurs in this domain encounter both risks of punishment by local authorities and being sanctions by U.S. government.

III.  Hopes, Challenges and Ambiguities

Iran’s government has been interested in cryptocurrencies for a long time in order to support international trade outside of the existing international trade system. In July 2018, President Hassan Rouhani’s cabinet revealed their intention of developing state-backed cryptocurrency. Multiple blockchain projects had introduced by the Central Bank of Iran last year at the Electronic Banking and Digital Payments Conference.

At the other hand, the popularity of crypto transactions has been increasing dramatically to the extent that many people consider bitcoin as the only way to transfer money out of the country. In 2019, a survey conducted among 1650 residents using bitcoin and the results showed that 25 percent of the participants earned between $500 and $3000 monthly from working with cryptocurrencies.

Both government and citizens in Iran are increasingly rely on decentralized technology for evading the American sanctions. It seems that the government has fully realized the economic gains in mining sector. In August 2019, the government finally recognized mining of cryptocurrencies as an industrial undertaking and sent a directive to the relevant government bodies.

New developments in the sphere of cryptocurrencies may open up new opportunities for the Iranian government and public to circumvent American sanctions. The rise of sovereign virtual currencies based on private blockchains that provides no traceability as currencies like bitcoin does so. Countries that are still seeking their interests in trading with Iran could easily achieve them bu use of such coins.

In addition, another remarkable development in the world of cryptocurrencies is decentralized finance (DeFi), which aims to provide common financial services such as banking, lending and trading over decentralized networks and without intermediaries. Due to excessive inflation, which Iran has been suffering since 2019, Iranians tends to borrow limitlessness from overseas markets at lower rates.

As mentioned in table above, Iranian parliament had opened the gates of crypto regulation by publishing a study on the official website of Majlis Research Center. Different areas such as issuing coins by private and public sector, using virtual currencies in micro payments and maintaining currencies in created electronic wallets mentioned in this study but it lacked any further clarifications about considered solutions or way of addressing these issues from government.

Many questions remain to be answered about the cryptocurrencies regulation in Iran. One of them is how the government is planning to enforce the law on the Iran’s crypto exchanges that most of them are registered abroad.

Another question and maybe the more important one is about the approach of Iranian government to regulating the decentralized finance. As we might know, DeFi is inherently border-less and with this new technology, transferring value and negotiating contracts across the globe may become as easy as sending an email. Because it delivers financial services that are difficult to link to specific entities or even jurisdictions, we need an activity-based approach to regulation, instead of execution of supervisory mandates and directives that relies on the presence of centralized decision-making entities.

Finally, there is a considerable debate over whether the deterrent measures of government are due to their concerns about risks inherent in decentralized finance and more broadly speaking cryptocurrency markets, or they implement them as they worry about losing their roles with rising of the blockchain technology. It is argued that the blockchain technology can provide more efficient substitutes for services currently monopolized by the government such as money supply provision, contract enforcement and maintaining property rights.

IV.  Conclusion

Some experts believe this crackdown and restriction carried out on the cryptocurrency space by the government in order to pave the way for CBI’s plans to launch its sovereign cryptocurrency. It seems that Iranian Government aims to reap the rewards of blockchain technology and draw on their relative advantage in this sector, and concurrently avoid problems arising from speculation, illicit activities and free outflow of capital. Apparently, the government wants to has its cake and eat it too!

read more: Iran does not have more time to lose blockchain opportunities!