Iran and Russia Move to Crypto for Cross-Border Trade
Facing harsh international sanctions, Iran and Russia have taken steps in recent weeks to establish support for cryptocurrency use in commerce, specifically imports. In early August, Iran gleefully made its first import using cryptocurrency — $10M worth of foreign cars. Iran has now passed a comprehensive law outlining the use of cryptocurrencies for international trading purposes.
On the heels of Iran’s announcement last week, Russia’s prime minister stated that digital assets will provide a good alternative to ensure uninterrupted payments for imports and exports. Sanctioned states — subject to highly punitive barriers to international trade and cut off entirely from the global banking system — have eyed cryptocurrency as a potential alternative to circumvent these barriers. However, cryptocurrency’s reliance on traditional banking systems, coupled with sanctions on major exchanges that engage with sanctioned states, makes this alternative.
Cryptocurrency Regulations
Iran
Announced on August 29, the new regulations allow Iranian businesses to use crypto instead of the US dollar or Euro. Previous statements by the Ministry indicates that the use of cryptocurrencies and smart contracts will be widely used by September 2022. The Iranian Ministry of Industry, Mine, and Trade in conjunction with Iran’s central bank, developed the law to avoid crippling global sanctions.
“All the issues related to crypto-assets, including how to provide fuel and energy [for mining], and how to assign and grant licenses were devised,” said Reza Fatemi Amin, Minister of Industry, Mind and Trade.
Major challenges to the nation’s energy grid, such as drought, make cryptocurrency mining an undue stressor to the nation’s power grid. The new regulations would outline the use of fuel and electricity for Bitcoin and other crypto mining activities. In 2019, the Central Bank of Iran placed a ban on cryptocurrencies after wide-spread blackouts plagued the nation because of mining. Earlier this year, Iran increased penalties for the use of subsidized energy in crypto mining. While cryptocurrency mining operations were legal at the time, they have been subject to a licensing process since 2019. An Elliptic report published last year suggests that 4.5 percent of all bitcoin mining was taking place in Iran.
Announcing the fines, the Iranian Energy Ministry’s spokesman Mostafa Rajabi Mashhadi stated that unauthorized mining of cryptocurrencies “creates problems in supplying electricity due to the damage to the local power grid and transformers.”
Russia
This morning, local news reports emerged that the Bank of Russia, the country’s central bank, has reportedly endorsed the finance ministry’s decision to legalize the use of cryptocurrency for cross-border payments, an approach they historically opposed.
This is a major shift away from Russia’s former policies towards cryptocurrencies. In 2020, Russia adopted the “On Digital Financial Assets” law, which officially prohibited the use of cryptocurrencies for payment purposes. In 2021, Russian President Vladimir Putin said in a statement that he believed it was “still premature” to use cryptocurrency for trades and energy resources.
But the invasion of Ukraine earlier this year, followed by a new wave of sanctions, has brought cryptocurrency back to the forefront of the Russian economy.
At a strategic session on the domestic financial system, Russian Prime Minister Mikhail Mishustin said in a statement:
“We need to intensively develop innovative areas, including the adoption of digital assets. This is a safe alternative for all parties that can guarantee uninterrupted payment for the supply of goods from abroad and for export.”
Mishustin statements comes just days after Iran’s Ministry of Industry, Mine, and Trade approved the use of cryptocurrency for imports. But is cryptocurrency really an effective tool to circumvent sanctions? Especially those as strong and widespread as the ones on Iran and Russia?
Bypassing Sanctions
Tehran’s announcement to implement cryptocurrency more widely as a method of cross-border trade was seen as a way to skirt sanctions that left Iran cut off from SWIFT — the world’s largest bank transfer system — which has hampered Iran’s ability to import weapons and foreign technology for decades.
The US imposes an almost total embargo on Iran — second only to Russia following its invasion of Ukraine — the result of Iran’s nuclear program, further isolating the country from international markets. Iranian oil markets have plummeted 70% in the last decade, leaving the country with soaring unemployment and civil unrest.
Mining Bitcoin and other cryptocurrencies requires a lot energy. Power-hungry computers process new transactions and add them to the blockchain in return for token. The mining process converts energy into cryptocurrency. This is a particularly attractive opportunity to sanctioned states that suffer from a shortage of cash, but a surplus of oil and natural gas. Bitcoin mining will bring in an approximate annual revenue of almost $1B. The electricity used by miners would account for 10 million barrels of crude per year — 4% of total Iranian exports.
Therefore, Bitcoin mining can be seen as a way for Iran to sell its energy reserves on the global market, using Bitcoin mining to bypass trade embargoes. Miners are paid in Bitcoin, which they can then use to pay for imports, circumventing sanctions on payments through Iranian financial institutions.
But as a way to avoid sanctions, cryptocurrency actually does very little to help. Contrary to popular belief, cryptocurrency transactions actually provide more transparency to regulators about where money was moved than traditional financial institutions. The dependence of cryptocurrency on banking systems undermine its potential benefit for illicit activity. While there is always a possibility that an exchange will allow sanctioned entities, or for sanctioned states to set up their own cryptocurrency, international trade still relies on payments that can be converted into reliable fiats, like the US dollar or Euro. This means that most crypto transactions will be routed through centralized exchanges where the risks for violating compliance regulations are high.
“Crypto had kind of a terrible reputation because it was initially very popular with criminals, because people thought it was untraceable. But the ironic part is that crypto is actually way more traceable than traditional finance,” says Peter Piatetsky, a former U.S. Treasury official who now heads the compliance firm Castellum.AI.
The U.S. Treasury Department Office of Foreign Assets Control (OFAC) maintains a list of Specially Designated Nationals (SDNs) to prohibit transactions with sanctioned entities and individuals. They have taken steps to block certain cryptocurrency addresses, which have been associated with sanctioned organizations, and most recently went so far as to sanction Tornado Cash, a cryptocurrency mixer that allegedly laundered millions for the North Korea-sanctioned hacker group, Lazarus.
These types of sanctions provide a strong deterrent to third-party actors, such as exchanges, who do not want to face US sanctions for supporting the transactions of members of the SDN list. Kraken, a US-based crypto exchange, has recently come under investigation on suspicion of violating sanctions by allowing users in Iran to trade digital assets. Coinbase, one of the largest cryptocurrency exchanges globally, has taken major steps to comply with international sanctions, including blocking more than 25,000 cryptocurrency wallet addresses “related to Russian individuals or entities we believe to be engaging in illicit activity.”
Furthermore, it’s likely that cryptocurrency markets aren’t nearly liquid enough to support sanctions evasion by Russian oligarchs and business. Hundreds of billions of dollars are controlled by Russian individuals and entities — if the cryptocurrency market is not liquid enough to support extremely large sell-offs, then cryptocurrency would be a less attractive means of sanctions evasion. In fact, a Chainalysis article argues that cryptocurrency markets are, indeed, not nearly liquid enough to support effective sanctions evasion,. It argues that it is more likely that if Russia does lean on cryptocurrency to evade sanctions it will be in the form of money laundering and not mass-conversion.
Resulting to cryptocurrency is not a solution to stringent international sanctions. While it may prove to be a good converter of energy-surplus to money, its use as a means to transact around the international financial markets will likely fall flat. Its traceability, coupled with new investigative techniques in blockchain, will ensure that sanctioned actors are identified and isolated quickly.
As Piatetsky added, “Could Russia create some sort of ecosystem where there’s a Putin coin and an Iran coin, and they just do business with each other? Sure, but they would be honestly much better off filling planes with gold and flying them back and forth.”
About Centuries Analytics
Investing in cryptocurrency doesn’t have to be risky — not anymore. We let data speak; not investors, “experts”, pundits, or tv show commentators. Centuries uses social media, financial, and macro-economic data to determine and predict cryptocurrency markets.
Find out more: https://www.centuriesanalytics.com/
