Smart Money — Regulating Cryptocurrencies in Iran
For much of 2018, observers have been closely watching the rise and fall of cryptocurrency prices across the globe, and speculating about the role they might play in the future of the global economy. Although the sustained decline in the value of major cryptocurrencies such as Bitcoin has been mirrored by a drop-off in media attention over the past few months, Iranian officials have continued to hotly debate how these currencies should be regulated, and whether they offer a solution to the challenges posed by the reimposition of financial sanctions
In recent months, senior Iranian parliamentarians, officials from the National Central Bank, the ICT Minister, the Supreme Council of Cyberspace (SCC), and the Supreme Council for Combating Money Laundering (SCCML) have all discussed the need to develop new regulatory frameworks with regard to cryptocurrencies. This comes in light of suggestions that cryptocurrencies may be used to bypass international sanctions, or that it would be in Iran’s national interest to develop a national cryptocurrency.
Despite their enthusiasm about the issue of cryptocurrencies, policymakers have struggled to assemble a very coherent vision for a national regulatory framework, with a number of different competing visions and policy priorities being articulated. The Iranian Parliamentary Research Centre’s September 2018 report Virtual Currency: Legislation in Different Countries and Proposals for Iran is the latest attempt at drawing together a model for cryptocurrency regulation — we’ll pick it apart a little later in this report.
In this edition of Filterwatch, we’ll take stock of Iranian policymakers’ efforts to grapple with the challenges raised by cryptocurrencies, and assess their implications for both Iran’s digital economy, and the rights of its citizens.
Money Talks — Ongoing Policy Discussions
On 6 May Mohammad-Reza Pourebrahimi, the Head of Iran’s Parliamentary Finance Committee, claimed that $2.5bn dollars has left the country due to Iranians buying cryptocurrencies. Though this claim played a part in driving a sense of urgency in policymakers to regulate cryptocurrencies more closely, it’s difficult to see how this number was reached given the untraceable nature of the largely informal cryptocurrency exchange market in Iran.
Although there are a number of well-known online money exchange sites that buy and sell cryptocurrencies in Iran, much of this activity takes place either in informal Telegram channels, or using other communications platforms, making it extremely difficult to track the volume of cryptocurrencies being exchanged. The lack of tangible legal guidelines around cryptocurrencies has only facilitated the expansion of these unregulated markets.
On 22 April Iran’s Central Bank issued official guidelines restricting the use and trade of cryptocurrencies in all financial institutions in Iran, including currency exchange shops. These guidelines were published with reference to the decision made by the SCCML on 30 December 2017, which described cryptocurrencies as a possible vehicle for money laundering and the provision of support for terrorism-related activities. Although these restrictions were imposed in April, it was stressed that the limitations would be temporary, and that future regulatory frameworks could feasibly allow for the use or trading of cryptocurrencies.
Subsequently, the Supreme Council of Cyberspace (SCC) met on 28 July to discuss — among other issues — the possibilities offered by using foreign cryptocurrencies or a ‘national cryptocurrency’ to support the Iranian economy. Although discussions took place, no concrete policy decisions were taken at the meeting about regulating cryptocurrencies, and the issue was deferred once again.
Iran’s Parliamentary Economic Committee has also been proactive on the issue. On 13 January Mohammad-Reza Pourebrahimi announced that Iran’s Parliamentary Research Centre would publish research into the impact of cryptocurrencies on Iran’s economy. The report was published nine months later, on 2 September.
The report offers little in the way of concrete policy suggestions, instead opting to list different states’ approaches and attempt to outline best practices of addressing various challenges, including money laundering, taxation, and Securities and Exchange regulation. Taking account of frameworks in place in the EU, US, Ecuador, Venezuela and Russia, the report also offers an assessment of how existing Iranian legal mechanisms could be deployed to regulate or control the exchange of cryptocurrencies.
The report proposes that existing legislation already allows the government to undertake some level of regulation of cryptocurrencies:
The 2008 Anti-Money Laundering Act grants the SCCML authority to regulate the exchange of cryptocurrencies involving private companies and financial institutions.
The 2015 Direct Taxes Act could be used to tax dividends earned on trading or owning cryptocurrencies. In this case, the Tax Affairs Organisation would be responsible for drawing up a relevant taxation regime, and educating the public about it.
The 2005 Securities Market Act would allow the Supreme Securities and Exchange Council to classify cryptocurrencies as “financial instruments” and to regulate their trade.
The report also mentions two emerging national initiatives proposing the launch of Iranian cryptocurrencies, however the detail on this point remains incredibly limited.
Furthermore, the Iranian Parliament has not indicated any plans to bring forward legislation as the result of the report, nor have they indicated they will seek answers from government ministers on the matter.
However it is likely that head of the Parliamentary Economic Committee — who also sits on the SCCML — will incorporate its findings into his policy advocacy in the coming months, when responsible lawmaking bodies including the SCCML and SCC will be bringing the issue forward for review.
Generally though, there is a great deal of disorganisation and heel-dragging amidst Iran’s regulatory institutions as to how best to approach the issue of cryptocurrency regulation. Although the Parliamentary Research Centre’s report suggests a number of ways in which existing institutions could start to grapple with the challenge of regulation, the lack of policy detail suggests that policymakers are still struggling to articulate a unified response.
Breaking the Bank — Developing a National Cryptocurrency
Compared to the prevarication of Iran’s existing regulatory institutions, ICT Minister Azari Jahromi has been fairly vocal in backing the development of a ‘National Cryptocurrency”. On 21 February Jahromi announced on his Instagram account that the ICT Ministry would partner with the Post Bank of Iran to design, test and implement Iran’s first cryptocurrency. In his post, Jahromi warned that Iran risked falling far behind its global competitors if organisations did not start to harness the perceived potential of cryptocurrencies.
Yet even Jahromi sometimes appears to be confused about the technical detail of cryptocurrencies. At times when he speaks about the potential benefits of cryptocurrencies, it appears that he is in fact advocating the introduction of blockchain technology to different corners of Iran’s ICT infrastructure and banking system — an altogether different conversation.
In February 2018, the Post Bank of Iran (which operates as a subsidiary of the ICT Ministry) invited experts to feed into their consultation about establishing an ecosystem for blockchain-based cryptocurrencies in Iran. Experts were asked to email their credentials and declare their intentions to engage with such a project to cryptocurrency@postbank.ir by 16 March 2018. Since this date, there have been no further announcements about the scope of this project, or its timeline for delivery.
Notably, other state-affiliated organisations have claimed to have made progress in developing cryptocurrencies, but once again the evidence to support these claims are very limited. The Informatics Services Corporation — which operates under the Central Bank of Iran — announced on 26 July that it had designed the first ‘national’ Iranian cryptocurrency, with its value pegged to the Iranian Rial. However there appears to be no information about the design of the currency or the methods of its distribution.
So far, official announcements have only confirmed that value of the new cryptocurrency would be pegged against Iranian Rial. According to the ISC, during the first phase of the cryptocurrency’s launch, it would only be made available to commercial banks to be used for transactions between financial institutions. IBENA — a financial news agency affiliated to the Central Bank of Iran — reported that the new currency would be based on the Hyperledger Fabric blockchain framework, and would be issued by the Central Bank of Iran alone, rather than being open for the public to mine. No further information has been made about the features or proposed timeline for the roll-out of this ‘national cryptocurrency’ since this August announcement.
Based on all of the information currently in the public realm, there remains little clarity about the form any proposed Iranian national cryptocurrencies might take. Depending on the eventual shape of these proposed programmes, a whole host of potential challenges could arise relating to privacy, financial stability, and socio-economic inclusion.
The extent of these challenges will largely depend on whether the government plans to stick with its proposed framework to deploy cryptocurrencies solely as tools for financial institutions, or whether they anticipate them being made available to citizens for everyday financial transactions. Although at present it seems as though the former may be the case for now, it seems that some Iranian politicians may have more far-reaching aspirations for cryptocurrencies in the long-term.
Competing Visions — Iran’s Three Options for Cryptocurrency Regulation
While the Parliamentary Research Centre outlined some ways that existing legislation could be ‘retrofitted’ to develop regulatory frameworks for cryptocurrencies, there are also a range of Iranian political actors who have developed their own visions of how they should be managed. These competing visions can be broadly divided into three groups:
Firstly there are the ‘Skeptics’ — those who have raised concerns about the use of cryptocurrencies in Iran. In their view, the widespread deployment of cryptocurrencies outside the current banking system in Iran would facilitate money laundering and provide terrorist organisations with untraceable means of transferring funds. The Central Bank and the SCCML are the two institutions most closely aligned with this strand of thinking.
Another point of contention among the ‘Skeptics’ is the volatility of cryptocurrencies. In January 2018 ICT Ministry Jahromi noted that confidential ICT Ministry-authored reports outlined the large volume of Bitcoin bought by Iranian public through money exchange shops in Iran. He said that many Iranians had lost significant sums of money due to the sharp collapse in the price of Bitcoin.
Interestingly, Jahromi also mentioned that the national economy had been damaged as a result of the widespread investment in Bitcoin, with huge sums of money flooding out of the country. While there has been no analysis of the impact of Bitcoin-powered capital outflows on the Iranian economy, it is possible that officials fear the sharp decline in value of the Iranian Rial may feed a cryptocurrency-fuelled capital flight.
The second vision is that put forward by the ‘Sanction Busters’. They argue that cryptocurrencies could be used on a large scale to bypass financial sanctions imposed on Iranian businesses. Although this is sentiment mostly championed by media commentators, some policymakers have shown sympathy toward such a vision.
On 24 June the Head of the Parliamentary Economic Committee Mohammad-Reza Pourebrahimi echoed this sentiment in an statement to Russian media organisations, and said that Iran and Russia could establish a system based on cryptocurrencies to bypass SWIFT sanctions on Iran.
Similarly, on 19 December 2017 Mohammad-Morad Bayat, the Head of Iran’s Centre for the Promotion of e-Banking and Professional Training (FABA) said that Bitcoin could be deployed to bypass some of the sanctions in place against Iran.
Finally, there are the ‘Cryptovangelists’ — those who believe blockchain technology and national cryptocurrencies could bring efficiency and transparency into the Iranian ICT and banking sectors. This is a stance that has been repeatedly articulated by ICT Minister Jahromi, who looks set to continue push for greater inclusion of such technologies in the future of Iran’s ‘National Internet’ programme, or SHOMA.
For instance, on 28 April Jahromi said: “With regard to cryptocurrency, trying to move backward is meaningless, because the framework of the future of the world is based on blockchain technology, and because of that we have to continue working on this until we achieve results.”
Small Change — Iran’s Next Steps
Although there is no denying that many Iranian citizens continue to use international cryptocurrencies for all sorts of personal reasons (including bypassing International sanctions), Iranian officials are adamant not to promote use of known cryptocurrencies such as Bitcoin as a permanent solution to these challenges. Given the ongoing instability of the Iranian currency market, the perceived risk of cryptocurrencies as a vehicle for capital flight seem to be weighing heavily on policymakers’ minds.
Yet other segments of the establishment see potential rewards rather than risks; they instead would prefer to fully explore the possibility of using cryptocurrencies (whether existing, or nationally developed) to bypass punishing international financial restrictions imposed on Iran.
As the technologies and protocols for establishing such currencies are already widely available, the biggest obstacle to promoting this policy outcome is seemingly the establishment of sustainable and coherent legal frameworks for regulating cryptocurrencies’ use in Iran. As we’ve outlined, this seems to be the main challenge for authorities at present.
Although there is a lack of unity in policymakers’ vision for cryptocurrency regulation, there is a notable lack of open infighting when compared to ICT policy debates around censorship and surveillance. There has also been an interesting level of active participation in these debates from lawmakers in Iran’s Parliament, something that has frequently been missing from other debates on online privacy and censorship.
Throughout these debates, it has become clear that Jahromi has the ambition of introducing blockchain technology, and a national cryptocurrency into Iran’s existing ICT infrastructure. Although related projects have been announced and are supposedly underway, it is yet to be seen whether the remaining three years of Jahromi’s tenure as ICT Minister will see the aspirations of his ‘Cryptovangelists’ come to fruition. In any case, unless the incorporation of blockchain into Iran’s ICT infrastructure goes beyond interbank financial transactions, it is unlikely that the Iranian public would feel the effects of its implementation in any meaningful way.
The outcome of these internal policy debates will prove the primary determinant of the eventual shape of Iran’s regulatory landscape, and the form of any hypothetical national cryptocurrency. Yet other factors remain up in the air, including the possibility of collaboration with geopolitical allies such as Russia, the fate of international financial sanctions, and the value of the Iranian rial — all of these issues will certainly play a role in shaping any forthcoming legal frameworks.
We’ll continue to monitor the government’s progress in resolving these policy debates in upcoming editions of Filterwatch, and will assess how far any decisions are likely to impact citizens’ rights online.
This article is taken from Small Media’s September 2018 edition of Filterwatch.
