When one travels to Iran, the first problem to solve is money. US sanctions mean Iran is financially isolated. No banks accept international credit cards. Visa and Mastercard can’t operate in Iran. There are no bank transfers, no Paypal; there is not even a Western Union. Foreign visitors, therefore, need to bring cash (euros or dollars) — or bitcoin — and exchange it locally against rials, the local iranian currency.
I traveled in Iran for several weeks recently. I learned about Iran’s currency issues the hard way, about its capital controls and the impact of the US sanctions. It became obvious to me that Bitcoin can be a solution on many levels. I started digging and got an insider’s look in the Iranian crypto and mining community.
Iran’s economy is struggling
Iran’s national currency the rial is the story of a continuous depreciation. On March 15 1978, before the Islamic revolution, a US dollar was worth over 70 rials.
Fast forward to 2016, before Trump was even elected, and a dollar now equaled 29,000 rials. With Trump’s election, the rial’s downfall accelerated. First, he threatened to withdraw from the Iran nuclear deal. Word then came out from Washington saying the deal was practically doomed. The rial plunged with a dollar worth 60,000 rials on the black market. This prompted an angry response from Iran’s First Vice-President. The government and the central bank started enforcing an official rate of 42,000 rials per USD. Any person selling dollars at rates higher than 42,000 are supposedly “dealt with severely”.
But Iran and Iranians need hard currency leading to an elaborate game of cat and mouse, with several options to change cash:
- At the banks: the so-called “primary market”, sellers are offered the central bank fixed exchange rate of 42,000 rials per USD.
The US dollar to Iranian Rial
- At the exchange offices: the so-called “secondary market” is still tolerated, sellers will find a floating exchange rate from 60,000 rials to 80,000 rials per USD. Foreigners can easily sell dollars there. But Iranians can’t buy dollars through these exchanges because it’s now illegal.
- On the street: the “illegal market”, where ordinary people on motorbikes make approaches to buy and sell foreign currency. The exchange rate depends on your negotiation skills.
Most Iranians I met expected the rial to plunge to lower levels, closer to 100,000 rials per USD, especially in light of Trump’s newest sanctions. This affects the country on many levels: imported goods become more expensive, foreign trade falls, inflation is expected to increase. On the other hand, Iran is not able to profit from benefits usually associated with a weak currency, such as attractive export prices (oil, mostly), as all exports are severely impacted by the USA.
A newly acquired stack of cash after changing 100 euros in rial
People who own savings in rials see their purchasing power diminish every day. They are looking for ways to protect their wealth, and find a refuge for what little cash they have. They are looking for stores of value to survive the economic collapse: dollars (but they can’t find any in Iran) or gold.
Bitcoin is helping Iranians protect their purchasing power
Financial transactions today are still very much geographically isolated by borders, legal jurisdictions, and nation states. Iranians know this as a fact and understand it. They cannot transact with the rest of the world.
Are they unbanked? No, Iran is a country with a flourishing startup ecosystem, great developers, and many banks. The usage of wholly domestic credit cards is high, and pay by phone systems are common.
A taxi ride in Tehran
So what they do have is an isolated banking system: banking without international markets and currencies, banking with currency and capital controls, and banking with little liquidity.
Their current banking system offers services such as:
- A savings account in rial –a fast depreciating currency–
- Loans with extraordinarily high-interest rates (an average of 18%) — to be expected for a hyperinflationary economy-
People in Iran are increasingly turning to cryptocurrencies to protect themselves from an economic collapse and to evade the financial repression. And the government is noticing.
Trading volume on LocalBitcoin does follow the price of Bitcoin but has increased since April (following the economic uncertainty with the embargo and the banking ban).
A few weeks ago, the Chairman of the Economic Commission of the Parliament Mohammad Reza Pourebrahimi stated that “More than $USD 2.5 billion has been sent out of the country for buying digital currencies”. Shortly before, Iran’s Central Bank banned all cryptocurrency operations. This is of course an attempt to control capital flight, which further weakens the currency. Despite this ban, certain platforms are still operating. The buying and selling is done manually in a discreet way through platforms such as Payment24 or LocalBitcoin.
Business can circumvent the sanctions by moving money internationally
The US Treasury Department’s Office of Financial Assets Control states that no payments linked to Iran may be processed through the U.S. financial system. You cannot receive money from Iran as a company or as a bank and you cannot trade in dollars.
This embargo affects European businesses too, since the US government is not shy at attempting to block trade with Iran to non-US parties. With most trade happening in dollars, it is virtually impossible to receive money from Iranian businesses and make sure that it does not go through a US bank or a subsidiary. Back in 2014, BNP Paribas had to pay a $9 billion fine for helping clients in Iran conduct dollar-based transactions.
It doesn’t look like Trump is going to be any nicer with businesses dealing with Iran
Now, with new sanctions, even European companies operating outside of the US and interacting with Iran via currencies such as the euro and renminbi could be punished by the Trump’s administration. While the EU wants to keep the nuclear deal alive, European businesses are leaving the country to avoid sanctions (Total, Maersk, CMA CGM, the list keeps getting longer). When Iran attempts to withdraw 300 million euros from a german bank account, the US Ambassador to Germany intervenes by asking Germany to prevent such transfers.
Bitcoin and blockchain solutions become naturally attractive when you have no means of moving money internationally. Iran is cut off from the international banking community, but investing and trading using Bitcoin is beyond the reach of the US administration.
I met Iranian crypto miners that used Bitcoin to receive fundraising by Western investors to develop their farms. As soon as an investor sends them Bitcoin, it takes 30 minutes to convert the equivalent amount in rial and receive it in their bank account. Bitcoin is faster and more secure than sending money through the interbank messaging platform Swift. More importantly, Bitcoin is censorship-resistant. It has no walls and no national borders. It is a decentralized infrastructure for exchanging money, a neutral platform that is open and accessible using just an internet connection.
Bitcoin as a hedge for Iran’s geopolitical situation
An estimated 60% of world trade is done in dollars today. This currency is the property of the United States of America. US authorities largely control who can use it, how much of it is created, and exert tremendous geopolitical influence thanks to its status as the world’s reserve currency. The dollar is what makes European and other countries firms subservient to US sanctions. And Bitcoin could help free them.
Iran has started reporting foreign currency amounts in euros rather than US dollars to reduce its reliance on the currency. Russia and Iran are thinking of transacting in cryptocurrencies to bypass the US dollar and the US sanctions.
While Iran’s central bank banned national banks from dealing with cryptocurrencies to reduce capital flight out of the country, the government has shown a keen interest in using blockchain-related technologies to circumvent sanctions. Weeks before banning banks from dealing with cryptos, the government organized a conference (“Regublock”) with the Iranian crypto-community. They were engaging with the community to understand how they could use this technology, in order to potentially create their own national crypto-currency.
An event organised by the ICT ministry “Regublock.ir“ ”
The greater the US pressure through financial embargos will be, the greater the incentive for nation-states to adopt Bitcoin as a method of transferring money.
Bitcoin has the potential to lessen the clout of US influence on geopolitics at the margin.
Electricity is cheap, the rial is becoming worthless
Good electricity deals tend to come in smaller packages and are distributed worldwide. As a consequence, mining farms do not have economies of scale. When I visited Tehran, I met with some miners there. They allowed me to visit their recently acquired farming complex: an old factory that fell on hard times because of economic sanctions. But the factory had one saving grace: it was paying the industrial electricity rate for electricity, or $0.012 per kWh.
With greater electrical capacity, the rate can go as low as $0.0092 per kWh. Because electricity is dirt cheap, Iran is probably the second cheapest place to mine Bitcoin after Venezuela. And people have noticed it: in the Noor Shopping Centre (Tehran’s Hardware and Computer shopping center) it has become common to see people walking around with newly purchased mining frames. Mining rigs are now displayed for sale in computer stores.
A small part of the GPU mining farm. Mining 12.5 ETH came at a cost of $150
Like in Venezuela, the government also noticed that mining could be a profitable business. Crypto mining is like having a money printing machine that needs mostly one important resource : electricity. Iran is luckily awash with electricity coming mostly from its rich thermal energy sources (ie: burning oil and gas). It is even estimated that 18.5% of the electricity produced in Iran is wasted before it reaches the consumer.
This simple statistic and the fact that the ICT minister goes to the inaugurations of “knowledge-based” companies, among which a “data and bitcoin mining facility” all indicates strong official interest. Indeed, it is possible the government itself has engaged in mining activities to help the state collect dollars and euros. But that means they have to find a way to sell those bitcoins. And while that is easier said than done, Bitcoin would appear to have a bright and prosperous future in Iran. And after all, we might even envision a future when such conversions are not even necessary, if a full Bitcoin economy arises.
Today, the US dollar, since Bretton Woods and the petrodollar system, is the global reserve currency and the de facto currency of our time. But it would be a mistake to assume that because it is so today, it shall always be so. A global currency such as Bitcoin is well positioned to be the next global reserve currency in the future. It might already well become the next reserve currency for financially isolated countries such as Venezuela, Iran and Zimbabwe.
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Thank you to Manuel Valente, David Fay, Marc Zeller, Roman Beyon, Anissia Tcherniaeff & Ciaran O’Hagan for reading drafts of this post.
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