Iran is finding ways to bypass U.S. sanctions through cryptocurrencies and blockchain technologies. Exemptions to sanctions expired on May 2nd for nations importing Iranian oil, and digital currencies may provide a way around Tehran incurring future penalties. The U.S. Government has options to counter Iran’s use of cryptocurrency and blockchain technologies, but currently lacks the procedure to do so. The United States should prioritize the development of a strategy to close this loophole.
Iran’s Crypto Breakthrough
2019 is filled with digital currency breakthroughs for Iran. In January, its Central Bank introduced draft cryptocurrency regulations, which would lift today’s blanket ban on digital currencies (despite leaving restrictions in place on their use inside the nation) and legally recognize global cryptocurrencies. Although accepted by a few of its Ministries, the exact legislation has not yet been finalized.
Iran followed the introduction of new cryptocurrency regulations with an announcement about plans to develop a national digital currency backed by Iran’s gold reserves. Iran plans to mint more than a billion tokens, titled “PayMon” (PMN), which will be issued by four of Iran’s banks and traded on Iran Fara Bourse, an over-the-counter exchange.
All of this culminated in Iran unveiling its first bitcoin ATM in late April that can exchange Bitcoin to rial. It is pertinent to note that although Iranian nationals can now trade and invest in digital tokens, they cannot use them as a means of payment settlement under current regulations. However, the proposed state-backed digital currency will have no such restriction.
Why Iran’s Cryptocurrency Might Succeed
This is not the first endeavor to create a sovereign virtual currency. The failure of Venezuela’s “Petro” digital currency, backed by its own oil reserves, leads many to question if Iran will be successful. However, Iran’s currency is better positioned for success for a number of reasons.
First, the Iranian regime is much more stable than Venezuela’s past and present regime. Although Iran’s economy has weakened, it has consistently adapted to U.S. embargoes and continues to be better positioned to do so than the more-isolated Venezuela. Iran recently signed a trilateral blockchain cooperation agreement with Russia and Armenia, and continues to develop a deeper alliance with China and European nations.
Second, the demand for gold, and therefore gold-backed cryptocurrencies, is a factor in the currency’s success. Despite the overall struggle of the global cryptocurrency market, demand has increased for gold-backed token DigixDAO. Basing its hurt economy on a currency other than the dollar will be a challenge, most notably as the U.S. dollar continues to strengthen; however, it is still a potential way to circumvent the issue of sanctions.
What has the United States Done?
The U.S. Treasury’s Office of Foreign Assets Control (OFAC) took new initiative over the past year to tackle cryptocurrency challenges. In an almost-immediate response to Tehran’s announcement of the launch of PMN, OFAC added cryptocurrency players to its sanctions blacklist; in an unprecedented move, it also made associated cryptocurrency addresses public.
What can the United States do?
Digital currencies provide transferring parties with an advantage: another nation cannot intervene. With no banks or central offices involved in the process, there are no forces at play to step in between the transfer. The use of a sovereign virtual currency not only decreases reliance on the U.S. dollar, but adds yet another layer between Iranian and U.S. financial systems.
Illicit finance is a primary issue for Capitol Hill. If Congress wants to tackle the international use of cryptocurrencies, the Blocking Iran Illicit Finance Act should be reintroduced in both the House and the Senate. As a result, realistic penalties can be determined against those who provide “financial, material, or technological support” for the development of PMN. Additionally, the bill can be referred to relevant committees and become a discussion point for the House Financial Services Committee’s new FinTech Task Force. This task force can help decide strategic measures to counter the potential misuse of Iran’s proposed digital currency.
The United States Treasury can also disrupt the trade of digital currency, as it did when it caught two Iranians in an illegal exchange of Bitcoin to Iranian rials through WhatsApp. While PMN may lead to an increase in the illegal exchange of digital currency, experienced professionals can easily de-anonymize the user — creating a more complicated picture for law enforcement. The Treasury’s workforce is not currency positioned towards the enforcement of illegal crypto activity and scams outside the dollar, but with the rise of digital currencies, it should consider a new enforcement strategy.
The implementation of sanctions against those who provide support for PMN would be tricky, and additional footwork is needed from Congress and federal agencies. As Iran continues to plan new ways around U.S. sanctions, discussions surrounding the U.S. response to cryptocurrencies need to start now.