What do we know about Iran’s new strategy?

With the Ministry of Commerce officially approving the use of cryptocurrencies for foreign trade, Iran will become the first of its kind in the world.

The obvious problem with the news is that the country’s innovative policies are clearly aimed at circumventing economic sanctions that have hindered the country’s participation in the global economy for many years.

These circumstances set an ambivalent tone for Iran’s experiment – while for some it may prove crypto’s liberating ability to evade the all-too-real hegemony of US political will and the international financial institutions that enforce it, hardline crypto-skeptics may get the proof they need for their prophecies that decentralized digital assets are a weapon of choice for disrupting the fragile global order.

Putting aside the ethical debates, it remains curious to know how exactly this strategy will work, what influence it will have on Iran’s trading partners and what challenges it will draw from the hostile enforcement agencies.

The road to adoption

The first public announcement of a trading system that allows local businesses to settle cross-border payments using cryptocurrencies in Iran came in January 2022. At the time, Iran’s Deputy Minister of Industry, Mining and Trade, Alireza Peyman-Pak, spoke of the “new opportunities ” for importers and exporters in that type of system, a product of joint action by the Central Bank of Iran and the Ministry of Commerce should provide:

“All economic actors can use these cryptocurrencies. The merchant takes the ruble, rupee, dollar or euro, which he can use to obtain cryptocurrencies such as Bitcoin, which is a form of credit and can pass it on to the seller or importer. […] Since the cryptocurrency market is done on credit, our financial players can easily use it and use it a lot.”

In August, Peyman-Pak revealed that Iran had placed its first import order using crypto. Without any details about the cryptocurrency used or the imported goods involved, the official claimed that the $10 million order represents the first of many international trades to be settled in crypto, with plans to increase this during September.

On August 30, Trade Minister Reza Fatemi Amin confirmed that detailed regulations had been approved, outlining the use of cryptocurrencies for trade. Although the full text could still not be obtained online, local businesses should be able to import vehicles into Iran and a variety of imported goods using cryptocurrencies instead of US dollars or euros.

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Meanwhile, the local business community expressed their concerns over the policy’s possible design. The head of Iran’s group of importers and representatives of foreign companies, Alireza Managhebi, emphasized that stable regulations and infrastructure should be prepared to be able to use cryptocurrencies for imports. He also the possible threat of the new payment leads to the emergence of rent-seeking business groups.

How would that work?

Babak Behboudi, one of the founders of digital asset trading platform SynchroBit Hybrid Exchange, told Cointelegraph that although the official policy was only approved in recent years, the Iranian government and companies have been using crypto as a payment method for a couple of years. now.

But there are a number of reasons why the government decided to recognize such practices on a national scale, such as the disappointment of Iranian negotiators in reaching a win-win agreement with the West on the nuclear deal, the frustration in the economy and hyperinflation in the domestic market.

The rise of the Chinese digital yuan and the geopolitical conflict between Russia and Ukraine also greatly influence such a decision, Behboudi added.

There remains the question of the effectiveness of the new strategy. Almost any potential foreign partner will face difficulties in completing the deals in crypto, as most countries, unlike Iran, do not have a legal framework for using crypto as a business payment method or, at worst, outright prohibit it. The pseudonymous nature of Bitcoin (BTC) and other mainstream cryptocurrencies does not make potential partners too confident in their invisibility from US financial enforcement.

This gives foreign companies two possible options, believes Behboudi. They can use either the mediation of proxy companies in crypto-friendly jurisdictions to convert crypto to fiat or use the services of companies from third countries that trade with Iran, such as Russia, Turkey, China, the United Arab Emirates and others.

Christian Contardo, a global trade and national security attorney at the law firm Lowenstein Sandler LLP, sees the scope of Iran’s potential partners as quite limited. The ease of crypto transactions can facilitate legitimate trade, especially in regions where traditional banking may be impractical or unreliable. However, due to the regulatory regimes involved, it is unlikely that large legitimate commercial entities would trade in crypto with Iranian counterparties “unless they tried to hide their involvement in the transaction,” he adds.

Allies and enforcers

Up until this point, reports of crypto-sanctions circumvention in Iran were fairly scarce. Although Binance faced no allegations after journalists claimed that Binance served Iranian customers, another major crypto exchange, Kraken, came under investigation by the US Treasury Department’s Office of Foreign Assets Control in 2019 for the same reasons. At least one person is currently alleged to have sent more than $10 million in Bitcoin from a US-based crypto exchange to an exchange in a sanctioned country.

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Contardo is confident that enforcers, particularly the United States, will increase their scrutiny of transactions linked to countries like Iran. And while it is practically impossible to track all large transactions, they still have all the tools they need:

“Enforcement agencies and even commercial investigative services have multiple sources of information to identify parties involved in a transaction. When this information is gathered and the parties identified, the evidence on the ledger makes a strong enforcement case.”

Given recent announcements by Russian officials, who are also actively exploring the potential of using crypto for cross-border payments, the Iranian strategy could start the digitization of a parallel market, which would include sanctioned countries and the nations willing to trade with them. Behboudi links this possibility to the further development of central banks’ digital currencies (CBDCs):

“The growth of CBDCs, such as digital yuan, ruble, rial and lira, can minimize the risk if these countries can manage their transactions through bilateral and multilateral agreements, so that the businesses can deal with each other using their CBDCs.”

In a sense, Iran’s innovative strategy of adopting crypto as a cross-border method does not change much – unless the use of decentralized currencies as a means of payment for private companies is allowed – this loophole will attract a limited list of nations that have not shied away from the trade with Iran in the past.