Why is Iran moving to a new “digital rial”? | Crypto news

Tehran, Iran – A national digital currency is coming to Iran, and the country’s central bank plans to launch a “digital rial” pilot project in the coming days.

The Central Bank Digital Currency (CBDC), which has also been referred to as the “cryptoreal”, is expected to remain pegged at a 1:1 ratio to the rial, the national currency.

It’s a project that officials hope could significantly increase their control over the national currency and its users, while providing new opportunities for financial players.

Struck by tough US sanctions after former President Donald Trump unilaterally withdrew from a 2015 Iran nuclear deal, as cryptocurrency hit 2018 highs, some officials in Tehran saw the potential of cryptocurrencies to circumvent sanctions – even if that won’t be the case with the digital rial, as it will only be used within Iran’s borders.

And some of the same potential alternatives that have attracted supporters have raised concerns among members of the local crypto community, who fear the project could jeopardize privacy and security.

The digital rial will run on a platform called Borna, which was developed using Hyperledger Fabric, the open source enterprise blockchain platform established by the American technology giant IBM.

It is a permissioned distributed ledger technology (DLT) platform, which means that only the central bank can decide which entities will have access, and also means that the currency cannot be mined like Bitcoin and many other decentralized cryptocurrencies.

The structure allows a select few banks to maintain and update the network’s distributed ledger, where an immutable record of all transactions and activities is kept. Other devices may also gain access in the future.

Bank users are expected to be able to hand over their rials – either in notes or in their accounts – to the banks in exchange for the same amount of the new digital rials that will be stored in their mobile phone wallets.

More transparency

According to Saeed Khoshbakht, one of the people who worked to develop Borna, the project is unprecedented in Iran and will set a precedent for further projects in the future.

He also said that while the project was highly centralized, it would allow more banks to be involved in the aforementioned distributed ledger, potentially enabling more transparency.

“For now, at least four more nodes will be designated to handle the distributed ledger. It is true that they are also banks, but instead of being focused on a single point, the data will now be placed on at least five points, and that number could gradually grow if the project is successful, he told Al Jazeera.

Fintech companies will eventually be expected to offer rial-based financial services online, which means a central bank-approved pegged asset – a rial “stablecoin” – will be required.

Although Borna is not included in the initial limited public launch later this month, Borna also envisions a competitive tier, where companies can offer services within the framework of the platform, potentially easing red tape.

Khoshbakht added that if executed correctly, Borna could also create a chance for banks and fintechs to access new fee-based revenue streams, potentially overhauling the current limited fee-based services, which for years have been a thorn in the side of cash-strapped Iranian providers of financial services.

Finally, a wide variety of smart contracts, self-executing contracts that can be implemented automatically, can be deployed on the platform, which has yet to find widespread use in the Iranian economy.

Potential hazards

Dozens of central banks around the world are working on their own CBDCs, and the biggest concern everywhere seems to be their potential impact on citizens’ privacy.

In its draft document, the Iranian central bank acknowledges that privacy is a concern, but also points out that anonymity will increase concerns about money laundering.

“Choosing an optimal point between these two components may be one of the considerations in the development of the digital rial,” it said without elaborating.

For some members of the local cryptocurrency community, potential violations of their right to privacy are major concerns.

The current local online banking and tax and other electronic record-keeping systems give Iranian authorities enormous oversight capabilities, but a digital rial could further expand and accelerate them, according to Hamed Salehi, a researcher who runs crypto- and blockchain-focused media and event firm BlockDays.

“This digital fiat money could be a big step and an additional way towards violating people’s privacy and social freedoms,” he told Al Jazeera.

“For example, during [November 2019] protests, you would lose your internet and phone connection if you were in areas where protests were going on. Now, what can happen is that in addition to that, the establishment can also limit or block your money and financial transactions based on your activities.”

Salehi also believes the pervasive nature of malware in Iran could mean hacked phones could be used to attack the digital rial app.

Effect on the economy

The digital rial could end up being linked to efforts to tame Iran’s rampant inflation, which is now more than 40 percent.

A major factor behind the country’s runaway inflation for decades has been a lack of fiscal discipline, which has resulted in uncontrolled money printing to help with multi-year budget deficits.

A digital version of the country’s currency could prove to be an economic opportunity or a threat, according to electronic banking expert Nima Amirshekari.

“If implemented correctly, the project can help prevent inflation, just in the digital sector. Inflation comes from money creation, uncontrolled borrowing and unsecured money, so if you take away money in circulation and issue the same amount in digital rials, then it can help inflation, provided you can’t use the digital rial to allocate loans and credits [which would increase the amount of digital rials in circulation].”

The central bank’s deputy governor for new technology, Mehran Mahramian, has indicated that loans are part of the process, telling state television that the digital rial can help ensure that loans are invested where they are meant to be.

But Amirshekari said the same problems that have caused large amounts of non-performing loans (NPLs), bank loans that have been repaid late or are unlikely to be repaid, another long-standing problem for Iran’s banking system, could affect the digital rial.

“Authorities already know where loans go across the banking system. The problem with our NPLs is that they have been taken out by people or organizations powerful enough that they can refrain from returning the money. The same can happen with the digital rial.”

Amirshekari said that one benefit of the project could be to increase the knowledge and expertise of the central bank on global cryptocurrencies, which in turn positively impacts its regulatory stance.

A state of lawlessness and confusion has reigned over the local cryptocurrency scene in recent years.

A central bank directive banned credit institutions and currency exchanges from handling crypto in 2018, and there has been a crackdown on crypto exchanges, but technically there has been no law banning the average citizen from trading.

“I hope it can teach them to use chain analysis and other technical methods to exercise supervision, so they can devise a useful regulatory framework instead of banning or prohibiting everything,” Amirshekari said.