The Islamic Republic of Iran has a long way to go before it’s ready to launch a national cryptocurrency. Tehran’s central bank has that ambition, but the effort remains at the experimental stage. Some recent media reports claim that Iran has “launched” a state cryptocurrency based on gold called the Peyman. What really is happening, however, is less dramatic. It has few immediate implications for Iranian sanctions evasion, but does signal Iran’s strategic intent to use blockchain technology to develop long-term sanctions resistance.
Iran’s finance and technology sectors are teaming up to pilot a cryptocurrency platform that would give Iranian banks new ways to represent and transfer financial assets. At the Central Bank of Iran’s Eighth Annual Electronic Payments and Banking Systems Conference in late January, the head of Iranian tech startup Kuknos presented plans for four Iranian banks to use his company’s cryptocurrency platform to convert bank assets into security tokens. This involves representing ownership shares of traditionally illiquid assets like real estate or debt equity onto a blockchain so that such shares could be traded and transferred more easily. Of the four banks involved — Parsian Bank, Bank Pasargad, Bank Melli Iran and Bank Mellat — all but Pasargad are currently under U.S. sanctions. The banks themselves have funded Kuknos to develop this project.
However, the central bank also reported at the conference that it currently is testing five different cryptocurrency models. The Peyman is the first of several Iranian cryptocurrencies that may get unveiled in the coming year. It is not a new “crypto-rial.”
The Peyman pilot project is led by the tech sector with buy-in from some banks. Iran’s central bank in July 2018 announced that it planned to issue a sovereign cryptocurrency to be used initially by domestic banks and that various companies were working out the kinks for such an endeavor. The Kuknos team is marketing its platform to government officials and apparently is gaining some traction. Last week, Kuknos signed a memorandum of understanding with Iran’s department of Science and Technology to develop a distributed ledger technology innovation center focused on capital markets.
The Peyman initiative follows a broader trend of developing security tokens as a way to base cryptocurrency on something with real-world value, unlike purely digital assets such as Bitcoin. Security token advocates claim this approach will bring greater liquidity and transparency to financial markets and create platforms where participants can raise capital from the assets they hold. On the Kuknos blockchain system, the Peyman will be backed by gold held by the participating banks and used for trading various assets on the platform. The Kuknos plan is to launch its token by August 2019 and for it to be used first by Iranian banks.
Iran’s gradual approach to developing a state cryptocurrency may represent an effort to avoid last year’s debacle in Venezuela. The Maduro regime launched its petro token with no market testing and no reliable infrastructure for government cryptocurrency use, which led to the coin getting little interest from buyers within or outside Venezuela.
In January, the head of the Iranian central bank’s Monetary and Banking Research Institute Ali Divandari said it was “immature and farfetched” to believe that blockchain could help Iran evade sanctions, given the technology’s limited capacity. Divandari is familiar with the impact of sanctions; the U.S. sanctioned him in 2009 when he was the chairman of Bank Mellat. Put simply, cryptocurrencies’ volume is too small and blockchain technology too under-developed to support the large-scale transactions banks need to facilitate international commerce.
Non-blockchain-based alternative payment channels probably pose a greater sanctions evasion risk. For instance, Iran may seek to exploit the new Instrument for Supporting Trade Exchanges (INSTEX) that France, Germany, and the United Kingdom have set up to facilitate trade between Iran and third countries. Although European companies using INSTEX may be vulnerable to U.S. legal pressure, the channel could potentially conduct trade valued at tens of millions of euros per year. Although blockchain technology receives much media hype for its theoretical benefits, there appear to be no blockchain platforms in operation facilitating full, large-scale trade in major commodities.
The current blockchain technology scene in Iran should be seen as similar to the activity occurring in many other countries, including the U.S. These blockchain projects are mostly proof-of-concept experiments, trying to figure out a product-market fit. A Kuknos advisor said this week that there are “at least 50 blockchain companies in Iran.” Iran’s central bank is encouraging this experimentation, funding some blockchain startups directly and even recently drafting legislation that allows cryptocurrency mining and trading, although prohibiting tokens as a method of payment within the country.
It is important to note that Iranian tech companies are building these cryptocurrency platforms through open source software that often originates from U.S. ingenuity. The Kuknos platform is built on the Stellar blockchain payment platform, a free, open source system available on the Internet and funded by the San Francisco-based non-profit Stellar Development Foundation. But because blockchain technology is usually open source, trying to stop sanctioned governments from developing on these platforms is practically impossible.
Although blockchain technology’s ability to help Iran skirt sanctions right now is minimal, U.S. authorities must ensure that current sanctions tools are up-to-date to prevent Tehran from exploiting cryptocurrencies in the future. Treasury is on the right track by recently identifying and designating Iranian digital currency exchangers facilitating illicit operations. The U.S. also should ensure that if a true “crypto-rial” is disbursed by the Central Bank of Iran, that the same sanctions restrictions on Iran’s fiat currency are applied to its digital token.
Other U.S. adversaries such as Russia and China are also piloting blockchain technology projects and contemplating ways to develop national digital currencies. The U.S. government should be working to influence the development of such financial technologies in order to maintain the integrity of the global financial system. It may take decades to grow blockchain technology into a major channel for transferring value, but the building blocks are in plain view today.
Yaya J. Fanusie is a senior fellow with the Center on Economic and Financial Power at the Foundation for Defense of Democracies. Follow him on Twitter @SignCurve.