Bitcoin backlash: Iran cracks down on crypto exchanges

The current hawkish stance by Iranian officials against the country’s crypto sector comes in the wake of bitcoin’s meteoric price rise since mid-December, feeding a growing appetite in Iran for crypto assets after the country’s stock bubble burst last summer.

By MAZIAR MOTAMEDI

Iranian officials are cracking down on the use of cryptocurrencies in the country again, with crypto exchanges becoming the latest target of official efforts to control the burgeoning industry.

The current hawkish stance comes in the wake of bitcoin’s meteoric price rise since mid-December, feeding a growing appetite in Iran for crypto assets after the country’s stock bubble burst last summer.

Enthusiasts see bitcoin as a hedge against devaluations of Iran’s currency, the rial, and as a way to circumnavigate United States sanctions that have crippled Iran’s economy because bitcoin is not controlled by any government.

That decentralisation has seen regulators all over the world wrestle with how to control bitcoin and other digital currencies that by design are meant to be beyond their reach.

Iran is no exception. But supporters of crypto warn that government pressure could backfire by leading to less transparency and making Iran less competitive in the rapidly innovating industry.

Trying to control bitcoin trades

Last month, Mojtaba Tavangar, the head of the Digital Economy Commission of Iran’s hardline parliament, wrote a letter to President Hassan Rouhani, his ministers and the Central Bank of Iran calling for a complete halt to the use of the rial to buy and sell bitcoin and other cryptocurrencies on crypto exchanges.

Tavangar warned that trading cryptocurrencies could foster large-scale financial scams and fraud – several of which involving traditional assets have dogged the country over the past decade.

His letter followed in the wake of an announcement in February by Iran’s Central Bank Governor Abdolnaser Hemmati that a select number of crypto exchanges would soon be designated strictly to facilitate sale transactions for miners whose coins will be spent to import goods into the country.

Days later, Shaparak, Iran’s payment settlement network under the Central Bank, tightened the noose further, telling local payment facilitating companies to stop offering services that allow “illegal” conduct, including “selling cryptocurrencies, selling VPNs [virtual private networks], and betting and gambling websites”.

The order, which targeted mostly private online crypto exchanges, comes as a vague blanket ban on the use of cryptocurrencies issued three years ago still remains in effect.

Over the past three years, Iran has intermittently taken steps to exercise greater control over the countries crypto sector, with directives that sometimes reveal officials struggling to understand the nature of what they are targeting.

In April 2018, the Central Bank communicated a directive issued by the High Council of Anti-Money Laundering that said: “using the tool of Bit Coin and other virtual currencies is forbidden in all the country’s monetary and financial centres”, misspelling the name of the world’s most popular cryptocurrency.

An August 2019 directive saw the government place responsibility for cryptocurrency risks firmly on exchanges and their customers.

As recently as this year, bitcoin mining, the energy-intnsive practice of using powerful computers to verify transactions in exchange for bitcoin, was blamed by officials for fuelling high levels of air pollution.

‘Traditional controls don’t work’

Each time authorities try to control or disparage the crypto industry, private-sector actors warn of the potential downsides.

This time is no exception.

Amir Hossein Mardani, CEO of BitPin, an Iranian online crypto exchange, told Al Jazeera that the recent orders by the Central Bank and the country’s payment settlement network could hamper competition.

“Firstly, it was an attempt by a number of monopoly seekers in the market to direct the regulators to monopolise the market. Secondly, it was aimed at directing the media to strip Iran’s active exchanges of public trust,” he said.

Mardani added that while BitPin saw a drop in the number of new customers after Shaparak directed firms to stop facilitating cryptocurrency transactions, he is confident business will recover in a few months’ time.

“Our users’ behaviour shows us that there is strong demand for bitcoin and other cryptocurrencies and users will ultimately conduct their transactions, so this hype is temporary,” he said.

Mardani further cautions that attempts to restrict Iran’s crypto trade could backfire by driving some activity underground, decreasing transparency, and increasing capital flight as customers move their business to exchanges abroad.

“The nature of the crypto market and the technology behind it is to create financial decentralisation,” he said. “I think governments, including Iran’s government, must accept that traditional controls don’t work on these markets.”

Ali Amiri, chief financial and operational officer at ZarinPal, shares those concerns.

“Forcing activities underground, making the brilliant minds in this field move out of the country, and driving capital from local markets to international ones are some of the short- and medium-term consequences of this decision,” he told Al Jazeera, adding that it also risks undermining Iran’s future competitiveness in burgeoning blockchain and crypto technologies.

The stock market factor

The latest crackdown on crypto also follows in the wake of severe stock market losses in Iran.

Encouraged by government officials, millions of Iranians poured money into the stock market last year, only to suffer huge losses when the equity bubble burst in August 2020.

Bitcoin, by contrast, has soared in value since August and is currently trading around $57,000, prompting many Iranians to seek their fortunes by trading in it.

Local media, meanwhile, are feasting on narratives of competition for investor capital between Iran’s stock and crypto markets.

Last week, Mohammad Ali Dehghan Dehnavi, who was recently appointed as the head of Iran’s Securities and Exchange Organization after his predecessor resigned, explicitly told Iranians to stay away from cryptocurrencies.

“Instead of investing in places that benefit other countries, the people should invest in the capital market so it would lead to the country’s economic growth,” he said.

Bahman Habibi, chief executive of Iranian crypto exchange Bittestan, disputes the narrative, likening a crypto investment to gold.

“The same rings true about the nature of cryptocurrencies because by buying and stacking cryptocurrency reserves in the country, we would actually be creating reserves that have a much higher added value than US dollars, euros, or even gold,” he told Al Jazeera. (Al Jazeera)