Evaluating the landscape of blockchain technology and cryptocurrencies in Iran

When it comes to cryptocurrency and blockchain, chief among the technology’s promise has been an open financial system for all, where all economic activity occurring within its systems is censorship resistant. In theory, if these systems are allowed to fully mature, it will diminish the effectiveness of a geopolitical tool the U.S. and other economic powerhouses have successfully wielded for decades: sanctions.

This brings us to Iran, the Islamic Republic that has been a target of economic sanctions by the U.S. and the U.N. since Iran’s 1979 Islamic revolution. Over the years, a wide assortment of sanctions has been applied to Iran. Through their use, U.S. financial institutions have been barred from dealing with them (even indirectly). Scientific exchanges are forbidden, Iran’s Central Bank’s assets have been frozen in the EU, the trade of gold and other materials has been halted. Even SWIFT, a global financial network crucial for cross-border payments has been taken away, limiting their ability to be paid for exports.

If the promise of blockchain technology holds up, many of these constraints would theoretically be able to be skirted, and U.S. Government officials have taken notice. Recently, U.S. Congressman Brad Sherman has called for a bill that would bar U.S. citizens from purchasing and owning cryptocurrencies. The congressman noted that a lot of the U.S.' power and influence comes from the dollar being the center of international finance. Cryptocurrencies could erode that power and render sanctions irrelevant.

It seems highly unlikely that the U.S. will go as far as banning cryptocurrencies, nor is it practical from a technical perspective. However, it is interesting to examine the validity of Sherman’s argument. How is Iran, whether it be the government or private citizens, positioning itself when it comes to blockchain technology? Given its financial predicament, the nation is a natural fit for using bitcoin and cryptocurrencies.

Data is hard to come by; however, we will look at the regulatory environment and how the Iranian government has fared when it comes to allowing cryptocurrencies and blockchain-related companies to flourish.

Regulation

There are two main points to be made about bitcoin and the regulatory environment in Iran. First is the ban instituted by the Central Bank of Iran on banks and financial institutions using Bitcoin around March/April 2018. The second is a regulatory draft published on the Central Bank’s website in January. In its current unratified state, the draft would make the use of bitcoin or other cryptocurrencies as a payment option by merchants in the country illegal, but buying, holding, and transacting in cryptocurrencies would be remain legal.

When looking at adoption, at first glance, you will find an industry beginning to take shape, even in spite of extreme regulatory uncertainty. You'll find exchanges to buy cryptocurrencies like bitcoin, payment processors, mining operations, blockchain related media companies, research labs, and even blockchain communities where you can find workshops to learn about the technology.

Exchanges and Vendors

The way cryptocurrencies are acquired in Iran makes it tricky to pull accurate data on just how prevalent it is in the country. According to Mohammad Reza Pourebrahimi, chairman of Iran’s economic commission, Iranians have spent over $2.5 billion on cryptocurrencies and possibly as much as ten times that.

These numbers should be met with skepticism because the most popular method citizens use to acquire cryptocurrencies is through vendors that act like OTC platforms, where a website managed by a few people serves as an intermediary. One of the reasons given for this is that many people do not want to declare their real income.

The vendors operate using a reputation-based system where the better reputation a site has, the more business it receives. One of the more popular platforms has been Farhad Exchange, but, this is just one example of many vendors in the country. Speaking to individuals directly involved in the industry in Iran, they estimated 80-85 percent of deals happen on these sites rather than on exchanges.

LocalBitcoins was also a popular avenue for residents to acquire bitcoin peer-to-peer, and the platform was one of our data sources on trading activity in Iran. Just a couple of weeks ago that came to a stop, most likely because of regulatory concerns and sanctions, although the company has given no official statement. Before closing down, its last recorded week saw $328,500 in volume.

Source: Coin.dance and LocalBitcoins

The highest volume on LocalBitcoins for Iran was recorded on Dec. 16, 2017, at slightly above $1.9 million. The increased activity coincided with the height of the bull run where bitcoin touched nearly $20,000. Around the same period, threats of the U.S. pulling out of the Iran deal grew, and the threat of sanctions loomed.

Amid sanction fears during the first two quarter of 2018, demand for gold coins and bars went up 200%, according to the World Gold Council. During this time same time, the bitcoin volume on LocalBitcoins decreased by approximately 77%.

This suggests that Bitcoin was not being used as a preservation of wealth like gold. As the Iranian rial was reaching all time-lows, the appetite for bitcoin soured and assets like gold became preferred.

Exchanges

As previously mentioned, it is nearly impossible to gather data like daily exchange volume in Iran, and even if the numbers were readily available, they likely do not represent a high percentage of the trades happening due to the large proportion of transactions conducted through vendors. Iranian exchanges never publish their data, making it difficult to compare one exchange's scale with the rest of the market.

Despite these challenges, we have been able to gather some data and information on two spot exchanges that operate in the country. Exir is currently the largest exchange in Iran outside of OTC platforms and has been operating since 2017.

The exchange has 12,000 users and a daily volume of approximately $250,000. When translated to bitcoin, on any given day, the exchange is experiencing volume of 30-40 BTC. That may seem like a small number, however, since Iran is isolated from much of the world, these numbers don’t tell the whole picture.

The second exchange, Nobitx, is the nearest competitor to Exir. While we have gathered some data, it is essential to note that these figures are based on the founder’s words. Currently, the exchange has about 3,500 users, and its volume is nearly half of Exir’s, which would put it at about 15-20 BTC a day, or between $115,500 to $154,000 per day.

Through Exir’s experience of running the exchange over the past two years, they have noticed that the penetration of using BTC as a store of value is still relatively niche. The majority of its citizens prefer other vehicles to shield their wealth during times when the value of their currency is in decline. For the majority, buying gold, foreign currencies (USD & euro) or property is still the favored store of value.

As Bitcoin and other cryptocurrencies become more mainstream, it may become a more favored asset to protect wealth. The exchange also noticed that the demand for bitcoin in Iran has a strong relationship with the price of the U.S. dollar. When the price of USD goes up, the demand for bitcoin rises in tandem.

The main reason for this correlation is that Iranians want to preserve the value of their assets. We have seen similar parallels with gold.

As the U.S. reimposed sanctions during the second quarter, demand for gold bars and coins tripled, reaching its highest demand in four years.

In 1H 2018, demand for gold dropped for Saudi Arabia, U.A.E, and the rest of the Middle East, however, Iran was the outlier due to sanctions, its political environment, and the decreasing value of its currency. There, demand for the precious metal soared approximately 27%.

Now that we have taken a look at exchanges, vendors, and the way the majority of people acquire bitcoin or other cryptocurrencies, we will take a look at the other method: mining. Perhaps not surprisingly, the mining industry in the region operates in murky waters.

Mining

Technically there is no law governing mining in the country. However, thanks to sanctions, it is illegal to import devices such as ASIC miners used to mine Bitcoin. If detected, they are confiscated by Customs. What’s strange is that in spite of this, Cyberspace Council’s secretary Abolhassan Firoozabadi declared on national television that the Iranian government considers mining a legitimate industry.

It would make sense for Iran to become a mining hub for entrepreneurs, as it is in a unique situation compared to many countries like the U.S. due to its cheap electricity.

While low energy prices make mining already lucrative, it is possible to get costs as low as one cent per kilowatt hour through Iran’s industrial rate. The rate is essentially a subsidy for businesses like factories. There’s no permit for mining businesses to acquire this rate, however, there is a loophole. In the case of companies that have already received the license for other purposes but have gone bankrupt or otherwise no longer exist, the license persists and can be rented out to businesses like mining operations.

Other projects and companies operating in Iran

We will now take a look at merchant adoption and payment processors. Residents don’t necessarily want to use bitcoin inside Iran, but there are circumstances where they have to, for example in purchasing digital goods like VPNs. Officially, using a VPN service in Iran is illegal with few exceptions. This has been an opportunity for Bitcoin to show its utility in cases where Iranians have been able to acquire VPNs, even from U.S.-based companies, because of the nature of cryptocurrencies.

While the usefulness and value of a censorship-resistant and peer-to-peer currency like bitcoin have been shown in the purchase of digital goods, when it comes to physical goods, it has been somewhat lacking. Due to sanctions and political tensions, most businesses don’t or can’t ship products. An example of this is the favored site Purse.io, which allows users to get discounts using Bitcoin to purchase goods from Amazon, but does not allow Iranians to use its platform.

While the purchase of physical goods online and outside of the country remains an issue, companies are operating in the country for payment processing. One such company is Jeeb. Jeeb is a payment gateway that allows companies and businesses to accept cryptocurrencies, specifically Bitcoin and Litecoin. Individuals can use white labels and transact up to $100 without the need for KYC or any authentication.

In the background of their payment processing, the company can convert the payment directly to the stablecoin Tether (USDT), and soon will also have the option to convert to the Iranian rial.

One issue faced by companies like Jeeb is while what they are doing is technically legal; they are still not able to get official “verification” from the government. Because these cryptocurrency gateways are not recognized as official, earning customer trust is a challenge. They hope more explicit regulatory clarity will pave the way for more users and adoption.

Government Activities and Projects

We will now take note of some projects, startups, and research that has been afforded some funding directly from the Iranian government. There has been speculation that the government might issue its own rial “cryptocurrency,” as Venezuela has done with its “Petrodollar.” The Central Bank of Iran has been working with Areatak, a Tehran-based blockchain company, to help develop a blockchain platform for Iran’s banking and finance industry. The platform called Borna is being built on IBM’s open-source enterprise blockchain platform called Hyperledger Fabric. While there are no immediate plans for it,  on a technical level, the platform would be able to support tokens like a central bank-issued digital currency.

According to a signatory of the recent Chainpoint blockchain agreement, Iran has already signed a blockchain cooperation deal with Russia and Armenia and is in talks with leading European economies and South Africa to use sovereign cryptocurrencies as a replacement for the SWIFT system to allow the processing of international transactions.

Projects/Companies

Borna – Received government funding for a national system of identity verification and token management

Kuknos protocol – Seeking to issue a gold-backed token called Paymon; however, it’s still waiting for government approval and has not received any government funding

Iran Blockchain LABS – A research and advisory center and innovation hub tasked with the implementation of digital technologies in the Islamic republic’s economy and established by Sharif University (the MIT of Iran) with participation by the Central Bank of Iran.

We have highlighted some of the nation's advantages like cheap electricity, which could make it a dominant player in the mining industry if the government allows or encourages it. Analogous to how Iran is one of the world’s major exporters of gold, it might one day do the same for bitcoin. Until there is more definitive clarity on the working regulatory draft, the best we can do is speculate.

What we do know is while the industry is smaller in comparison to some of its global counterparts, it may be just the right environment to test blockchain technology to its limits to see just how censorship-resistant these systems are on a geopolitical level. These systems may ultimately offer a safe haven for the 83 million Iranians who have been cut off from the entire world financially due to political circumstances beyond their control.

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