What is the problem Iran is facing?

Over the last 40 years sanctions aimed at individuals, certain trades and business as well as bankings were imposed on Iran. As the result of these sanctions, the country has been cutoff from banking channels with the outside world. PayPal, Mastercard and, Visa are nonexistent in Iran. Other banking channels like the SWIFT network are either unaccessible, full of problems or also, nonexistence.

Some of these sanctions have been lifted, allowing Iranian small businesses to resume trade with abroad but these businesses are still cut off from international banking channels. So practically, no business is being conducted.

The lack of international banking infrastructure is depriving Iran’s economy of much needed international business. Cryptocurrencies like Bitcoin would be ideal for solving this issue.

American banks are still prohibited from interacting with Iranian banks. Although, since 2015, Asian and European banks and business have been allowed such liberties. So, what is stopping the Europeans and the Asians to resume banking relations with Iran? The short answer is Donald Trump!

Let me elaborate on this point. Although some of these sanctions go back a long time and are still in place, many of Iran’s problems with the banking world outside of the U.S. originated with the sanctions imposed on Iran during the Obama administration. These sanctions were designed to hit many different sectors such as the banks. At the end, the Obama administration and P5+1 reached a deal with the Iranians. This deal which came to be known as JCPOA put the Iranian nuclear program under international monitoring. On the other hand, the European Union, the United States and, the rest of the United Nations Security Council agreed to lift the sanctions on Iran.

It was expected that the Europeans and Asians would re-establish their relations with Iran and business would return to the usual. Secretary of State John Kerry went around the world reassuring the European and Asian bankers that they are now allowed to resume business with Iran. Though, Donald Trump’s campaign promises slowly shattered these expectations.

Donald Trump repeatedly called the Iran Deal “the worst deal ever,” promising to tear it up when he takes office. The atmosphere around the future of the deal has not improved since the new administration took over the White House.

The problem is simple. Re-establishing these banking relations requires millions of dollars to be invested in rebuilding the necessary banking infrastructures. Mr. President’s constant rhetoric against the Iran Deal makes the international banks extremely uneasy about taking the risk for those investments. The banks have a simple and understandable logic; their investment would go to waste if Mr. President decided to end the deal and reimpose sanctions on Iran.

This fear is not just theoretical. Donald Trump’s insist on “fixing” the deal has made an impact. Just last week the European nations announced that they will be voting on a new badge of sanctions on Iran’s missile program in an attempt to satisfy the Trump administration, hoping to preserve the deal with Iran.

What would be the solution to this problem?

Perhaps the same solution that is proposed to any financial, monetary or banking problem that we face today, Bitcoin!

Cryptocurrencies will allow small and midsize Iranian businesses to interact with customers outside of Iran. For small businesses this means participation in online markets. For Iranian firms this would mean fast and cheap financial transactions with their European or Asian counterparts.

Let’s be clear, I’m not arguing for Iranians to go around the sanctions that are still in place by using cryptocurrencies. I am arguing that Iranians should stop trying to do their legal business through banks and instead turn their attention to cryptocurrencies.

The peer-to-peer network that underlies cryptocurrencies does not require the two sides of the transaction to invest in any infrastructure for conducting a transaction. The decentralized network enables anyone to participate in a transaction.

Here’s the catch! Even though participation in a transaction does not require much, doing continuous business in such an environment would require the support of an ecosystem. The Iranian government can be smart and facilitate this process or they could significantly slow it down.

There are a number of steps that need to be taken by the Iranian government to create such an ecosystem. The Europeans are not willing to invest in banking relations with Iran, that doesn’t mean the Iranian government should not be willing to invest in reconciling with the international business world to salvage its economy.

What should the Iranian government do to flourish a crypto-friendly ecosystem for business?

In November 2017 Iran’s Deputy Minister of Information and Communication Technology released a statement saying that the Ministry had been researching cryptocurrencies. He also indicated that they are aware of the need to build an infrastructure to prepare the adoption of this technology.

In late February 2018, this time the Minister himself, Mohammad Javad Azari Jahromi took to Twitter to talk about a meeting he had with Iran’s Post Bank in regards to cryptocurrencies. Azari Jahromi stated that they are planning on developing Iran’s first cryptocurrency on a test network. He also extended an invitation to all experts to cooperate with Post Bank in developing this project.

So, the Iranians are well aware that they need to be building the infrastructure for a crypto-friendly ecosystem. What worries us is Iran’s history of mishandling new technologies. Government run cell phone operators and web censorship are the most notorious examples of this mishandling. Although, over the past few years, the rate of filtering new websites and apps has drastically decreased. Also, in the 2000’s we saw introduction of private operators after at least 15 years of state monopoly over that technology. So, if there’s worry, there is hope too.

Here is my humble advice for Mr. Minister: Iran doesn’t need its own national cryptocurrency.

As a matter of fact no nation does. The invention of this technology allows there to be currencies that are separated from a state or any central authority. Creating a national cryptocurrency is in its essence paradoxical to the very nature of this technology. Moreover, a national cryptocurrency is significantly less attractive for conducting international business. That Iranian made cryptocurrency on the test network could provide the ministry with valuable data on how to build an infrastructure but, launching a public, national cryptocurrency will be counterproductive.

Instead of trying to control this technology like the many examples in the past, Iran should seek to develop an ecosystem where its citizens would be able to freely immerse themselves in this technology. Otherwise, with tight state control, the process of adaptation will be long and miserable. Ask me, I was still using dial-up internet in Iran in the year 2008.

So, what is this ecosystem that I keep talking about?

When you get paid in U.S. dollars you are able to spend that money in its original form or exchange it for other stores of value and currencies. Also, if there were any disputes with whoever pays you or whoever you’ve paid using dollars you can take that dispute to the court. The cryptocurrency ecosystem will look the same. There will be the need for legal recognition. Then, before we hope to see an Iran where every merchant accepts cryptocurrencies, there will be the need for exchanges. These exchanges will need access to cryptocurrencies and legal recognition. Therefore, I am arguing that Iran should invest in the infrastructure for mining cryptocurrencies as well as passing legislation and regulations that would ease transactions in this medium.

Legislation and regulation will be necessary for flourishing this ecosystem. I am not an advocate of excessive regulation. Though, a bare minimum of legislation and regulation is a basic layer of protection for businesses and their customers.

Such legal recognition would ensure business and their potential customers that should there be any problems, they will be able to take their cases to the court and the cases would be treated just as a transaction conducted with Iranian rials would be.

Being able to pay taxes directly with cryptocurrencies is another necessary legislation. Many countries and U.S. states are moving in this direction because the inability to pay taxes in these currencies significantly slows the process of their adaptation.

It is also very important that the legislation recognizes cryptocurrencies as money and not as property. The United States for example, treats cryptocurrencies as property, making every transaction subject to a capital gain tax. This legal approach significantly complicates commerce in this medium therefore, it is crucial that cryptocurrencies be recognized as money and not as property.

Now, here’s the case for Iran’s investment in mining infrastructure; cryptocurrencies can enter the Iranian ecosystem by 3 methods: in exchange for fiat currency, in exchange for exported goods, or by mining. Exchanging fiat for cryptocurrency is harmful while, exchanging goods for cryptocurrencies cannot be done on a massive scale at the moment. Mining seems to be the only way.

First let’s see why Iran should seek to avoid exchanging fiat for cryptocurrencies since, this method is the main vehicle through which cryptocurrencies enter Iran’s economy today. The case is basic economics. Exporting will add to trade surplus while importing adds to trade deficit. Doesn’t matter if the good that is being imported is a currency itself, what matters is that rials were spend to purchase dollars and that transaction alone devalues rial in favor of dollar.

Just like anywhere else in the world, the Iranians too are interested in buying cryptocurrencies. Today, the way they access these digital currencies is by exchanging Iranian rials to dollar, the dollar then leave the country in order to be deposited to European or American exchanges. Then, the cryptocurrency is bought and transferred to Iran. This method is inefficient and legally problematic but, a great many individuals who have access to abroad are making money doing this in a black-ish market. By doing this, they are adding to Iran’s trade deficit and hurting the economy.

Though, reversing the above process would be beneficial to Iran. If Iranians where able to export goods and get crypto in exchange for it, then they would be adding to Iran’s trade surplus. There is a problem with this solution. This is what we wanted to do in the beginning but we didn’t have the legal recognition and access to infrastructure to continuously conduct this type of business. Iran’s goal is to get to here but first, the ecosystem should be established.

So, mining seems to be the best way for developing this ecosystem.

Just like how gold and precious metals are mined, cryptocurrencies like bitcoin are created through the virtual version of the same process. Miners who participate in the process of validating transactions are rewarded with newly created bitcoins. To make sure of the goodwill of these miners, the network requires them to do a lot of expensive processing, hence the name, proof of work. I know, it’s a complicated idea to grasp at first but trust me, it works!

Mining is precisely what Iranians need to do. Through investing in computer hardware and paying for electricity they would be “generating” cryptocurrencies inside the country instead of buying it from abroad.

Now, I am a firm advocate of the decentralized aspect of cryptocurrencies so, I’m not arguing that the Iranian government should start mining. I would argue against it. Mining should be done by individuals or businesses. But, their work could be significantly facilitated if the government helped with access to computer hardware and electricity.

The specialized computer hardware is hard to come by in Iran precisely because firms have a hard time conducting business with the outside, but the government could help ease the importing process. On the other hand, electricity required for mining could be subsidized by the state to further facilitate this process.