Iran-based bitcoiner Zahra Amini was used to answering questions on cryptocurrencies, but usually about their relationship with crime. So when a 70-year-old man recently asked her to explain crypto because he no longer wanted to rely on the national rial, Amini felt something had changed.
“If people that age are thinking about storing their wealth in anything rather than the national rial, it’s because they are just losing confidence in it, and more and more people are looking for alternatives,” Amini told CoinDesk.
Cryptocurrency is increasingly relevant in Iran as the country suffers from an economic downturn fueled by U.S. sanctions and the COVID-19 pandemic. Bitcoin’s independence from government control makes it an attractive option for individuals hoping to hold on to the value of their earnings as the rial suffers from inflation.
Amini openly advocates for bitcoin and joked that she wouldn’t mind stopping people in the streets to tell them about the cryptocurrency. Speaking to CoinDesk, fellow Iranian and “bitcoin maximalist” Ziya Sadr went so far as to say that holding wealth in rials can mean losing money every day.
Iran’s famously repressive government has not snuffed out cryptocurrency. It has recognized bitcoin mining as a legitimate industry that could bring wealth into the country, though it risks suffocating it with too much regulation. The country’s central bank has also endorsed the creation of a national digital currency.
After the U.S. withdrew from the nuclear deal with Iran in May 2018 and reinstated economic sanctions, Iran’s economy fell into an ongoing recession. Its national currency, the rial, lost over half of its value against the dollar. In June 2020, with the pandemic putting pressure on economies across the globe, one dollar was worth more than 66,000 rials. By August, Iran’s year-on-year inflation rate rose over 25% despite President Hassan Rouhani’s government trying to curb it, which included replacing its local currency with the toman (each worth 10,000 rials).
Although bitcoin may help Iranians circumvent U.S. sanctions in certain cases, it is now showing promise as a hedge against inflation. Some Iranian students abroad are using bitcoin to pay their tuition, and a convenience store in Sanandaj, the capital of Iran’s Kurdish province, is now accepting the digital currency as payment. According to data provided by Iranian bitcoin exchange EXIR, the platform saw a 200% increase in users over the past three years.
The platform, launched in February of 2017, now serves over 63,000 users. A new Chainalysis report on the geography of crypto revealed Iran as the second highest-ranking country in the region for crypto adoption, placing 52nd on the Global Crypto Adoption Index.
While Iranians are quietly exploring new use cases for what Amini calls “magic money,” the government has been hyper-focused on regulating the local bitcoin mining industry, whose growth is partly due to cheap, subsidized electricity. Bitcoin mining was legalized last year and Iran still appears to be a mining hub with the government approving over 1,000 mining permits since then. But government scrutiny and compliance requirements are making it difficult for miners to operate.
What bitcoin offers
Ehsan Ghazizade launched Tehran-based crypto exchange EXIR in 2017, the same year bitcoin had its historic bull run. Back then, Iranians could register on international exchanges like Bittrex and Poloniex, Ghazizade told CoinDesk. But in 2018, the U.S. government exposed the identities of Iranians involved in a crypto hack. Last year, the Helsinki-based LocalBitcoins peer-to-peer trading platform cut off Iran-based users from accessing its services after suspicions arose that Iranians might be using crypto to circumvent sanctions.
In such an atmosphere, Iranian users started looking for a local platform to invest and trade their crypto assets without missing out on bitcoin price jumps, Ghazizade said.
Even though the number of users on his platform grew quickly over the three years, EXIR’s trading volumes tell a different story, showing a drop in 2020 despite the inflationary rial and the bitcoin price run.
“Because the bitcoin price fluctuation in Iranian toman is very high and most Iranian users cannot trade in huge amounts, we have grown in the number of trades but saw a drop in total volume at this time span,” Ghazizade said.
Sadr, for example, does not trade bitcoin at all. He gets paid in bitcoin for providing tech services for companies abroad. The pinned tweet on Sadr’s profile is a list of payment methods he cannot use from Iran like Visa, Mastercard, Apple Pay and PayPal. So whenever bitcoin is accepted as a payment method, mostly on the internet, he uses the cryptocurrency.
Bitcoin provides privacy in transactions, and is not completely vulnerable to censorship from the government, Sadr said. He primarily uses bitcoin to purchase virtual private network (VPN) services so that he can bypass internet censorship to access apps like Telegram, which are banned in Iran. He also buys digital merchandise including game accounts and gift cards.
In 2017, before U.S. sanctions, Iran set the poverty line at around $480 a month. At the time, 33% of the population (24 million people) fell below the line. Even for Sadr, who earns a decent living, purchasing a smartphone costing upwards of $200 is a difficult task.
“If you get paid $500 a month in Iran, you’re on the wealthy side,” Sadr said.
He prefers to store his earnings in bitcoin because he has the option of storing it electronically. In addition to the cap imposed on dollar or euro deposits that can be held in regulated banks in an effort to support the rial, a general distrust in traditional banks has led to people storing U.S. dollars under mattresses at home. But physically holding dollars or gold comes with its own risks of robbery and violence.
“I know people from my family who were killed for holding gold. So I know what bitcoin offers to us. If I’m changing my income to bitcoin, it’s because I don’t want to get into trouble holding it physically and I don’t want to lose the value of my money,” Sadr said.
Regulating banks and exchanges
In 2018, the Central Bank of Iran (CBI) banned the country’s banks from dealing in virtual currencies. According to Iranian crypto lawyer Arman Babagol, the ban was in line with most other jurisdictions concerned about money laundering and terrorism funding. But there was also the added fear of a digital currency undermining the rial: the government debated banning Telegram when it announced its initial coin offering (ICO) in 2018 for the “gram” token.
Iran ultimately didn’t ban citizens from dealing in cryptocurrencies, but warned them of accepting the responsibility of risk should they decide to use it, Babagol told CoinDesk. He said that as one of the few attorneys in the country familiar with crypto-related laws, he is now inundated with crypto scam cases. He also handles mining cases, and one took him from Tehran to the Pakistan border to help a client that was accused of stealing electricity from the grid to power bitcoin mining.
Right now, crypto exchanges don’t need a license to operate in Iran, Babagol said. Ghazizade confirmed this but doesn’t feel that will be the case for long. This year, amid fears that the pandemic will encourage capital outflow, the Iranian government is looking to tighten rules around cryptocurrencies under currency smuggling and foreign exchange laws to protect the rial against further devaluation.
Even before sanctions came into place, the government began looking into the creation of its own national cryptocurrency. This state-backed currency would not be decentralized like bitcoin, and could potentially even lead to the prohibition of unapproved digital currencies. Last year, four of Iran’s leading banks partnered with blockchain startup Kukonos to kickstart project “PayMon”: Iran’s own gold-backed digital currency. But Soheil Nikzad, who worked on the Kukonos project, told CoinDesk that the PayMon initiative has slowed down pending government approval after passing the regulatory sandbox.
Borna, a second cryptocurrency project directly funded by the central bank of Iran, is developing the infrastructure to support a digital currency.
Meanwhile bitcoin mining continues, but with restrictions.
In 2016, Omid Alavi watched his brothers mining bitcoin from their home in Iran, and saw a business opportunity. A year later, the brothers had already branded their company Vira Miner and were opening industrial mining farms equipped with thousands of imported ASIC Antminer V9s.
At the time, mining was not regulated and subsidized electricity costs were as low as $0.006 per kilowatt-hour. This piqued the interest of Iranian miners despite the fact that the country didn’t produce its own mining rigs. Equipment was mostly smuggled into the country from China, Alavi told CoinDesk. By the summer of 2019, he was overseeing up to eight farms.
“Back then, it was a miner’s paradise,” Alavi said.
The government grew increasingly aware of the large spikes in electricity consumption by mining farms like Alavi’s. Last year, deputy minister of electricity and energy Homayoun Haeri proposed miners should not be allowed to tap into the heavily subsidized electricity meant for citizens at no additional cost or tax. Days later, authorities shut down two mining outfits following a power spike and seized over 1,000 machines from two abandoned farms.
Yet, in July 2020, less than a month following the incident, Iran declared bitcoin mining legal, and the industry came under the jurisdiction of Iran’s ministry of industry and mines. Haeri announced the government will vote on modified electricity rates for miners.
According to Alavi, the following month, the government stormed his farms and seized over 6,000 machines. The incident cost him over $5 million and he is working with a non-governmental blockchain association to negotiate the return of his rigs even though their value has since depreciated, Alavi said.
Now, Vira Miner has one of the 1,000 or more permits issued by the government to set up a farm. Local news reported around 14 farms have set up shop with these licenses. However, Alavi said miners need a second license to actually start operations. He is still waiting for one.
Now that mining is legal, Alavi said he has to pay a tariff of over 20% on future imported mining equipment. Mining operations are fined for using subsidized electricity and equipment suspected of being smuggled into the country. According to Alavi, the ministry of energy is selling gas to bitcoin miners at 500 times the price it’s sold at to regular power plants. He also said that electricity rates are now higher for miners, costing up to $0.09 per kilowatt-hour. Earlier this year, the government gave miners a month to register in an effort to mitigate equipment smuggling and illegal mining.
In April 2020, the government licensed a Turkey-based company called iMiner to launch a bitcoin mining operation in Iran. The firm allegedly sank $7.3 million into setting up its mining facility in the country.
But a Telegram group with over 81,000 members is accusing the firm of running a Ponzi Scheme, paying initial investors with funds from new investors without actually mining anything. Prominent Iranian bitcoiners including Alavi and Babagol recently joined an advisory YouTube panel that openly accused the government-approved company of misleading investors.
“Between last year and now, [Iran] became a hell for miners,” Alavi said.
Mining continues, however, with Iran having a 4% stake in global hashrate (the amount of computing power a country contributes to mining) and Iranian power plants selling excess power to mining operations.
Meanwhile, veteran bitcoiners like Amini and Sadr are witnessing how crypto is actually changing lives. Adoption is small and slow, but it’s nonetheless increasing, Sadr said. According to Amini, people from the crypto community may come into the space to simply buy VPN or a book that they cannot buy otherwise.
“But then, you can see some concerned mother who just wants to send some money to her child studying abroad,” Amini said, adding:
“You know, bitcoin is just more usable and more people are coming to this space not because of the technology, but because they don't have any other option. We could consider this a beautiful thing.”