Are Bitcoin payments traceable for the government?

Is Iran circumventing sanctions with Bitcoin?

Bitcoin, the rogue currency for the US government, is also gaining popularity in Iran

The Trump administration's January 3 assassination of Qasem Soleimani also made waves in the Bitcoin market. The rumor quickly spread that the Bitcoin exchange rate in Iran had risen to 24,000 or even 29,000 US dollars, a four-fold increase at the turn of the year.

What turned out to be the often-cited fake news, however, contained a grain of truth. Bitcoin is the modern version of the crisis currency gold. Geopolitical tremors are causing the course to rise, while regulations are causing it to fall. According to a survey by Statista, the popularity of the currency is not great in countries that are among the early adopters of digitization, but in crisis-ridden countries. Threatened by civil unrest, sanctions or hyper-inflation.

All of this is currently in Iran, where the cryptocurrency is also flourishing. The US magazine Foreign Policy wrote in a recent article: "The economic sanctions have proven effective and the Iranian economy has shrunk by 10 to 20 percent. But they have also accelerated Iran's use of cryptocurrencies like Bitcoin." The world of cryptocurrency opens up new opportunities for the Iranian government and the people of Iran to evade sanctions, it says.

With Bitcoin against sanctions

As is well known, the economy of Iran has been badly hit by the US sanctions. They decimated Iran's crude oil exports, at the same time let inflation soar to over 35 percent. Foreign companies are prevented from doing business in the country. However, the cryptocurrency Bitcoin enables Iranian citizens and companies to make international payments, at least in part. In this way they circumvent the sanctions, but they have little choice but to do anything else.

When in November 2018 the international banking organization SWIFT blocked more than two dozen Iranian financial institutions from their services under pressure from the USA, cryptocurrencies were still banned in Iran. The EU Commission had declared that it would ignore the threats from overseas and stressed that Swift would not shut down the Iranian banks, but the EU's attempt to maintain trade with Iran failed. The Instex, initiated in 2019, also remained symbolic in nature.

But now it has become impossible for Iranian citizens and companies to participate in international trade unless they use cryptocurrencies. The Iranian government also recognized this, and a rethink took place. At the beginning of 2019, the country announced a gold-pegged cryptocurrency called PayMon. Ali Divandari, the new head of the Iranian central bank, said: "Blockchain has the potential to revolutionize the concept of money."

When PayMon did not meet the desired demand, Iran relied on Bitcoin. In August 2019, crypto mining was legalized as an industry, and Bitcoin had become the only way to make cross-border transfers anyway.

Nonetheless, Divandari said: "Blockchain simply lacks the ability and ability to circumvent sanctions." Iran's trade and financial transactions are too extensive to be handled with newly found technologies such as blockchain. "Proposals like this are immature and far-fetched."

But for the USA, cryptocurrency initiatives in Russia, China, Venezuela or Iran meant threatening machinations not only against US sanctions, but also against the banking world.

"The Iranian government has long had an interest in using cryptocurrencies to support international trade outside of the traditional banking system," writes the US magazine Foreign Policy. "Iran has clearly understood that cryptocurrencies are one of the ways to challenge and undermine the US-dominated financial architecture."

"First, these projects inevitably run on private blockchains that have no external traceability, as is the case with a Bitcoin network. Second, these tools are completely outside the purview of the current US global financial architecture." A 2018 statement by the US Treasury Department said: "The Treasury Department will aggressively pursue Iran and other rogue regimes that attempt to exploit digital currencies."

Was on crypto?

So the question arises to what extent Bitcoin and other crypto currencies can keep the promise of being able to offer an alternative for the global financial network. When the first cryptocurrency exchanges were set up, the landscape wasn't regulated - and for many that was part of their charm. But the hurdles have been increasing in the crypto world since then. International regulators keep trying to take action against Bitcoin.

For example against their core idea, decentralized financing (DeFi). It aims to provide traditional financial services such as banking, credit and trading through decentralized networks and without intermediaries or banking institutions. "By using decentralized exchanges, the regime can also help convert cryptocurrencies into fiat through channels that cannot be effectively controlled by external regulators," writes Foreign Policy.

There are also new obstacles. The room for anonymity for cryptocurrency transactions is shrinking as the formal identification of customers through adherence to Know Your Customer guidelines increases worldwide. This means checking personal and business data from new customers of a credit institution to prevent money laundering and terrorist financing.

Standards set by the Financial Action Task Force in 2019 and now enforced in 37 member states provide for full KYC compliance at the level of providers of services for virtual assets, as well as a "travel rule" according to which both originators and beneficiaries Identify and report suspicious information from cryptocurrency transactions.

Since then, several well-known trading sites have been blocking buyers and sellers from Iran. Some confiscate money belonging to Iran-based customers. It is to be feared that the use of crypto currencies by Venezuela, Iran, Russia or China, the "crypto enemies" of the USA, will serve to legitimize the strict regulation of the threatening idea behind Bitcoin for the financial world.

(Bulgan Molor-Erdene)

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