Industry Spotlight: Bitcoin Mining
/By Connor Bulgrin, Research Associate
U.S. sanctions and banking restrictions against Iran have had a devastating impact on the Iranian economy. Since 2018, Iran has averaged a negative growth rate and in 2020 alone the Iranian rial lost 57% of its value against the U.S. dollar. Individuals have seen their savings dwindle and purchasing capacity drastically reduced. With its foreign reserves diminishing, the Islamic Republic as a whole has struggled to import foreign currencies and goods.
It comes as no surprise then that individuals and the Iranian government alike have looked at Bitcoin as an opportunity to allay some of their problems. Bitcoin’s appeal lies, in part, in its untraceable nature. It allows individuals to exchange goods and services outside the purview of regulators and other monetary authorities. Although Bitcoin wallets are identifiable through their static electronic addresses, discovering the exact owner of a particular Bitcoin wallet is an incredibly challenging task. As a result, Bitcoin has been viewed by some as a potential method to skirt U.S. sanctions.
For individuals in Iran who have been hit hard by inflation and US sanctions, Bitcoin is particularly useful as a store of value versus the rial; it also allows them to do business more easily with people living abroad. Indeed, many Iranians have spent the last few years experimenting with this digital currency. Some have been “mining” the currency using high-performance computers smuggled in from China. (1) Others have simply converted their local currency into Bitcoin via trading platforms. As of June 2021, an estimated 12 million Iranians are trading cryptocurrencies.
For the Iranian government Bitcoin presents a dual-edged sword. While the digital currency may help the Islamic Republic mitigate the effects of U.S. sanctions, the government is worried that it may lead to an excess of capital flight. In fact, this concern led the government to crack down on Bitcoin transactions and Bitcoin mining in April of 2018.
However, Donald Trump’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and imposition of a “maximum pressure” strategy against Iran, changed the government’s political calculus. The government began viewing Bitcoin mining as an opportunity for the Islamic Republic to acquire foreign currencies. In 2019, the government recognized Bitcoin mining as a legal industry. Iran’s cheap electricity and devaluation of the rial made it a suitable location for these operations. Since legalization, the government has granted mining permits to at least 1,000 investors, though only a few dozen legally-recognized active server farms have ever existed in the country.
Still, several regulations are attached to Bitcoin in Iran. Most importantly, the use of Bitcoin in domestic transactions is forbidden. Recent amendments to the law also require Bitcoin miners to sell their Bitcoin directly to the Central Bank of Iran. The government hopes this will provide them increasing control over Iran’s Bitcoin supply and a means to fund imports. Although they currently have no method by which they can enforce this provision of the law, it makes Iran the “first country in the world to use cryptocurrencies at a state level for value exchange.”
So far, using Bitcoin to avoid U.S. sanctions has been an unsuccessful project. While in 2019 Iran’s Trade Promotion Organization held negotiations with representatives of seven European countries and South Africa regarding the use of cryptocurrencies in financial transactions, these talks did not lead to any agreements. Although The Iranian Presidential Center for Strategic Studies, a think tank associated with the office of President Rouhani, has optimistically projected that future Bitcoin mining revenues could be as high as $700 million annually, Iran is currently far from this goal.
In recent months, the government’s position on Bitcoin mining seems to be changing yet again. After a series of blackouts and clouds of smog descended upon the country in January, the government blamed Bitcoin miners as the source of these troubles. Specifically, they alleged that illegal Bitcoin farms were overtaxing the nation’s energy grid. In response, the government has attempted to shut down both licensed and unlicensed Bitcoin farms, closing over 1,600 facilities. In early March, the government imposed an indefinite ban on cryptocurrency trading platforms.
Critics of the government’s policy note that Bitcoin mining consumes less than 2% of Iran’s energy production. Former deputy head of Iran’s Department of Environment, Kaveh Madani, argues that Bitcoin is being used as a scapegoat and that “decades of mismanagement” is the true cause of recent blackouts and pollution.
Regardless, the government’s ban is unlikely to mark the end of cryptocurrencies in Iran. While Bitcoin farms may be shut down, prohibiting the trading of Bitcoin is near impossible given its anonymizing nature. Furthermore, the government may want to keep the possibility of future Bitcoin mining open. As long as U.S. sanctions remain tough, Bitcoin mining will present an opportunity for relief, however limited.
The government has also considered issuing a “crypto-rial,” a currency which they would have sovereignty over. Although this idea has not been pursued yet and the demand for such a currency in foreign markets would likely be limited, it might reveal the government’s future intentions to embrace methods to avoid sanctions that utilize cryptocurrency.
The U.S. Treasury Department has insisted that it “will aggressively pursue Iran and other rogue regimes attempting to exploit digital currencies.” While the U.S. Treasury has successfully identified the owners of a bitcoin wallet in one case pertaining to Iran, it is unable to do so on any significant scale. Currently, Bitcoin allows miners to make profits, Iranian businessmen to import foreign goods, and everyday citizens to preserve their wealth against a devaluing rial. Whether or not cryptocurrencies will become a serious tool for skirting U.S. sanctions is yet to be seen.
Footnotes
(1) For the uninitiated, “mining” Bitcoin consists of using high-performance computers to solve complex mathematical problems that reward miners with Bitcoins for completing “blocks” that become part of a larger blockchain.
