Since 2013 and perhaps earlier, Iran has been engaging in crytpo-currency-based transactions for a variety of purposes.
On October 11, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an advisory that stated, among other things, that “with the full re-imposition on November 5 of sanctions lifted under the Joint Comprehensive Plan of Action (JCPOA), FinCEN expects that Iranian financial institutions, the Iranian regime, and its officials will increase their efforts to evade US sanctions to fund malign activities and secure hard currency for the Government of Iran.”
The US also asserts that “the Iranian regime uses deceptive practices, including front companies, fraudulent documents, exchange houses, seemingly legitimate businesses and government officials, to generate illicit revenues and finance their malign activities,” according to the advisory.
“Financial institutions should also be aware of possible Iranian abuses of virtual currency and precious metals to evade sanctions and gain access to the international financial system and to conceal their nefarious actions.”
“Iran’s deceptive practices have been orchestrated not only by elements of their government such as the Islamic Revolutionary Guard Corps Qods Force, but also by Central Bank of Iran officials who were at the highest levels,” said Sigal Mandelker, US Under Secretary of the Treasury for Terrorism and Financial Intelligence.
“We expect Iran to continue to attempt to engage in wide-scale sanctions evasion while simultaneously using its resources to fund a broad array of malign activity, financial institutions should continue to sophisticate their compliance programs to keep these actors from exploiting them.”
Iran has made no attempt to keep secret its active involvement in crypto-currency development as well as their potential application in the pursuit of sanctions relief. However, most experts appear to agree that Iran’s use of virtual currencies to evade sanctions is insignificant to date.
“While some reports refer to Iran’s nascent attempts to develop some kind of national crypto-currency, it is unclear how the currency would function in practice, especially with respect to sanctions evasion,” Omar Bashir, senior associate at Washington DC-based Financial Integrity Network, told Asia Times. “Iran may use transactions in conventional virtual currencies such as Bitcoin – potentially coupled with mixers and conversion to more privacy-friendly coins – to avoid detection.
“FinCEN’s October 11 advisory states that Iran has been involved in at least $3.8 million worth of Bitcoin-denominated transactions per year since 2013. The advisory also notes that this is a comparatively small number and suggests that Iranian sanctions evasion via virtual currency is a potential concern rather than a phenomenon it has observed already.
“Even though recent indictments show that Russia has used Bitcoin to avoid scrutiny when purchasing specific items for political interference, scaling up a virtual-currency approach for broad sanctions evasion would be challenging.”
“There is not much public visibility into where [Iran is] besides a few statements officials have made to the press. All we have heard is that they plan to roll out their crypto-currency first for Iranian banks,” said Yaya Fanusie, director of analysis for the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance.
“Secrecy is not a big issue here for Iran. Otherwise, they would not have announced their intentions. They want their crypto-currency plans to be public. They say they’re using a blockchain platform called Hyperledger Fabric that is open source software available on the market.
“Their rhetoric may be intended to bolster an image of not cow-towing to the US. Anyone participating with Iran on crypto-currencies probably would be participating with Iran in non-crypto-currency ventures, so I do not think this activity poses a new risk.”
North Korea-Iran connection
That said, Iran is certainly watching North Korea closely and may be learning important lessons in the process. Is there any connection between North Korea and Iran here? In other words, has the North Korean successful track record in using crypto channels impacted or even emboldened the Iranians?
“I can only speculate, but the North Korean example is likely an aspirational one for Iran. In addition to using virtual currency channels to move money, North Korea has reportedly hacked computers to secretly mine crypto-currency, stolen funds from crypto-currency exchange customers and raised money by launching scam initial coin offerings or ICO’s,” said Bashir.
“I am uncertain about how easily North Korea has converted crypto-currency gains into real purchases. As the North Korea example illustrates, countries under comprehensive sanctions are likely to seek multiple evasion methods to stay ahead of sanctioning authorities. But Iran is likely to focus more heavily on tried and true methods of sanctions evasion.”
Fanusie agrees, saying he does not think “there is much connection here.”
“North Korea appears to be hacking some crypto-currency exchanges and experimenting with crypto-currency mining. But neither country has shown what I would call success in the crypto-currency sphere. What is happening is that people and nations in general are becoming more familiar with crypto-currency technology and are looking for ways to use it to their advantage.
“But this technology is still very nascent. What we’re seeing now is experimentation. We should not assume that this pathway will develop into a significant or dominant source of funding for these regimes,” said Fanusie.
“Evasion methods that rely on virtual currency would require an exchange to convert virtual currencies into currencies that are more widely accepted,” Bashir said. “Iranians involved in such activity, as well as those participating in these schemes from outside of Iran, would likely be designated under sanctions authorities. Systematic efforts to evade sanctions, if revealed, would further harm the reputation of Iran’s financial sector regarding illicit finance risk.
“Even after sanctions are unwound, reputational concerns and ratings by the Financial Action Task Force can prevent financial institutions and other companies from engaging in target countries. The reputational consequences could be less severe if no Iranian financial institutions were involved.”
Monitoring the situation
The US Office of Foreign Assets Control (OFAC), which administers and enforces economic and trade sanctions at the US Treasury Department, has been monitoring the situation in Iran for years.
“Despite public reports that the Central Bank of Iran has banned domestic financial institutions from handling decentralized virtual currencies, individuals and businesses in Iran can still access virtual currency platforms through the internet,” the OFAC declared in a recent FAQ released in tandem with the FinCEN advisory.
“For example, virtual currency can be accessed through: (1) Iran-located, internet-based virtual currency exchanges; (2) US or other third country-based virtual currency exchanges; and (3) peer-to-peer (P2P) exchangers … Institutions should consider reviewing blockchain ledgers for activity that may originate or terminate in Iran. Institutions should also be aware that the international virtual currency industry is highly dynamic; new virtual currency businesses may incorporate or operate in Iran with little notice or footprint. Further, P2P exchangers – natural or legal persons who offer to buy, sell or exchange virtual currency through online sites and in-person meetups – may offer services in Iran.”
Anyone subject to OFAC jurisdiction and actively using digital currency cannot engage in unauthorized transactions prohibited by OFAC sanctions such as dealings with blocked persons or property, or engage in prohibited trade or investment-related transactions.
The OFAC FAQ also specifically reminds all US persons that “their compliance obligations with respect to transactions are the same, regardless of whether a transaction is denominated in virtual currency or not.”
The OFAC is watching funds flowing via so-called “funnel accounts” where funds are “subsequently withdrawn in a different geographic region with little time elapsing between deposit and withdrawal. The rapid flow of funds may also span a large geographic area between the deposits and withdrawals, including instances where the deposit location is thousands of miles away from the withdrawal location.”
The Russian connection
Russia looms large in the background as a potential sanctions-busting partner for Iran in this regard. However, European University at Saint-Petersburg senior lecturer of political economy Nikolay Kozhanov recently declared that despite much pressure from the Iranian business sector for a greater use of crypto-currency as a means of both preserving asset and inventory values and relieving pressure based on wide swings in current currency exchange rates, attempts by Moscow and Tehran to tap into bilateral trade-based crypto-currency flows are merely matters of discussion for now. Meaning nobody can predict the outcome.
“The problem is that you are taking out preferred currencies like the euro and the dollar out of these exchanges,” Kozhanov told Cointelegraph. “First of all, it is going to be the first experience of using crypto-currencies to facilitate trade. Iran has not done it before so to a certain extent, it is an experiment. Secondly, the decision has not even been taken yet in Iran itself.”
Fanusie reported that in May, “a senior Iranian economic official met with his Russian counterpart in Moscow. The Iranian official then announced that Iran’s central bank would develop proposals for a state-backed crypto-currency and opined that crypto-currencies could help both countries steer clear of the SWIFT banking system and dollar transactions.
Russian media also reported that the two countries planned to reconvene to discuss interbank cooperation in July, although there has not been press coverage of that meeting. Interestingly, Russian entrepreneurs helped Venezuela’s Maduro regime to launch a state crypto-currency, although it appears that effort has floundered; some media sources report that the Kremlin has overseen the Venezuelan crypto project.
Iranian and Russian press report that Russia is stepping up its campaign to speed up the adoption and integration of its international payment system known as the System for Transfer of Financial Messages (SPFS), developed by the Central Bank of Russia as the Russian equivalent to the Europe-based financial messaging network known as the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Talks are underway involving Russia, China, Turkey and Iran.
Russia started its development of SPFS in 2014 after the US threatened to disconnect Russia from SWIFT. The first SPFS transaction took place in December, 2017. The announcement by US Treasury Secretary Steven Mnuchin in October that talks are underway with SWIFT aimed at Iran’s disconnection from SWIFT as part of the US’s maximum pressure campaign simply will compel Iran to become more open to adopting SPFS.
Anatoly Aksakov, head of the Russian parliamentary committee on financial markets, was quoted as saying that SPFS is now more popular than SWIFT and that the number of SPFS users outnumber those using SWIFT.
“We are already holding talks with China, Iran and Turkey, along with several other countries, on linking our system with their systems,” Aksakov said. “They need to be properly integrated with each other in order to avoid any problems with using the countries’ internal financial messaging systems.”
Imagine if Iran, China and Russia implement a crypto-currency-friendly SPFS solution. China and Russia are already seeking a way to displace it not defeat the almighty dollar outright, but doing so remains nothing more than a pipedream for now. China and Russia together dominate the global crypto mining sector today. Currently, these are pieces of a much bigger puzzle. Once assembled, however, it could change everything.