Tehran, Iran – A national digital currency is coming to Iran, and the country’s central bank plans to launch a “digital rial” pilot project in the coming days.
The central bank’s digital currency (CBDC), also known as the “cryptorial”, is expected to remain pegged at a 1:1 ratio against the rial, the national currency.
It is a project that officials hope will significantly increase their control over the national currency and its users, while opening up new opportunities for financial actors.
Packed with harsh United States sanctions imposed after former President Donald Trump unilaterally withdrew from a 2015 nuclear deal with Iran, when cryptocurrency peaked in 2018, some officials in Tehran saw the potential of cryptocurrencies to circumvent sanctions – although that won’t be the case with the digital rial as it will only be used within Iran’s border.
And some of the same potential alternatives that have excited proponents have raised concerns among members of the local crypto community, who fear the project could compromise privacy and security.
The digital rial will run on a platform called Borna, which was developed using Hyperledger Fabric, the open-source enterprise blockchain platform founded by US tech giant IBM.
It is an authorized platform for distributed ledger technology (DLT), which means that only the central bank can decide which entities have access, and also means that the currency cannot be mined like Bitcoin and many other decentralized cryptocurrencies.
The structure allows a few select banks to maintain and update the network’s distributed ledger, which maintains an immutable record of all transactions and activities. In the future, other entities may also gain access.
Bank users are expected to be able to hand over their rials – in notes or on their bills – to the banks in exchange for the same amount of the new digital rials stored in their mobile phone wallets.
According to Saeed Khoshbakht, one of the people who contributed to the development of Borna, the project is unprecedented in Iran and will set a precedent for further projects in the future.
He also said that while the project was highly centralized, it would allow more banks to get involved in the aforementioned distributed ledger, potentially allowing for greater transparency.
“For now, at least four more nodes will be designated to handle the distributed ledger. It is true that they are also banks, but instead of being focused on a single point, the data is now spread across at least five points, and that number could gradually grow if the project is successful,” he told Al Jazeera.
Financial tech firms are eventually expected to offer rial-based financial services online, meaning a central bank-approved pegged asset — a rial “stablecoin” — will be required.
While not included in the first limited public launch later this month, Borna also envisions a competitive tier, where companies can offer services under the platform, potentially easing red tape.
Khoshbakht added that if done correctly, Borna could also create an opportunity for banks and fintechs to access new fee-based revenue streams, potentially overhauling the current limited fee-based services, which have been a thorn in the side for years. have been eyed by Iranian financial service providers who are strapped for cash.
Finally, a wide variety of smart contracts, self-executing contracts that can be implemented automatically, could be deployed on the platform, something that has yet to be widely used in the Iranian economy.
Dozens of central banks around the world are working on their own CBDCs, and the biggest concern everywhere seems to be the potential impact on citizens’ privacy.
In its draft paper, Iran’s central bank acknowledges that privacy is a concern, but also points out that anonymity would add to concerns about money laundering.
“Selecting an optimal point between these two components can be one of the considerations when developing the digital rial,” it said without elaborate.
Potential violations of their right to privacy are a major concern for some members of the local cryptocurrency community.
Current local online banking and tax systems and other online accounting systems offer Iranian authorities huge oversight capabilities, but a digital rial could expand and accelerate them further, according to Hamed Salehi, a researcher who manages the crypto- and blockchain-focused media and events agency. BlockDays.
“This digital fiat money can be a big step and an additional way to violate people’s privacy and social freedoms,” he told Al Jazeera.
“For example, during the [November 2019] protests you would lose your internet and phone connection if you were in areas where protests were going on. What could happen now is that the establishment may also restrict or block your money and financial transactions based on your activities.”
Salehi also believes that the ubiquitous nature of malicious software in Iran could mean that hacked phones could be used to attack the digital rial app.
Effect on economy
The digital rial could eventually be linked to attempts to tame Iran’s rampant inflation, which is now over 40 percent.
A major factor behind the country’s runaway inflation over decades has been a lack of financial discipline, which resulted in the unchecked printing of money to help with perpetual budget deficits.
According to electronic banking expert Nima Amirshekari, a digital version of the country’s currency could prove to be an economic opportunity or a threat.
“If implemented correctly, the project can help prevent inflation, only in the digital sector. Inflation arises from money creation, uncontrolled borrowing and unsecured money, so if you take out money in circulation and spend the same amount in digital rials, it can help with inflation, provided you can’t use the digital rial to make loans and credits. [which would increase the amount of digital rials in circulation].”
The central bank’s deputy governor for new technologies, Mehran Mahramian, has indicated that loans are part of the process, telling state television that the digital rial can ensure that loans are invested where they are intended.
But Amirshekari said the same problems that have caused large amounts of non-performing loans (NPLs), bank loans that have been repaid late or are unlikely to be repaid, another long-standing problem for Iran’s banking system, could affect the digital economy. rial.
“Authorities already know where loans end up in the banking system. The problem with our NPLs is that they have been shut down by people or organizations that are so strong that they can forgo paying back the money. The same can happen with the digital rial.”
Amirshekari said a benefit of the project could be to increase the central bank’s knowledge and expertise on global cryptocurrencies, which in turn would positively impact its regulatory stance.
In recent years, there has been a state of lawlessness and confusion over the local cryptocurrency scene.
A central bank directive banned credit unions and currency exchanges from handling crypto in 2018, and crypto exchanges have been cracked down, but technically there is no law prohibiting the average citizen from trading.
“I hope it can teach them to use chain analysis and other technical methods to do oversight so that they can make useful regulations rather than ban or ban everything,” Amirshekari said.