While the central bank has stated that it plans to develop a CBDC, the specifics are yet unknown.
New technologies are upgrading financial infrastructures that have been in use for years as payment methods continue to evolve. Central bank digital currencies (CBDCs) are currently a hot topic in several countries throughout the world, including the Islamic Republic of Iran.
The Middle Eastern country has suffered significant economic and financial challenges as a result of US sanctions, and it believes that piloting a CBDC can help it overcome the blockade’s problems.
A CBDC is also seen by some as a possible answer to the country’s perceived corruption problem.
Iran has been dogged by corruption allegations for decades. Iran had a 25 out of 100 rating in Transparency International’s Corruption Perception Index published in 2020. High-profile government officials, including top judges and a recently imprisoned parliament speaker, are among those charged with corruption.
The road to become a CBDC
When the Central Bank of Iran (CBI) authorised the Informatics Services Corporation, a central bank executive arm responsible for payment and automation services, to develop a CBDC in 2018, Iran began its journey to digitalizing its currency.
In January, local news site Ilna claimed that the CBI’s Deputy Governor for Information Technology, Mehran Moharamian, said that CBDC work would begin soon. He did not, however, disclose any specific dates for the pilot.
According to sources, the Iranian CBDC was created using the Hyperledger Fabric protocol, which is hosted by the Linux Foundation, although neither Hyperledger nor the central bank has acknowledged this.
“There is no precise technical data about the Iranian Central Bank’s digital currency,” Ehsan Ghazizadeh, CEO of a local cryptocurrency exchange called Exchange Iran (EXIR), He went on to say that the government hasn’t told anyone about the infrastructure, possible supervisors, the formal white paper, or the number of issuers as of yet.
According to Ghazizadeh, the government’s target audience and market are still unknown, and it’s unclear how the CBDC will be made available to the public. “Our understanding of the matter is, in fact, general,” he said, “but it appears that the pilot version will take over a year to complete.” The closer the date approaches, the more information will be available.”
Iran is crypto-friendly, but fears about power are impeding progress.
Iran was one of the first countries to legalise Bitcoin (BTC) mining in order to alleviate the country’s financial crisis. However, as a result of ongoing blackouts caused by catastrophic droughts and punishing sanctions, the government was forced to temporarily suspend mining operations.
“The Energy Ministry has been implementing measures to reduce the use of liquid fuels in power plants since last month,” Mostafa Rajabi Mashhadi, the deputy managing director of National Grid Dispatching, said in December. “These measures include cutting licenced crypto farms’ power supply, turning off lampposts in less risky areas, and stringent consumption supervision.”
Using cryptocurrency to promote international trade
Iran approved 1,000 crypto mining licences in the beginning of 2020, as local officials recognised crypto’s potential to benefit the geopolitically isolated country in international trade.
“Today’s situation in the country is very special, and we need foreign exchange earnings,” Amir Hossein Saeedi Naeini, a member of the Trade Union and Computer Organization, said in January 2020. “In this situation, the mining and digital currency extraction industry, while importing foreign currency, can facilitate trade…”
Iran recently indicated interest in tapping into the possibilities of cryptocurrencies, which have proven to be quite effective in facilitating international trade. The Iranian Central Bank and the Ministry of Trade agreed last month to link the central bank’s payment gateway to a trading system that allows enterprises to settle payments using digital assets.
Iran’s Deputy Minister of Trade and Development, Alireza Peyman-Pak, who also oversees the country’s trade promotion organisation, told Mehr News Agency that the crypto payment mechanism would be implemented in a few weeks.
“We’re working on a system-operations method right now.” This could open up new potential for importers and exporters to use cryptocurrencies in international transactions,” Peyman-Pak allegedly stated, adding that the government should take the cryptocurrency industry’s commercial and economic prospects more seriously.
Peyman-Pak pointed out that while there may be prohibitions on the use of cryptocurrencies in certain of their target areas, such as Iraq, Afghanistan, or Pakistan, the usage of digital assets is common in their key markets, such as Russia, China, India, and Southeast Asia.
CBDCs are making progress around the world.
At the early stages of digital asset development, no one could have predicted the widespread adoption and use of Bitcoin and other cryptocurrencies. Decentralization was a primary goal, as was putting power in the hands of the users.
CBDCs could be a means to rein in the decentralisation that cryptocurrencies have achieved thus far. Banks may be okay with crypto being used as a speculative asset to some level, but they may not be willing to buy into the premise that it can be used as a medium of exchange.
Because the concept of digital currency cleared the path for financial inclusion to some level, it’s evident that central banks have recognised the benefits and are now attempting to develop bank-backed digital money.
El Salvador can serve as a fantastic example of a country attempting to attain equal access to financial services, with over three million people using the Chivo Bitcoin wallet, especially in a world where an estimated 1.7 billion people are unbanked.
CBDCs are not truly cryptocurrencies, according to some, because they are not decentralised. When examined closely, however, CBDCs are not unlike to many other cryptocurrencies. CBDCs, like Ripple’s XRP, are categorised as centralised coins because their issue is controlled by a centralised body, in this case the government.
Some major economies are now in the CBDC pilot stage, examining and analysing its potential, as governments’ interest in digitising fiat currency develops. Others, on the other hand, have set aside funds for CBDC research and are looking into other solutions.
According to The Atlantic Council’s CBDC tracker, 87 countries representing over 90% of global GDP are looking into CBDCs. Nigeria, the Bahamas, and seven other Caribbean island countries have all launched their digital currencies.
The pilot versions of CBDCs are being tested in 14 countries. The Chinese digital yuan is the most well-known of these. Sweden, Thailand, and South Korea are among the countries currently undergoing testing.
The US is still in the research phase of retail CBDCs, consulting with academics at the Boston Fed and MIT.
The Reserve Bank of India plans to deploy a digital version of the Indian rupee in 2022 or 2023, with a pilot programme starting on April 1 of this year. However, there are no specifics on how the digital rupee will function, whether through blockchain or other technology.
“The introduction of a central bank digital money will give the digital economy a major boost.” “Digital currency would also lead to a more efficient and less expensive currency management system,” India’s Finance Minister Nirmala Sitharaman stated.
A dilemma in quest of a solution
Central banks or federal reserves have been asked to build CBDCs that can be beneficial to the public as the payment system continues to grow, with individuals desiring speedier transactions and banks looking to play a stronger role in facilitating payments.
CBDCs, according to Federal Reserve Bank Governor Christopher J. Waller, who recently spoke at the American Enterprise Institute in Washington, D.C., are “solutions in search of a problem.”
“One may argue, for example, that the general public has a fundamental right to own a riskless digital payment instrument,” Waller said, “and a CBDC would achieve this in a way that no privately issued payment instrument can.” “On the other hand, commercial bank accounts already provide the general public with a risk-free digital payment tool for the vast majority of transactions, thanks to federal deposit insurance.”
If the CBI’s proposal to trial the CBDC succeeds, Iranians will be able to use digital currencies to facilitate smooth local and international trading.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.