Tehran, Iran – A national digital currency is coming to Iran, with the country’s central bank planning to launch a “digital rial” pilot project in the coming days.
The Central Bank Digital Currency (CBDC), also known as the “cryptorial”, is expected to remain pegged at a 1: 1 ratio to the rial, the national currency.
It’s a project that officials hope will significantly increase their control over the national currency and its users by providing new opportunities for financial players.
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Affected by harsh US sanctions imposed after former President Donald Trump unilaterally withdrew from a 2015 nuclear deal with Iran, as cryptocurrency soared in 2018, some Tehran officials saw potential for cryptocurrencies. circumvent sanctions, although this will not be the case with the digital rial, as it will only be used within the Iranian border.
And some of the same potential alternatives that have excited developers have raised concerns among members of the local crypto community, who fear the project could endanger privacy and security.
The digital rial will run on a platform called Borna, which was developed using Hyperledger Fabric, the open source corporate blockchain platform created by US tech giant IBM.
It is a Distributed Ledger Technology (DLT) licensed platform, which means that only the central bank can decide which entities will have access and also means that the currency cannot be mined like Bitcoin and many other decentralized cryptocurrencies.
The facility allows a select few banks to maintain and update the network’s distributed ledger, where an immutable record of all transactions and activities is maintained. In the future, access may also be granted to other entities.
Bank users should be able to deliver their rials – in banknotes or their accounts – to banks in exchange for the same amount of new digital rials that will be stored in their cell phone wallets.
According to Saeed Khoshbakht, one of the people who worked on Borna’s development, the project is unprecedented in Iran and will set a precedent for other projects in the future.
He also said that although the project was highly centralized, it would allow more banks to be involved in the previously mentioned distributed ledger, potentially allowing for greater transparency.
“For now, at least four other nodes will be designated to manage the distributed ledger. It is true that they are also banks, but instead of being concentrated in one place, the data will now be spread over at least five points and this number could gradually increase if the project is successful, “he told Al Jazeera.
Fintech companies will eventually have to offer rial-based online financial services, which means they will need a central bank-approved index asset, a “stablecoin” rial.
While not included in its initial limited public launch later this month, Borna is also planning a competitive tier, where companies could offer services under the platform, which could ease red tape.
Khoshbakht added that, if done correctly, Borna could also create an opportunity for banks and fintechs to access new sources of paid revenue, potentially by reviewing current limited paid services, which have been a thorn in their side for years. tied Iranian financial service providers.
Finally, on the platform, which has not yet been widely used in the Iranian economy, a wide variety of smart contracts could be implemented, self-executing contracts that can be automatically implemented.
Dozens of central banks around the world are working on their own CBDCs, and the main concern everywhere seems to be their potential impact on citizens’ privacy.
In its draft document, the Iranian central bank acknowledges that confidentiality is a concern, but also points out that anonymity would add to money laundering problems.
“Choosing an optimal point between these two components can be one of the considerations in developing the digital rial,” he said, without providing further details.
For some members of the local cryptocurrency community, potential violations of their right to privacy are huge concerns.
According to Hamed Salehi, a researcher who runs BlockDays, a media and events company focused on cryptocurrencies and blockchain.
“This digital fiat currency can be an important step and another 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 the areas where the protests were taking place. Now, what could happen is that on top of that, the institution could also limit or block your money and financial transactions based on your activities.
Salehi also thinks that the pervasive nature of malware in Iran could mean that hacked phones could be used to attack the digital rial app.
Effect on the economy
The digital rial could end up tied to efforts to curb runaway Iranian inflation, which currently exceeds 40%.
For decades, one of the main factors contributing to the country’s runaway inflation has been the lack of financial discipline, which has led to the uncontrolled printing of money to help fill perennial budget deficits.
A digital version of the country’s currency could prove to be an economic opportunity or a threat, according to e-banking expert Nima Amirshekari.
“If properly implemented, the project can help prevent inflation, only in the digital sector. Inflation comes from money creation, uncontrolled lending and unsecured money, so if you take money out of circulation and issue the same amount in digital rials, it can help inflation, as long as you can’t use the digital rial to allocate loans and credits [which would increase the amount of digital rials in circulation]. “
The central bank’s deputy governor for new technologies, Mehran Mahramian, indicated that the loans are part of the process, telling state television that the digital rial could help ensure that the loans are invested where they are.
But Amirshekari said the same problems that caused large amounts of non-performing loans (NPLs), overdue or hard-to-repay bank loans, another long-standing problem for the Iranian banking system, could affect the digital rial.
“The authorities already know where the loans go in the banking system. The problem with our PNPs is that they have been eliminated by people or organizations powerful enough to refrain from returning the money. The same can happen with the digital rial.
Amirshekari said one of the project’s benefits could be to increase the central bank’s knowledge and expertise on global cryptocurrencies, which would positively impact its regulatory stance.
A state of anarchy and confusion has reigned on the local cryptocurrency scene in recent years.
A central bank directive banned lenders and money changers from handling cryptocurrencies in 2018, and there were crackdowns on cryptocurrency exchanges, but technically there was no law prohibiting the average citizen from doing business.
“We hope this teaches them how to use chain analysis and other technical methods for surveillance, so that they can write useful regulations instead of banning or banning everything,” Amirshekari said.