Iran has become the world's second nation to officially announce the development of a state-backed cryptocurrency, following in the footsteps of Venezuela. Iran's new crypto will be known as Paymon, the Persian word for 'covenant'. It has been launched in response to U.S. sanctions but will not be permitted for payments inside Iran itself. As such, it is a tale of two bans.
Paymon will reportedly tokenize excess assets and properties of four Iranian banks: Bank Mellat, Bank Melli Iran, Bank Pasargad, and Persian Bank. It will be listed on the Iran Fara Bourse exchange and backed by gold. Reports say that the token will be used mainly to conduct cross-border transactions. Iranian officials are currently in talks with a number of foreign governments including Switzerland, Russia, the UK, and several others.
U.S. sanctions and SWIFT
Iran has been a source of international political tension for decades. That tension has only grown worse as the U.S. has placed sanctions on Iran in hopes of preventing the country from furthering its nuclear weapons program. Unfortunately for Iranian businesses, those sanctions include the inability to conduct cross-border banking transactions through the SWIFT platform.
SWIFT is an international cooperative owned and operated by banks and other financial institutions. Its services are used in more than 200 countries by tens of thousands of institutions. They essentially control all of the electronic commercial and retail banking transactions that take place worldwide.
Since Iran has been prevented from accessing SWIFT for the last several years, their economy has taken a hit. Government officials decided in 2018 that the only way to circumvent SWIFT is to create their own digital token. The trick is getting other countries on board so that government agencies and private companies can pay its bills with crypto. Hence the discussions with other countries.
It is worth noting that, whether you agree with U.S. policies or not, Iran developing its own digital token is a perfect illustration of why cryptocurrency is so popular to begin with. Crypto allows for the exchange of payments between individuals and entities without government interference.
Bypass government, make payment
What Iran has done by developing Paymon is the same thing online gamblers do, just on a much larger scale. It can be easily understood simply by thinking about how you might gamble online from a country that has either banned or severely restricted online gambling.
Let's say you live in the U.S. and you're hoping to gamble on a site hosted somewhere else. Banking regulations would prevent you from transferring money from your bank account to the casino's account in order to play. In other words, you cannot legally make a deposit. There are a number of workarounds, including finding an online casino that accept something like bitcoins. You make your bitcoin deposit and off you go.
Bitcoin allows you to circumvent banking regulations that would otherwise prevent you from gambling online. Your deposit ends up being a transaction between you and the casino - with no middleman involved. Iran is attempting to do the same thing on an international scale. It is relying on Paymon to circumvent U.S. sanctions in order to conduct business with other countries.
Not for Iranians
The premise of this post is that Paymon is a tale of two bans. The first ban - the one placed on Iran that prevents the country from doing business internationally - is the motivation behind developing the token. The second ban exists within the borders of Iran and is, quite frankly, rather ironic.
Iranian citizens have been prevented by law from buying and selling with crypto for years. That will not change with the development of Paymon. Citizens will still not be able to own the digital tokens themselves. They will not be able to use Paymon, Bitcoin, Litecoin, etc. from making payments domestically.
It is quite ironic that Iranian leaders want to free themselves of the sanctions imposed by the U.S. but have no problem continuing to sanction their own citizens. Having said that, there are rumors of a second rial-backed token being offered to Iranian citizens at some point in the future. That token would be controlled by Iran's central bank just like the country's fiat. It would be available for domestic transactions and likely offered only through local exchanges.
Mining and ICOs
The Iranian government says that there will be 1 billion tokens made available through the Paymon system. Token mining and ICOs will also be allowed, which creates an interesting question about the future of cryptocurrencies in Iran: Will others in Iran and elsewhere issue new tokens in order to facilitate business with Iranian companies and government entities?
Let's say Paymon does as well as the government hopes. Through it, both government agencies and private companies are able to regain their international financial footing. Would it be worth it to other investors to offer new coins available exclusively to Iranian businesses and the vendors they transact with?
We have talked in the past about a specialized token for online gambling. What about a specialized token for conducting international business with Iranian companies? It seems far-fetched, but Iran developing a state-back token despite its very strict domestic laws also seemed far-fetched before they first announced plans for Paymon in 2018.
As for mining, no one is yet clear as to how it will work with Paymon. Iranian officials have not divulged the blockchain platform they started with as their base. For all anyone knows, they may have created their own blockchain from scratch.
The benefits of going crypto
Iran developing a digital token in order to do business internationally seems a bit excessive until you step back and understand the benefits of doing so. Believe it or not, all the same benefits you enjoy by way of Bitcoin gambling are also available to Iranian companies, banks, and their international partners.
- Pseudonymity - A big plus of cryptocurrency is pseudonymity and the privacy it affords. We assume that companies and governments doing business with Iran will enjoy the same pseudonymity through Paymon.
- Freedom - Making payments internationally with a digital token provides a level of freedom Iranian companies and government agencies do not possess right now. Through Paymon they will have the freedom to conduct business as they see fit.
- Security - Assuming the tech wizards behind Paymon have done their job, the platform should be every bit as secure as any other. Those who use Paymon will do so with the knowledge that their payments are secure and protected.
- Speed - This is a big one for an Iranian economy that continues to suffer under U.S. sanctions. The minute crypto payments start moving, they will be a lot faster than the SWIFT system. Payments will be nearly instant in most cases.
The one benefit Paymon will not enjoy is decentralization. Remember that whatever a government establishes can also be taken away by that same government. As such, Tehran will ultimately control everything about Paymon. It is only a question of how transparent that control will be to the rest of the world.
Additional government tokens
We now have two countries with official state-backed cryptocurrencies: Venezuela (Petro) and Iran (Paymon). Both were developed in order to get around U.S. sanctions. The lesson here is one that the global community is going to have to start looking at seriously. What is that lesson? That there are ways around sanctions.
It seems as though the more sanctions are entertained as a means of coercing countries to do things in certain ways, the more creative means sanctioned countries are coming up with to get around what is being imposed on them. Does that mean governments should stop sanctioning others? That is a political issue and one for voters to decide.
The bigger question is whether or not other countries will follow in the footsteps of Venezuela and Iran. Venezuela is still up in the air for the simple fact that no one really knows how much Petro is worth. No one's really sure what exchanges offer it, either. The worst part about Petro is that no one really knows if anyone is purchasing and spending the tokens.
Paymon may have an advantage in that it is not designed to be a domestic payment system. It is designed for international payments between Iranian and international entities. If Iranian leaders can convince their counterparts in other countries to allow the token to be used, there would instantly be a market for it.
Cryptocurrency is not going away
Both Venezuela and Iran have developed their state-back cryptos out of necessity. They have to keep their economies going despite sanctions designed to cripple them. If they succeed, they will be laying the groundwork for other countries to develop state-backed tokens. So despite how any of us feel about the politics here, one thing is clearly being demonstrated: cryptocurrency is not going away.
Iran may discover that Paymon is the perfect solution for their sanctions problem. Should they then extend crypto to citizens through a rial-backed token, they could become the first country on the planet to fully embrace crypto across the board. Imagine that.