It’s your first day in office as the new democratically elected leader of Iran. What do you do?
I’ll lay out the problems you face first. Think of it like a leader’s brief. Then you can tell me how to get out of this mess.
The US has re-imposed economic sanctions. They hurt. A lot.
Your currency has collapsed. The official exchange rate is 42,000 rials to the dollar. The real rate is closer to 150,000. Inflation was 31% last year. The IMF predicts it’ll be 37% this year.
That’s because a massive chunk of your revenues come from oil. If you can’t sell oil, it’s going to be hard to survive. Oil revenues account for roughly a fifth of government income.
Not only are you getting locked out of the oil markets, you’re locked out of the banking system too. The sanctions are a two headed beast: you can’t export your oil and can’t get paid even if you could.
And things are getting worse. Six countries – including China and India – were exempt from the oil sanctions to begin with. Now they’re not. China’s has reduced its buying by 39%. India 47%. Donald Trump has claimed he’ll get your oil exports down to zero. Short of a meteor strike, that’s pretty much the worst case outcome for you.
So – what do you do?
Because you have to do something. You can’t just wait things out. There’s only so long the population will accept a shrinking economy and roaring inflation before… things get nasty. You need a plan. What is it?
One option is to shift your economy away from an over-reliance on oil. This may take several decades. And it would certainly require access to global banking/payment systems. It’s a long term strategy. But it’s not a short-term answer.
Another option is to lash out. Strike. Hurt your enemies. Make them realise that the sanctions – while effective – will have other, more unpredictable consequences. Perhaps you can break free that way: launch the drones.
Or you can try to circumvent parts of the sanctions. Create a new currency. Build out a new payment system. Or tap into a pre-existing one – something the US government cannot control…
OK. Let’s take a step back while you figure out what you’d do. You can submit your strategic battle plan to email@example.com if you like.
This is the situation Iran’s leadership finds itself in. And those solutions are roughly the options it can pursue. It has already released the drones. What’s it doing to circumvent the sanctions?
That’s where bitcoin and other cryptocurrencies enter the mix.
See, the crackdown on oil hurts. That’s Iran’s key export. But locking Iran out of the banking and payments systems – while less immediately obvious – is equally damaging. It shows just how much power the global reserve currency status confers on a country. The US may have the mightiest military on the planet. But it also has economic powers that cannot – yet – be matched.
That’s because countries need dollars. In this case, to buy oil or other commodities. They need access to the banking system. Control that and you wield a weapon that can bring a country to its knees without any military intervention.
At least, that’s the theory.
This is likely why Iran has been turning to bitcoin. In the last year it has been increasingly welcoming of bitcoin miners from around the globe. According to regional paper Iran Daily there are as many as 100 ‘unauthorised’ bitcoin mining sites in Iran – including one in a Mosque.
Unauthorised. But for how long?
It’s a neater solution than you’d first think. And it fights the sanctions on two fronts. I’ll walk you through it step by step:
Iran can’t export oil easily. But its internal economy is awash in the stuff. As yet, no one has stopped the Iranians from pumping their own oil.
This means energy inside Iran is extremely cheap. Electricity prices are low compared to most places.
Mining bitcoin is energy intensive. Bitcoin is first paid for in energy. Cheaper energy = cheaper bitcoin.
Therefore bitcoin miners are incentivised to move inside Iran’s border to take advantage of cheap energy.
In this way, Iran can effectively turn its oil into currency, by way of cheaper electricity prices. It may not be a particularly stable currency when compared to the pound or dollar. But compared to the rial – which is collapsing – it’s a decent option.
And bitcoin is plugged into a decentralised payment system. This means the US cannot control it in the same way as it can influence the dollar based system.
Which is the whole point of the crypto revolution. Why should one country have such control over the global payments network? There’s no reasonable answer to that question beyond “because it can”.
You might may think it’s right to sanction Iran. Or you may not. That’s beside the point I’m making – which is that cryptocurrencies will ultimately result in another way to move forward.
I don’t know if bitcoin is developed enough to provide a genuine alternative for Iran right now. But it’s an interesting test case.
And by the way, it’s one of many. As Sam Volkering is constantly telling me, we’re seeing increasing numbers of major institutions/countries experimenting with cryptocurrency.
If the 2017 boom was characterised by individuals discovering crypto, what we’re seeing now is being driven by massive organisations. Banks. Multinational corporations. Whole nations.
Sam reckons soon the entire space will be dominated by these big beasts. The crypto space will be either run or driven by them, as the stock, bond and commodity markets are today. That means you’re running out of time if you want to claim your own little stake in the movement before that happens.
Publisher, Exponential Investor