Destroyed by debilitating hyperinflation, The Iranian parliament has approved the changeover of its fiat currency – the rial – and replaced it with a new currency called Toma. Take according to the plan It will be worth 10,000 rials.
The changeover plan effectively removes four digits (four zeros) from the Iranian national currency to initiate an economic recovery in the country. It is a measure that reflects the actions of other countries such as Venezuela and Zimbabwe amidst enormous inflation.
With the United States withdrawing from its nuclear deal with Iran and reinstating sanctions, the country’s economic situation has started to spiral downwards. Practically frozen on an international level, Iran faced a severe liquidity crisis and a lack of foreign exchange.
In general, people in countries affected by an economic crisis are turning to cryptocurrencies not only to maintain wealth, but also as a means of performing international transactions. The case of Iran is no different: the price of Bitcoin (BTC) on peer-to-peer exchanges like LocalBitcoins even rises to an impressive 300%.
Iran’s fight against hyperinflation
In May 2018, the President of the United States, Donald Trump, gave up the joint comprehensive action plan – commonly known as the nuclear deal with Iran sanctions again imposed on Tehran. This decision put enormous pressure on the country’s already fragile economic situation. Babak Behboudi, CEO of the innovation company Blockchain Synchronium, commented on the impact of the U.S. sanctions on Iran as follows:
“”US sanctions have been the main problem facing the Iranian economy in recent yearsthat paralyzed an important part of the economy. In an economy like that of Iran, where a significant portion of the economy remains state-owned, these sanctions hinder economic stability and growth. “
During the entry into force of the agreement, the Iranian economy was open to the international scene and benefited in particular from increased oil exports. As a matter of fact The country’s president, Hassan Rouhani, conducted his 2017 election campaign based on programs that would take advantage of the opportunities offered by the agreement with the United States.
However, it is clear that the rial deteriorated even before the United States rejected the nuclear deal, with the country’s inflation rate more than tripling between 2017 and 2018. In fact, the sanctions were lifted in 2016, and it was not designed to boost real GDP growth. Between 2017 and 2018 there were protests in many Iranian cities, which expressed, among other things, dissatisfaction with the rising cost of living. In August 2018, the Iranian rial had lost more than 80% of its value in just one year.
In the face of a rapidly deteriorating economic situation, the central bank began to impose currency restrictions, a measure to curb the foreign exchange black market. L.The increasing devaluation of the rial meant the emergence of a growing margin of supply and demand in Nima, the country’s secondary currency market.
At the beginning of May 2020, the difference between supply and demand, the difference between the buying and selling rates of foreign currencies, was around 9,000 rials. Nima exporters in Iran take advantage of the Nima, and the widening gap between supply and demand in the market means that profits have to be made abroad at a much cheaper price, which in turn hurts the profitability of these companies.
The existence of a secondary currency market is partly due to the inability of the authorities to create a single exchange rate. The government’s failure in this regard led to a higher percentage of foreign exchange transactions being shifted to the black market, where participants could speculate with the endless volatility of the rial-dollar exchange rate.
At the time of writing this article while the official government rate is around 42,000 rials per dollarthe black market rate is almost four times higher – with one dollar being sold for 163,500 rials. In fact, the nima rate has also started to approach black market numbers $ 1 for 157,320 rials.
Currency conversion plans
Iran’s economic situation was not supported by the COVID 19 outbreak, which has seen the country’s currency plunge since February. The country has been hit hard by the fatal corona virus, which has killed more than 6,500 people, with around 104,000 cases since the first confirmed infection in mid-February. According to a April World Bank report, the country’s GDP growth will continue to lag due to falling oil revenues. The report says:
“”The continued decline in oil prices and export volumes (for example due to the significant decline in Chinese oil demand) would lead to a general shock and a much larger budget deficit in 2020/21“”
On Monday, May 4, 2020, the Iranian parliament approved the changeover of the country’s fiat currency, removed four zeros and replaced the rial with the toman. According to the plan, each toman is worth 10,000 rials. The move, which has been going for more than a year, started with a draft law drawn up by the governor of the Iranian central bank. The decision to convert also represents a change in Iran’s usual approach by devaluing its currency It has happened 3,500 times since 1971.
Some commentators, like government spokesman Ali Rabiei, said the measure will help simplify financial transactions in the country. Critics of the plan believe, however, that it will not solve the fundamental problems that affect the economy.
Tehran is late for the party
Speaking to Cointelegraph, Ali Beikverdi, CEO of the bitHolla exchange, said that the Iranians have already been renamed the country’s decree to serve a variety of purposes. According to Beikverdi: “Denoming the currency in a country does not solve a financial or economic problem. All it does is inflation. However, I have to say that this has been a topic of debate in Iran for some time.“Beikverdi explained the confusion caused by the country’s numerous landmarks, adding:
“While banknotes use the Iranian rial, people are already dropping a zero and calling it take. One take = 10 rials today. To add to the confusion, people are even dropping three more zeros to make the numbers smaller, and that’s very confusing if you’re not familiar with it. ” For the sake of simplicity, the face value of the coin has already occurred in humans, and this is nothing new.“”
Given the country’s multi-currency benchmarks, the government’s switchover plan may have difficulty achieving the desired results, particularly given the historical primacy of such measures. It is too early for Behboudi to determine the effectiveness of the government’s plan and to argue that removing four zeros from a coin in itself will have little impact:
“Such an effort can be a good little step in a number of serious, broader and more effective reforms, including la well-planned privatization of the economy, the decline in spending on the monetary system and the facilitation of banking“”
Speaking to Cointelegraph, a Iranian Treasury spokesman mocked the plan to create a new fiat currency for the country, saying:
“Everyone in the country knows that The changeover has no impact on inflation. Most economists believe that this is not a sustainable time for the changeover. Due to the price of coronavirus and oil, government revenues have dropped sharply and costs have risen at the same time. thats why We expect high inflation“”
Bitcoin enters the scene
Amid plans to renew the Iranian currency, Cointelegraph turned to Areatak, a blockchain solution provider based in Tehran. In May 2019, Cointelegraph reported that Areatak – in collaboration with the Iranian Central Bank’s Information and Services Corporation – developed Borna, a national blockchain project to transform the country’s banking and financial sector. In a message to Cointelegraph, Saeed Khoshbakht, Areatak’s CEO, revealed the latest updates to the project and said:
“”Borna’s infrastructure and platform has passed the first test phase and will be ready to start soon.. As mentioned in the white paper, Borna can house the central bank’s cryptocurrency, and maybe it will be used in this economic development. However, the decision rests with the central bank and the Islamic World Science Citation Database. “
As the government tries to solve the growing problem of inflation, those interested in cryptocurrencies in Iran say the situation favors a wider adoption of cryptocurrencies. Indeed, senior government and military officials in the country have called for the use of digital currencies to avoid crippling US sanctions. Khoshbakht commented the increasing acceptance of cryptocurrencies in Iran as follows:
“”If we analyze the acceptance of the use of cryptocurrencies in the world, we find two types of countries in the first row. Countries without digital payment systems and countries with high inflation. Due to the high inflation in Iran, people don’t trust the local currency and try to buy everything like real estate, gold, stocks and other currencies like the US dollar. and the cryptocurrency. “
Tehran’s stance on cryptocurrency mining has been significantly weakened as the authorities have allowed Bitcoin miners to settle in the country. As reported by Cointelegraph, Iran has issued around 1,000 licenses for cryptocurrency miners in the country.
Related: Five countries where cryptocurrency regulation made the most changes in 2019
At the beginning of May, the country’s Ministry of Industry, Mining and Trade also gave the Turkish cryptocurrency company iMiner the green light Construction of a 6,000 rigs facility in the province of Semnan. Iran has also granted tax breaks to crypto miners, provided that they return all of the revenue earned abroad. According to Behboudi, cryptocurrencies are facing even greater acceptance in Iran, adding:
“”Cryptocurrency mining, holding and trading, especially BTC and ETH, are common in Iran. I am sure that the public, especially the middle class, will invest more in cryptocurrencies like BTC in the coming months“”
For Beikverdi, the country’s economic crisis is only paving the way for more people to choose cryptocurrencies. “”As soon as you find that your currency will lose more than five times its value in about two years, as an investor, look for alternatives to secure the value“commented the CEO of bitHolla.
In fact, Bitcoin’s P2P trading data has shown significantly higher BTC premiums in Iran since the early 2020s. At LocalBitcoins, Bitcoin was consistently sold at 300% to 400% of the global average spot price.
While Bitcoin was trading around $ 7,800 in early January, The BTC list price for LocalBitcoins was over $ 25,000. While BTC recovered from the Black Thursday crisis on March 12, the cryptocurrency was apparently trading for $ 21,000, while the global average was $ 5,200.