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Risks of Virtual Currencies in Iran
Dr. jur. Ali Ettefagh*
This article intends to deal with issues and realistic risks related to virtual currencies that
have become phenomena in the last two years. Although the term “currency” by itself is
a misleading description, it has become an accepted description of essentially a few sets
and files of digital records in cyberspace whilst many legal questions and obstacles remain
unanswered: how it can be framed within existing laws, common perceptions, trade
customs and practices in domestic and international business.
The second goal of this paper is about what other peculiarities of such phenomena and
trendy international products, or concepts of value, can fit within the legal system and
financial environment in Iran.
To start, it is first necessary to have an understanding of a common set of terms in
reference to virtual currencies, how it all operates and circulates, and how the traditional
sovereignty of governments and their structural legal agencies and instrumentalities in
independent and sovereign states can officially function. Moreover, how enforcement of
existing laws, implementation of macroeconomic and financial policies, circulation of
money for valuable things for transactions of the private sector can be stacked up,
monitored, audited, and defined as economic activity or how it can all be analysed for the
potential risks of payment by virtual currencies in respect to illegal or illicit transactions
and crimes, including money laundering and financing of Terrorism (ML/FT) risks or
how it can be taxed.
As lawmakers, regulators and law enforcement officials around the world begin to
grapple with the challenges presented by virtual currencies, it is apparent that a common
vocabulary and definitions to accurately reflect the different forms virtual currency might
be missing. It is also important to recognize that such vocabulary and common sets of
definitions are fluid for they change rapidly along with evolution of technology and as
legal aspects and potential risks, mitigation of exposure, shortcomings and monitoring
However, the proposed terminology in this paper can provide a common reference for
developing a set of conceptual tools and a basis for better understanding of how virtual
currencies operate. Concurrently it is an attempt to decipher the risks and potential
benefits that might be offered.
Virtual currency is a digital representation of deemed value that can be digitally traded.
It can function as (1) a medium of exchange in lieu of legal tender; and/or (2) a unit of
accounting; and/or (3) a store of value. But virtual currencies do not have legal tender
status (i.e., when tendered to a creditor, is a valid and legal offer for payment) in any
jurisdiction. It is not issued nor guaranteed by a sovereign state or backed by a
traditionally recognized financial institution in any country or by an international
organisation. The root of its function is a mere acceptability by agreement within a
community of users of such virtual currency. Therefore, the application of the word
“currency” might be a misnomer or to mean that its acceptance has gained currency (of
acceptance), rather than being a form of money.
Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real
money,” or “national currency”), the commonly known coin and paper money
authorized, and issued, by a sovereign state that is designated as legal tender in that
country and legally allowed to circulate in customary use, as a recognized medium of
exchange in the issuing country (or increasingly in other countries within global trading
systems). It is physical and tangible and therefore distinct from e-money, which is a
digital representation of fiat currency used. In any case, e-money is essentially an
electronic certificate of fiat currency to enable an electronic transfer value denominated
in fiat currency in digital transfer and bookkeeping mechanism for fiat currency—i.e., it
electronically transfers value that has legal tender status.
Digital currency can mean a digital representation of either virtual currency (non-fiat)
or e-money (fiat) and thus is often used interchangeably with the term “virtual currency”.
(In this paper to avoid confusion, only the terms “virtual currency” or “e-money” are
Exchangeability of virtual currencies
This paper divides virtual currencies into two basic types of (i) convertible, and (ii) nonconvertible types of virtual currency. Although the synonyms of “non-convertible” and
“closed” are compared with “convertible” and “open”, it should be clarified that the
notion of “convertible currency” does not in any way imply an ex officio exchangeability
(e.g. in the case of gold standard), but rather a de facto exchangeability into fiat
currencies associated with the presumption that a market exists. Thus, a virtual currency
is only “convertible” into fiat currency so long as some private participants in a market
make bids and offers in exchange for fiat currency (or the e-money form of legally issued
currency). The “exchangeability” if virtual currency is not guaranteed by law of any
Convertible (or open) virtual currency has an exchangeable value in real currency and
can be exchanged back-and-forth for real currency. Non-convertible (or closed)
virtual currency is intended to be specific to a particular virtual domain or world, such
as a Massively Multiplayer Online Role-Playing Game (MMORPG) or Amazon.com
(essentially gift certificates), and under the rules governing its use, and it cannot be
exchanged for fiat currency. Reward “points” in frequent flyer programs or customer
loyalty programs of retailers are other examples of non-convertible virtual currencies that
might be exchanged for goods, services, transportation or other items of value.
Under terms and “house rules” set by the administrator, a non-convertible currency may
only be transferrable within a specific virtual environment set by contract and it is not
otherwise convertible. However, it could be a potential and presumption that an
unofficial, secondary black market, or unregulated bilateral bartering mechanisms, can set
up opportunities to exchange “non-convertible” virtual currency for fiat currency or
another virtual currency. Some traces of barter or trade in frequent flyer points or
customer loyalty points can be found in ad hoc circumstances.
Generally, the basic conditions of non-convertible character of such currencies are
spelled out in the basic contract and house rules. Administrators often apply sanctions
(including termination of membership and/or forfeiture of remaining virtual currency) to
those seeking to create or form a secondary market, contrary to such rules for such
currency (although such rules are essentially a mechanism to protect the administrator
from falling foul of national rules and laws that regulate fiat currencies that are issued by
sovereign states in each jurisdiction). Thus, the development of a robust secondary black
market in a particular “non-convertible” virtual currency may, as a practical matter but in
a relatively limited realm of practice, effectively transform it into a convertible virtual
currency. As such, non-convertible characterization is not necessarily static.
Centralized versus non-Centralized Virtual Currencies
All non-convertible virtual currencies are centralized: by definition, they are issued by a
central authority that establishes rules making them non-convertible. In contrast,
convertible virtual currencies may be either of two sub-types: centralized or
Centralized Virtual Currencies have a single administrating authority
(administrator)—i.e., a third party that controls the system. An administrator issues the
currency; establishes the rules for its use; maintains a central payment ledger; and has
authority to redeem the currency (or withdraw it from circulation). The exchange rate
for a convertible virtual currency may be either floating— i.e., determined by market
supply and demand for the virtual currency--or pegged—i.e., fixed by the administrator
at a set value measured in fiat currency or another real-world store of value, such as gold
or a basket of currencies. The Special Drawing Rights (SDR), a designated unit of
calculation of foreign exchange reserves of countries used by the International Monetary
Fund (IMF) is an early example of such convertible virtual currency before the dawn of
the Digital Age and frequent flyer or customer loyalty programs. The SDR was
introduced in 1969 by the IMF and designed to supplement a shortfall of preferred
foreign-exchange reserve assets, namely gold and the U.S. dollar reserves of member
countries of IMF. The IMF allocates SDRs to member countries. Private parties or
banks do not hold SDRs.
The value of SDR is pegged to a basket of international fiat currencies (U.S. Dollar,
Euro, Chinese Yuan and Pound Sterling) and the mix of the basket is reviewed and
adjusted every five years to reflect the prominence of these currencies in international
trade and national foreign exchange reserves of member countries.
The SDR was set up when the Gold Standard was the commonly accepted basis of
calculating the financial reserves of a country. Under the Bretton Woods system of fixed
exchange rates the SDR was pegged to the U.S. Dollar at a 1:1 ratio, equal to 0.888671
grams of gold. After the collapse of fixed exchange rates, and American abandonment
of the peg of U.S. Dollar to gold prices in early 1970s, the SDR became a (mostly)
statistical unit of calculation in 1972. However, it continues to serve as an early example
of a Centralized Virtual Currency used for a specific purpose.
Many other multilateral organizations and regional development banks (such as African
Development Bank, Arab Monetary Fund, Asian Development Bank, Bank for
International Settlements, Common Fund for Commodities, East African Development
Bank, Economic Community for West African States, International Centre for
Settlement of Investment Disputes, International Fund for Agricultural Development
and Islamic Development Bank) use the SDR for units of account and overall statistical
unit of accounting uniformity and as a way to reduce exchange rate volatility in
international markets that trade exchangeable national currencies. The SDR is also cited
as the basis of calculation for settlement of liabilities under treaties and international
conventions between sovereign states. (The Convention on Limitation of Liability for
Maritime Claims 1976 or The Montreal Convention for the Unification of Certain Rules
for International Carriage by Air 1999 are some examples.)
Currently, the vast majority of virtual currency transactions involve centralized virtual
Decentralized Virtual Currencies (a.k.a. crypto-currencies) are distributed, opensource, math-based peer-to-peer virtual currencies that have no central administrating
authority, and no central monitoring or oversight. Examples in this category are Bitcoin
Cryptocurrency refers to a math-based, decentralized convertible virtual currency that is
protected by cryptography. It incorporates principles of cryptography to implement a
distributed, decentralized, and secure information economy.
Cryptocurrency is set up on public and private digital keys to transfer deemed value from
one beneficiary (individual or entity) to another, and must be cryptographically signed
each time it is transferred. The safety, integrity and balance of cryptocurrency ledgers is
ensured by a network of mutually distrustful parties (in Bitcoin, referred to as miners)
who protect the network in exchange for the opportunity to obtain a randomly
distributed fee (in Bitcoin it is a small number of newly created Bitcoins, called the
“block reward”. In some cases, it could also be a transaction fee paid by users or as an
incentive for miners to include their transactions in the next block). Hundreds of
cryptocurrency specifications have been defined, mostly derived from Bitcoin, that use a
“proof of work system” to validate transactions and to maintain the block chain of
transfer or conveyance of deemed value from one to the next beneficiary. While Bitcoin
provided the first fully implemented cryptocurrency protocol, there is growing interest in
developing alternative, potentially more efficient proof methods, such as systems based
on “proof of stake”.
Anonymiser (anonymising tool) refers to digital tools and services, such as dark nets
and mixers, designed to obscure the source of a Bitcoin transaction and facilitate
anonymity. (Examples: Tor (dark net); Dark Wallet (dark net); Bitcoin Laundry (mixer)).
Mixer (laundry service, tumbler) is a type of Anonymiser that obscures the chain of
transactions on the blockchain by linking all transactions in the same Bitcoin address and
sending them together in a way that makes them look as if they were sent from another
address. A mixer or tumbler sends transactions through a complex, semi-random series
of dummy transactions that makes it extremely difficult to link specific virtual coins
(addresses) with a particular transaction. Mixer services operate by receiving instructions
from a user to send funds to a particular Bitcoin address. The mixing service then
“comingles” this transaction with other user transactions, such that it becomes unclear to
whom the user intended the funds to be directed. This essentially emulates the fungible
characteristic of cash forms of fiat currencies.
Tor (originally, The Onion Router) is an underground distributed network of
computers on the Internet that conceals the true IP addresses, and therefore the
identities of the network’s users, by routing communications/transactions through
multiple computers around the world and wrapping them in numerous layers of
encryption. Tor makes it very difficult to physically locate computers hosting or
accessing websites on the network. This difficulty can be exacerbated by use of additional
tumblers or anonymisers on the Tor network. Tor is one of several underground
distributed computer networks, often referred to as dark nets, cypherspace, the Deep
Web, or anonymous networks that participants use to access content in a manner
designed to obscure their identity and associated Internet activity.
Dark Wallet is a browser-based extension wallet that seeks to ensure the anonymity of
Bitcoin transactions by incorporating the following features: auto-anonymiser (mixer);
decentralized trading; uncensorable crowd funding platforms; stock platforms and
information black markets; and decentralized market places.
Cold Storage refers to an offline Bitcoin wallet—i.e., a Bitcoin wallet that is not
connected to the Internet. Cold storage is intended to help protect the stored virtual
currency against hacking and theft.
Hot Storage is an online Bitcoin wallet. Because it is connected to the Internet, hot
storage is more vulnerable to hacking/theft than Cold Storage.
Local Exchange Trading System (LETS) is a locally organized economic
organization that allows members to exchange goods and services with others in the
group. LETS use a locally created currency to denominate units of value that can be
traded or bartered in exchange for goods or services. Theoretically, Bitcoins could be
adopted as the local currency used within a LETS.
An exchanger (also sometimes called a virtual currency exchange) is a person or
entity engaged as a business, and for a fee, exchanges virtual currency for real currency,
legal tender funds, or other virtual currencies and or precious metals and commodities or
vice versa. Exchangers generally accept a wide range of payments, including cash, wire
transfer of legal tender currencies, credit cards (denominated in fiat currencies), and or
other virtual currencies. An Exchanger can be administrator-affiliated, non-affiliated, or
a third party provider service. Exchangers act as a bourse or market facilitator as well as
the custodian of such assets (real or virtual currencies). Individuals typically use
exchangers to deposit and withdraw money from their virtual currency accounts.
An administrator is a person or entity engaged as a business of issuing (putting into
circulation) a centralized virtual currency as well as establishing the rules for its use and
maintaining a central payment ledger while apportioning of the authority to various
persons whom can redeem (withdraw from circulation) the virtual currency.
A user is a person/entity who obtains virtual currency and uses it to purchase real or
virtual goods or services or send transfers in a personal capacity to another person (for
personal use), or one who holds the virtual currency as (personal) investment.
Users can obtain virtual currency in several ways. For example, they can (1) purchase
virtual currency, using real money (from an exchanger or, for certain centralized virtual
currencies, directly from the administrator/issuer); (2) engage in specific activities that
earn virtual currency payments (e.g., respond to a promotion, complete an online survey,
provide a real or virtual good or service); (3) self-generate units of the virtual currency by
"mining" them, and receive them as gifts, rewards, or as part of a free initial distribution
in a decentralized realm (e.g., Bitcoin).
A miner is an individual or entity that participates in a decentralized virtual currency
network by running special software to solve complex algorithms in a distributed proofof-work or other distributed proof system used to validate transactions in the virtual
currency system. Miners may be users, if they self-generate a convertible virtual currency
solely for their own purposes, e.g., to hold for investment or to use to pay an existing
obligation or to purchase goods and services.
Miners may also participate in a (bid and or offer) trading market of virtual currency
system as exchangers, as they create the virtual currency as part of a business in order to
sell it for fiat currency or other virtual currencies. Such trades of buy and sell (in
exchange for real money, in traditional legal systems) or a swap and exchange of one
deemed value for another deemed value (when two different virtual currencies are
Virtual currency wallet is the software application or other mechanism/media that
facilitate holding, storing and transferring Bitcoins or other virtual currency for a
A wallet provider is an entity that provides a virtual currency wallet and the means
(software application or other mechanism/media) for holding, storing and transferring
Bitcoins or other virtual currency and related data. A wallet holds the user’s private keys,
which allow the user to spend virtual currency allocated to the virtual currency address in
the block chain. A wallet provider facilitates participation in a virtual currency system by
allowing users, exchangers, and merchants to more easily conduct the virtual currency
transactions. The wallet provider maintains the customer’s virtual currency balance and
generally also provides storage and transaction security. For example, beyond providing
Bitcoin addresses, the wallet may offer encryption, multiple key (multi-key) signature
protection, backup/cold storage, and mixers. All Bitcoin wallets can interoperate with
each other. Wallets can be stored both online (“hot storage”) and offline (“cold
storage”). (Examples: Coinbase; Multibit; Bitcoin Wallet).
Additionally, various other entities may participate in a virtual currency system and may
be affiliated with or independent of exchangers and/or administrators. These include
web administration service providers (a.k.a. web administrators); third party
payments senders facilitating merchant acceptance; software developers; and
Applications and software development can be for legitimate purposes—e.g., to increase
ease of merchant acceptance and customer payments or to respond to legitimate privacy
concerns—or for illicit purposes—e.g., a mixer developer/operator can target illicit users
with products designed to avoid regulatory and law enforcement scrutiny.
It must be emphasized that this list of participants is not exhaustive. Moreover, given the
rapid development of virtual currency technologies and business models, additional
participants could arise within virtual currency systems and pose potential money
laundering and terrorism financing (ML/FT) risks.
Types of Virtual Currencies
|Convertible||Administrator, exchanger(s), users,
Can be exchanged for real money
|Exchanger(s), users (no
administrator), no Trusted Third
Can be exchanged for real money
Non-convertible Administrator, exchanger(s), users;
Cannot be exchanged for real
(Example: World of Warcraft Gold,
airline frequent flyer points)
Does not exist
Like other new methods of payment, virtual currencies have legitimate uses. Prominent
venture capital firms are actively investing in virtual currency start-ups. Virtual
currencies have the potential to improve payment and settlement efficiency, reduce
transaction costs for payments and fund transfers and bypass traditional banking
channels and intermediaries in transfer, exchange and delivery of real currency payments
As the most tangible example, Bitcoin functions as a global “currency” and avoids
exchange fees; it is processed with lower fees and auxiliary charges of traditional credit
and debit cards; and may potentially provide benefit to existing online payment systems
(e.g. Paypal). Virtual currency may also facilitate micro-payments, allowing businesses to
monetize very low-cost goods or services sold on the Internet, such as onetime game or
music downloads. At present, as a practical matter, such items cannot be sold at an
appropriately low per/unit cost because of the higher transaction costs associated with
traditional credit and debit cards or payment transfers by banks.
Virtual currency may also facilitate international remittances and support financial
inclusion in other ways, as new virtual currency-based products and services are
developed that may potentially serve the under- and un-banked markets in the
developing world. Virtual currency, notably Bitcoin, may also be held for investment. It
has recently gained recognition as an investment grade product as it is now an exchangetraded “commodity” on the Chicago Mercantile Exchange, along with future contracts
for major currencies vs. U.S. Dollar.
Therefore such potential benefits need to be carefully analysed, including whether
claimed cost advantages will remain if virtual currency becomes subject to regulatory
requirements and on par with other payments methods by means of legal tender
currencies. Moreover, and if fees for exchange into fiat currencies are factored in, will
market volatility, consumer protection laws and other traditional factors (such as
monetary policies and control of money supply) as well as macro fiscal regimes of
sovereign states, trading blocks and treaties (the Euro Zone), movement of national
currencies across borders, regulatory, supervisory and conflict of national laws limit the
potential of virtual currencies? With such anomalies and non-conforming characteristics,
will such limitations bar the entry or inclusion of virtual currencies in the global financial
Sovereignty of states
Fundamental and comprehensive control of economic activity and financial borders are a
tradition and essential elements of a country. It is inseparable from definition of a
sovereign state. The crux of regulatory decisions, government policies and national laws
focus on separation of valuable (tangible or intangible or intellectual) property whilst
existing laws of every sovereign country set specific rules, methods and limits on
transactions, transfer of ownership, payments and legal tender. Sovereign states deem
themselves to be the regulator and the sole authority and source to monitor transactions,
arbitrate and adjudge settlements, define income and tax flows of valuable activity (if
only to pay for such authority and functions of the sovereign government).
All such functions are the essence, and historic definition, of sovereignty of states and
countries. It defines independence, governance, control over economic interests and
activities, property and money within set rules and inter alia traditions that define
economic interaction and transactions.
Virtual currencies and other cyber-based financial or monetary instruments intend to
negate, bypass or counter such sets of controls by jumping over borders, and set aside
sovereign controls by operating in the unregulated cyberspace. Thus, virtual currencies
fundamentally infringe on such powers of sovereign states or otherwise amputate the
controls of governments and states (supervision of ownership, flow of capital, taxation,
money supply and thus inflation, money laundering, etc.).
Assuming that the existence of such virtual currencies can be framed in a legal and
regulatory structure, it is most likely that sovereign states will intervene in governance or
perhaps the fundamental existence of such virtual currencies that merely exist in form of
digital codes in the unregulated cyberspace realm. Thus, a clash of intentions is inherent.
The governing powers presume that such mechanisms of virtual currencies are
intentionally set up to contravene laws and regulatory supervision of a sovereign state, or
to destabilize its economic system. The economic wellbeing of a country is detrimental
to its existence and sovereign states deem it to be an infringement on their powers.
Hence the potential for a collision between the governors and the governed, in an
alternative, underground realm or bypass via cyberspace, is a clear and present matter of
concern for most countries.
Some countries might simply interpret it as an undeclared economic war against its
sovereignty— by an unknown set of enemies akin to terrorist activities. China, Russia,
Iran, South Korea, many Arab and African countries have laws that criminalize
destabilization of their economic order (or master plans that are centrally organised and
dictated) on par with “financial terror” or treason, and such acts are punishable by death
or long prison sentences.
Changes to, or interpretation anew of, existing laws, regulatory frameworks or
restrictions, or different approaches to bans and licensing will probably need a widely
cast scope. If states and governments decide to get along and live with these new
methods and instruments, it will inevitably lead to a change of paradigm in legal,
customs, practices and definition of many fundamental aspects of property and
ownership, transfer and conveyance of beneficial ownership, recording and evidentiary
proof of transactions (covering payments, exchange of value and thus definition of
economic activity), taxation and filters to ban tax avoidance or evasion in addition to
mechanisms of defined channels of reporting, supervision, audit, affirmation and
adjudication of transactions. Developments and interpretation of such new aspects by
regulatory agencies, courts and technical experts always lag behind these matters by in a
few years when rapid developments in technology always pace ahead of such
interpretations and rule making.
The second pillar of such structural review and revision will directly impact money
supply and control of it, debts of the private and public sectors to each other (internally
and internationally, including registration and metrics of such debt supplies) as well as
substantive control, and policies, over money supply of any country in circulation, the
measurement and metrics of value of the real currency as the central point of focus,
interest rates (set by supply and demand for real currency), exchange rates in
international markets and the final determination of what part of a the domestic product
in a country and state can safely fall outside the instruments of measurement and
statistical calculations within the “unregistered” or “underground” economy (which are
currently based on the currency of legal tender in each country and can be measured by
Virtual currencies bypass these traditional metrics. The concept of quantifying economic
activity, as transacted by virtual currencies are by definition, unrecorded within the
economic realm. How could, for example, a barter of 8 hours of labour or a car or a
building be measured if it is settled in cyberspace in Bitcoins, without involving the
handing over or payment of the national real currency? In contrast, black markets and
unrecorded trades without an invoice still involve the national, fiat currency of such
transactions and payment via a bank account or a credit card.
Moreover, the concept of controls and adequacy of monitoring economical proceeds of
criminal activity must be revisited and redefined. This means a redefinition as well as an
expansion of money laundering laws and fortifying requirements, for full and frank
disclosure of all transactions, will be necessary. A knock-on effect must redefine basic
notions of what could constitute acts of money laundering and or whether financing or
facilitation of illegal activities (smuggling of narcotics or humans or other banned
products or substances, terrorist or destabilizing activities, computer hacking of financial
institutions) can be properly monitored, assessed and adjudicated. This goes against the
principle of anonymity that is inherent with virtual currencies.
Payments related trade of narcotics might serve as the most prevalent and chronic topics
in money laundering. Virtual currencies provide an exceptionally shadowy method to
move money for such activities across borders that, inter alia, aid in tax evasion and
payments in a completely anonymous manner. Other smuggling activities, and evasion
of customs duties can also be categorised in this manner. Without tools of monitoring,
proceeds of nsider trading, manipulation of markets, rigging of interest or exchange rates
or other illegal activities would find virtual currencies as a useful tool to bypass existing
rules and supervised regimes.
There is a general trend in modernisation of legal concepts and customs in progress.
Some examples address electronic documentation, same sex marriage (and issues about
inheritance and children and redefinition of a family), electronic communication and
modern day definitions of intellectual property dealing with software, limits of privacy
and government intrusion, proof and assessment of realistic transactions, international
tax reporting conventions and alike. These modern day topics remain inherent and tied
to sovereign authorities of states. But they remain inferior to presumed authority and
fundamental controls of a country over its internal, and external, economic and financial
activities that are deemed sensitive and priority topics for any country. These concepts
have never been trespassed or limited by international conventions or bilateral treaties.
There are no historical precedence that core sensitive and existential matters have ever
been subrogated to the fluid and uncertain behaviours and norms that tend to develop
and transform in the unregulated (and impossible to control) realm of cyberspace.
Global Order, multilateralism and compelled disclosures
Financial and global structures after the Second World War (in form of the United
Nations, International Chamber of Commerce and its definitions of commonly accepted
rules and practices, the Bretton Woods agreements that set up the IMF and the World
Bank, the formation of Bank for International Settlements “BIS” and its function as the
central bank for all central banks, Organisation for Economic Co-operation and
Development “OECD”, the European Bank for Reconstruction and Development
“EBRD” and many regional development banks in Asia, Africa or Latin America or the
Masstricht and Lisbon Treaties leading to the European Union) are designed to structure
a global order to money, economic activities and cross border transactions whilst
respecting the sovereignty and independence of countries. Exchange of information is
the common thread of these structures.
Further developments in international law (such as the United Nations Convention on
Contracts of the Sale of Goods in 1980 “CISG” or the United Nations Commission on
International Trade Law or UNCITRAL) are other examples of a worldwide search for
commonly defined structures to frame international transactions.
The fall of the Berlin Wall and redefinition of global systems of trade (WTO), expansion
of OECD, the formation of G20, other multilateral and regional structures and unions
(The European Union, CIS in former USSR, ASEAN in the Pacific region, or the
International Criminal Court) as well as the formation or de facto enforcement of
commonly adopted principles and rules that finally converge under the Financial Action
Task Force on Money Laundering (FATF) and parallel derivative customs and practices
on Counter-Terrorism Financing (CFT). These agreements aspire to establish inter alia
methods and common standards, understandings, customs and rules in financial
transactions, increase transparency, and remove anonymity or opaque covers for source
of funds, beneficial ownership, purpose of transactions and avoidance of sham and
veiled movement of resources around the world. Increasingly, these rules have led to a
coordinated set of rules and practices for full and frank disclosure of all details.
Virtual currencies, related parties and functionaries aided with software, cryptography
and deliberate masking and hiding of the source, origin, purpose and beneficiaries stand
in contrast with these modern rules of financial engagement and transactions. In fact,
they tend to fly in the face of such rules and transparency principles that are developed
over the last 25-30 years. It can sum up to a global rebellion against multilateral and
global order that demands transparency and accountability. It is not clear how such
contrasting thoughts and tendencies can concur and cohabitate. Inevitably, noncompliance with global rules of transparency and disclosure can lead to isolation or bans
from the financial highways of the globalized trade order.
By definition, convertible virtual currencies can be fluidly exchanged for real money or
other virtual currencies while jumping over traditional borders. As such, potential
vulnerability to money laundering and terrorist financing abuse leads a wide spectrum of
Such fluid and anonymous character intentionally break most rules and filters set up for
traditional noncash payments across borders. It essentially replaces, and negates,
traditional movement of cash and bank notes across borders and bypasses it within
cyberspace. As a follow thru, and if used as an alternative means of payment, virtual
currencies can break down the existing rules for disclosure of ownership in bonds and
debt instruments, shares in companies, derivatives such as options and swaps of financial
instruments and thus puncture the overall supervisory oversight of regulatory bodies and
agencies of sovereign governments and multilateral reporting conventions.
Virtual currency systems exist and operate on the Internet, and are generally
characterized by setting aside face-to-face customer relationships. This permits
anonymous funding (cash funding or third-party funding through virtual exchangers that
do not properly identify the funding source). There is hardly any requirement to identify
the parties, comply with “know your counterpart” or KYC rules and permit anonymous
transfers. It is also difficult to ascertain the present location of such resources, where (or
whether) it was legitimately earned.
Decentralized systems are particularly vulnerable to anonymity risks. For example, and
by design, Bitcoin addresses, which function as accounts, have no names or other
customer identification attached, and the system has no central server or service
provider. The Bitcoin protocol does not require or provide identification and
verification of participants or generate historical records of transactions that are
necessarily associated with real world identity, as verified by a government with an
identification document or a passport or by a fingerprint, DNA or eye retina scan.
There is no central oversight body currently available to monitor, identify or filter
suspicious transaction patterns, flow of funds from illegal transactions or attempts to
launder questionable money. Law enforcement cannot target one central location or
entity (administrator) for investigative or asset seizure purposes (although authorities can
target individual exchangers for client information that the exchanger may collect). It
thus offers a level of potential anonymity impossible with traditional credit and debit
cards or older online payment systems, such as PayPal.
The rapid portability of virtual currencies, from one corner of the world to another via
the Internet (including via mobile phones with disposable and anonymous SIM card
ownership), supersede the form of anonymity and portability that cash, gold coins or
bearer certificates and bonds offered as a traditional instrument of money laundering.
This global reach and rapid cycles of movement exponentially increase potentials in
ML/FT risks and abuse.
Likewise, virtual currencies commonly rely on complex infrastructures that involve
several entities, often spread across several countries, to transfer funds or execute
payments. Such segmentation of services means that responsibility for AML/CFT
compliance and supervision/enforcement may be unclear or simultaneously fall under
several, unsynchronised jurisdictions that fail to function around the world in a
coordinated pace and in tandem with global financial markets, across several time zones.
Customer and transaction records are held by different entities, often in different
jurisdictions. This makes it more difficult for law enforcement and regulators to access
such records. While countries recognise and respect each other’s borders, cyber
transactions do not. This problem is exacerbated by the rapidly evolving nature of
decentralized virtual currency technology and business models, including the changing
number and types/roles of participants providing services in virtual currency payments
Centralized virtual currency systems could be complicit in money laundering and could
deliberately seek out jurisdictions with weak AML/CFT regimes. To confuse tracking,
some components (and encrypted codes and keys) of a virtual currency system may be
located in different jurisdictions that do not have adequate AML/CFT controls or
adequately trained personnel with the necessary language skills or software literacy. In
the meanwhile, different components of computer codes (or keys) stored on different
computers in different parts of the world might not be easily and immediately identified
as harmful, destabilising or illegal instruments.
Decentralized convertible virtual currencies allow anonymous person-to-person
transactions and they exist in a digital universe entirely outside the reach of any particular
country. A fragment of a code stored on a computer in a country might, by itself, be
dismissed as meaningless. But it can serve as part of a larger mathematical formula
across several borders. This compartmental and fragmentation will overwhelm
personnel resources of most countries, as second-guessing of intentions can grow
Encryption of various computer codes, in different languages and with different levels
and coding strengths, mixed with communication in several languages, different
alphabets or misleading use of “code of codes”, or parcelling different parts of a single
message on different servers around the world are other handicaps and potential pitfalls
in investigations and follow thru with law enforcement in different countries.
It is simply impossible to develop universal methods and equipment to deal with such
vast variants of technological and machine-assisted tasks that run contrary, and
intentionally, against existing legal systems that focus on facts, investigation, proof, intent
and results. As such, these complications are universal and unprecedented matters of
concern for most countries and on a global basis.
Additional risks in Iran
Iran is no different than other countries. It remains venerable to all international risks
associated with virtual currencies. It has an “étatist” state-dominated legal environment
that has codified the need for licensing of most transactions or business activities. It is a
rigid and out-dated legal system that has not completely absorbed changes and modern
methodology of electronic transactions (albeit that the Law of Electronic Trade was
codified in 1382 H.S., or 2003 A.D., but it remains without further procedural definitions
that concur with local customs).
The body of Iranian laws, practice, interpretation, jurisprudence or commonly accepted
international standards of expertise remains to be further developed. And it turn, this
much depends of further development and training of personnel resources. Most
noteworthy is that the text of this Electronic Trade law incorporates English definitions
of the technical terminology, in English, to clarify the Farsi equivalent used as
descriptions, and as a way to communicate the intentions of this special law! In other
words, the otherwise rich and ancient Farsi language has not kept up with modern and
technical language in cyber-related terminology.
Other anomalies of standards (in adequacy of legal proof, documentation, points of
reference and or establishment of an “event” or “transaction”) continue to rely on older
laws of judicial procedure to adjudicate a specific matter. The Code of Civil Procedure
or the Code of Criminal Procedure, for example, do not address cyber-linked events to
allow a judge to adjudicate a case--even though the Code of Criminal Procedure was
updated and modernised 2013 A.D. (1392 H.S.).
Other main concerns in Iran deal with restrictions on transfer of national money, foreign
exchange and transfer of funds abroad. The realm of rule making for such transactions
are under the exclusive jurisdiction of the Iranian Central Bank. Unauthorised
transactions in foreign currency are a criminal offence of smuggling. In large scale, it
can be deemed as a treasonous offence intended to destabilise the sovereignty of the
State and punishable by death.
Finally, it remains to be adjudicated if a virtual currency transaction by an Iranian, and
the relevant obligations thereunder, is deemed to be a legal transaction. Article 10 of the
Civil Code of Iran specifies that private contracts of parties that are not in direct
violation of law are allowed. However, other parts of the Civil Code clarifies a
“transaction” must have a defined object, justification for the transaction (Art. 190, 336)
and enforceability of it (Art. 210, 216, 217, 218), tangibility of the objective (Art. 215,
229, 348), authority to transact (Art. 247, 269) or essential concepts of ownership in
many other articles of the Civil Code can easily raise questions and doubt about
“ownership” or “control” or “possession” of virtual currencies, definition of what is
actually owned (a set of digital codes and keys? Right to own data stored on an
unidentifiable server abroad? An intangible right to use or benefit from something, and
what is the legal definition of such benefit? Is it a tangible thing or item or a right and
claim, a contract for difference, and basis of such contract)? Finally, and if it is a matter
for the Central Bank to license, govern and authorise to be traded, how will such control,
reporting, monitoring and compliance with existing laws will handle the matter, especially
as the Banking and Monetary Law (Art. 11, 12 and 14) does not recognise the existence
of such virtual currencies and or something that the Central Bank has explicit and actual
authority to own, hold, or regulate?
Another aspect of Iranian law is that it deems foreign currency to be an object or a
valuable thing like gold coins, and not money or fiat currency (Art. 522 of Code of Civil
Procedure). The only fiat currency recognised under Iranian laws is Iranian Rial (Art. 1
of the Law of Money and Banking 1351).
Finally, there are a unique set of mostly unprecedented national or international sanctions
that restrict transactions of many foreign countries and nationals with the Government
of Iran (including its agencies and instrumentalities and its Central Bank) or any person
resident in Iran (be they Iranian or foreign nationals). This is a vast set of restrictions
imposed by many different countries and target various persons, entities, class of
transactions whilst it can frustrate or block conveyance or delivery vs. payment in foreign
currency (especially in U.S. Dollar) to an Iranian. This layer of additional complication in
trade of virtual currencies is unique to Iranians (plus a small number of other countries
such as North Korea, Cuba, Libya and a number of organisations around the world).
Thus, transactions can complicate or frustrate trade in virtual currencies by an Iranian in
Iran. Restricted access to foreign bank accounts, or credit cards, is one simplified
example of such obstacles (as credit cards are a common method to exchange virtual
currencies with fiat currencies and e-money).
Concurrently, and mostly on political grounds, Iran is generally accused of supporting
international terrorism. The interconnection of the Iranian banking system is restricted
on basis (or excuse, whether justified or not) that it is not a banking system in
compliance with FATF and CTF regulations mandated by most international
jurisdictions and banks. In turn, this gives rise to further complexity of flow of funds to
and from Iran to an international financial channel to fund or refund proceeds of dealing
in virtual currencies.
Dealing with virtual currencies and the related technological complexities requires an
international effort and unprecedented coordination. The point of convergence can be a
threat to sovereignty and financial stability of most countries, especially in countries that
have fully convertible currencies traded on world markets. The unknown “money
supply” of virtual currencies, and how much of it is issued or in circulation is a
destabilising factor, as it can rapidly destabilise traditional financial markets and interexchangeable fiat currencies.
As such, this faceless threat can be treated as another potential face of terrorism, i.e.
financial terrorism, which cannot be easily detected or forecasted. Therefore, the
following recommendations could start a global dialogue about such risks and threats.
Governments must ensure clarity of legal and regulatory frameworks:
Governments should strive for legal and regulatory frameworks that are clear in their
intent, scope and wording. A balance must be struck between clearly intended
regulations that are not overly prescriptive. This is would be a delicate and challenging
task, but an essential one.
Pursue adaptive, not reactive, regulation: Sovereign states and their governments
must be willing to step outside old paradigms. Financial crime risk management is now
defined anew and with more sophisticated facets. Technological innovations have
reshaped traditional AML/CTF practices or have supplemented it.
Governments should reduce reliance on out-dated regulatory frameworks. An emphasis
on accountability and transparency over complete control is likely to be most effective.
For example, banning highly anonymized crypto currencies would likely prove
impractical and counterproductive to broader efforts to promote virtual currency
innovation. Rather, there should be an emphasis on encouraging transparency at certain
points of access to those networks.
Enhance funding and training: Education is the key. Governments should ensure
staff have adequate knowledge of virtual currencies. This includes training on type and
derivatives, related challenges, risk assessments and forensic techniques in detecting
financial crimes using virtual currencies. Governments should also ensure law
enforcement can seize and confiscate virtual currencies. Regional and international
forums should include analyst exchange, sharing of information and collaboration
Engage in cross-border coordination: International organizations, such as FATF and
the Egmont Group, should facilitate collaboration between governments on appropriate
regulatory and law enforcement responses to virtual currencies. These dedicated
organisations should refrain from political matters, encourage and facilitate appropriate
information sharing, and develop variants and scenarios. Governments should establish
region-wide forums for sharing intelligence, resources and forensic solutions.
These forums should regularly review approaches to manage risks and offer views in
respect to combating such threats. Continued efforts should align closely with
international responses to cybercrime and illegal dark web activity.
Facilitate a positive role for industry: Governments should empower the virtual
currency industry to play a constructive role in the fight against financial crime.
Governments should establish forums for sharing information with the virtual currencies
Declare tax and legal amnesty: A worldwide, coordinated and one-time tax amnesty
can provide an opportunity for illegally obtained funds to enter and remain the legitimate
financial market. As such, laundered money on grounds of tax avoidance, or from other
questionable activity can once and for all enter the legitimate cycles of capital and money
in circulation. In turn, such move could substantially remove the volumes of
underground money that fund these unregulated virtual currency markets and inject it
into the legitimate financial system.
For Industry Participants
Continue to take an innovative, entrepreneurial approach to developing AML/
CTF solutions: Virtual currency industry participants should continue to explore the
potential for increasingly sophisticated tools and applications for managing financial
crime risk. Innovators should aim to achieve an appropriate balance between data
privacy and transparency. Government ought to encourage such innovations with
Establish intra-industry working groups: Collaborative exchanges are vital to ensure
that industry participants can tackle AML/CTF challenges. Stakeholders should create
formal collaborative working groups and associations that enable them to exchange
information about best practices and risk management solutions in the sector.
For Banks and Other Established Financial Sector Participants
Build knowledge and awareness of virtual currencies. Firms in the established
financial sector should ensure their staff understands virtual currencies, their applications
and related legal risks.
Establish AML/CTF collaboration with the virtual currency industry: Banks and
other financial sector players should work with the virtual currency industry to establish
formal cross-sector partnerships aimed at building strong financial crime risk
management practices related to virtual currencies and Distributed Ledger Technology
applications. This could occur bilaterally or more broadly, for example through formal
networking arrangements, working groups or associations.
Virtual currencies and related technology present a challenge for the public and private
sectors. On the one hand, the financial crime risks of virtual currencies are real, even if
they are still immature and evolving. Established criminal and terrorist organizations
have yet to use crypto currencies on a widespread scale. As the scope of their
involvement in online crime grows, the use of crypto currencies by these actors could
expand. Cybercriminals are increasingly turning to crypto currencies in their operations,
demanding new law enforcement approaches and techniques.
On the other hand, virtual currencies and related technology – particularly Distributed
Ledger Technologies (or Blockchain) – offer a number of potential benefits. For
example, they could contribute to financial inclusion and make the delivery of financial
services more efficient and effective. Governments must be careful not to stifle these
innovations. Governments should also see in virtual currencies as an opportunity to
improve financial crime risk management.
Technology related to virtual currencies offers the prospect of new solutions and
techniques for combating financial crime. Governments should look to it as a test case
for developing new and more effective AML/CTF approaches that also respect the need
for financial privacy and innovation. This will require dynamic regulatory frameworks.
The private sector has an indispensable role in this effort. The virtual currency industry
can innovate technical solutions and best practices. Banks and the incumbent financial
sector can contribute valuable resource and experience towards developing related
technology and concurrent financial crime risk management practices.
By taking an approach that is forward-looking, adaptive, collaborative and innovative,
stakeholders can both manage the challenges and harness the opportunities of virtual
In respect to Iran, the government must take a more proactive stance in joining
international forums and associations to collaborate in adopting internationally
recognised, albeit de facto, standards of review, audit, control and reporting. Such
bilateral and voluntary adoption of standards does not need much formality. Nor should
they be shunned as some sort of a conspiracy theory.
Such collaboration will be a very useful basis to learn lessons on effective control on
macro as well as at practical levels. This could only lead to reduction of fraud and
criminal activity. At the same time, collaborative efforts can lead to education of
academic, middle management, technology developers and lawmakers as common
participants inside the country as well as the world. As Iran prepares to enter the global
financial superhighway, and financial trading mechanisms, it has no choice but to share
its internal and structure problems in an open-minded effort with the world and adopt
international standards in combating financial crimes. As concepts of money laundering
are relatively new standards of legal practice in Iran, it will be useful for Iran to think
about leaping to the most current and modern standards of practice and transparency,
rather than start its own experimentation with such concepts anew.
Moreover, it will be most helpful for Iranian regulators and governors to adopt uniform
standards of practice in assessment of risks and to promote transparency of the process.
In turn, financial markets can be more responsive and vigilant about perpetration and
committing of various forms of money laundering or support for other financial crimes.
It could lead to easing of some sanctions and international restrictions as further
transparency is demonstrated.
In all, the world faces unique and unprecedented challenges to combat understand and
accept new technologies. Close collaboration and exchange of ideas can provide
solutions in the global village and financial markets across borders. Iran cannot be an
exception to this general rule of the world.
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Dr. jur. Ali Ettefagh is an international lawyer based in Iran and Austria. Trade policies and sanctions,
commodity finance, oil & gas, financial markets, banking, shipping and aviation areas of private law are his focus