How Iran Uses Bitcoin Mining to Evade Sanctions and 'Export' Millions of Barrels of Oil?
12-10-2022 15:41

Elliptic estimates that 4.5% of bitcoin mining occurs in Iran, allowing the country to circumvent trade embargoes and earn hundreds of millions of dollars in crypto assets that can be used to buy imports and bypass sanctions. This has implications for financial institutions dealing in crypto assets. Financial institutions should ensure that they have controls in place to avoid violating sanctions.


The United States has imposed a near-total economic embargo on Iran, including a ban on all Iranian imports and sanctions on Iranian financial institutions. A 70% plunge in oil exports over the past decade has plunged the country into a deep recession, with soaring unemployment and ongoing civil unrest.


Faced with these sanctions, Iran turned to an unlikely solution — bitcoin mining.




Convert Oil To Cryptocurrency

Bitcoin and other crypto asset networks run on electricity, and quite a lot. Bitcoin miners run power-hungry computers that process new transactions and add them to the blockchain. In return, miners are rewarded with bitcoins — both from transaction fees and from the minting of new bitcoins. The mining process effectively converts energy into cryptocurrency.


Iran has recognized that bitcoin mining is an attractive opportunity for a sanctions-hit, cash-strapped economy with an excess of oil and gas.




Cooperate with Chinese companies

In 2019, Iran officially recognized crypto asset mining and subsequently established a licensing system that requires miners to identify themselves, pay higher (but still low) electricity rates, and sell the bitcoin they mine to the Central Bank of Iran. Thousands of unlicensed mining farms—including mosques with free electricity—were subsequently discovered and shut down.


The prospect of cheap energy for bitcoin mining has attracted massive inward investment, especially from China, the industry leader. Several Chinese companies have obtained mining licenses and operate in the country. The companies described good relations with the "Iranian army," and a particularly large facility in the Rafsanjan SEZ was reportedly built in collaboration with a "military organization."


A video tour of Chinese company RHY's Bitcoin mining farm in the Rafsanjan Special Economic Zone in southeastern Iran.




How much bitcoin mining activity is there in Iran?

How Big Is Bitcoin Mining in Iran? Exact numbers are hard to pin down, but Elliptic estimates Iranian miners account for about 4.5 percent of all bitcoin mined. This is based on data collected from miners by the Cambridge Center for Alternative Finance as of April 2020, as well as a January statement by Iran’s state-owned power generation company, which said miners consumed as much as 600 megawatts of electricity. This level of Bitcoin mining would currently bring in close to $1 billion in annualized revenue.

Bypassing Sanctions - Through Bitcoin Mining

So the Iranian government is effectively selling its energy reserves on the global market, using the bitcoin mining process to get around the trade embargo. Miners in Iran are paid directly in bitcoin, which can then be used to pay for imports — thus circumventing sanctions on payments through Iranian financial institutions.


It has almost become an official policy, with a think tank in the Iranian president’s office recently releasing a report emphasizing the use of crypto assets to avoid sanctions.


Many of those who transact bitcoin and pay Iranian miners will be based in the United States — the very country spearheading the sanctions. As the U.S. government considers whether to lift some sanctions on Iran in exchange for returning to the nuclear deal, it needs to consider the role bitcoin mining plays in enabling Iran to monetize its natural resources and access financial services such as payments.


At the same time, financial institutions should consider the sanctions risk they face due to Iranian bitcoin mining — especially those that start offering crypto asset services. If 4.5% of Bitcoin miners are located in Iran, then there is a 4.5% chance that any Bitcoin transaction will require the sender to pay transaction fees to Bitcoin miners in Iran. Financial institutions should also be on the lookout for cryptocurrency deposits from Iranian miners who are looking to cash out their earnings.




Sanctions Risk Solutions

However, as we discuss our new sanctions guidance in more detail, solutions to these challenges already exist and are already being adopted by financial institutions dealing with cryptoasset activities.


For example, a blockchain analytics solution provided by Elliptic could be used by regulated financial institutions to detect and block deposits of crypto assets from Iranian entities, including miners. Technology could also be employed to ensure that transaction fees are not paid to miners in high-risk jurisdictions.


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