Iran Launches Gold Backed Cryptocurrency “Covenant”

Iran, one of China’s Belt & Road partners but subject to sanctions after the United States pulled out of the Nuclear deal framework, has just launched its own cryptocurrency to try and get around sanctions. It is currently unable to access international payment networks such as SWIFT to enable it to trade. This has limited financial transfers to Rial-based transactions, however the currency has also been hit by US dollar pressure and is trading at a very low rates of 42,000 to the dollar. It has lost 2/3 of its value since 2011 and the commencement of American pressure upon the country.

Iran’s move to issue cryptocurrency backed by gold reserves is to provide a way for Iran to trade around US-sponsored sanctions, which have been increasing under Donald Trump’s push to dump the Obama-era “Iran deal.” The currency, known as Paymon in Iranian (“Covenant” in English) is based on the Stellar Lumens XLM network, an open-source codebase, and will trade in “special exchange offices.”

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The country has the cryptocurrency in cooperation with the Parsian Bank, the Bank Pasargad, Bank Melli Iran, and Bank Mellat. An over-the-counter (OTC) cryptocurrency exchange called Iran Fara Bourse is also expected to adopt the cryptocurrency, and will be used to tokenize Iranian financial institutions’ assets and properties. A initial 1 billion Covenants are expected to be issued in the initial offering and will be issued by the Central Bank to permit G2G trade. Countries such as China, Russia and Turkey – and several EU, Middle-Eastern and South-East Asian nations are also likely to accept the new virtual coinage.

Iran has been stepping up mining production of gold and other precious metals such as copper, in the wake of sanctions which also partially targeted these items. Iranian gold has been used in past years to get around sanctions, specifically those that predated the Iran Deal. Gold has helped Iran funnel billions of dollars around sanctions, mainly via Turkey.

Iran has about 320 tonnes of proven gold deposits, and is capable of mining about 5 tonnes a year. This is expected to increase to 25 tonnes per annum by 2022. The country is rich in a variety of mineral reserves, with reserves are estimated to amount a value of about US$770 billion. These will be mined to support the Covenant.

The new Cryptocurrency may also be extended for commercial and public use. In a second roll-out phase, the convenant would be traded by Iranian citizens in the country, who are also cut off from the global SWIFT network, depriving many ordinary Iranians from receiving personal remittances such as pensions and allowances from the Iranian overseas diaspora. The currency is not the first Cryptocurrency to be in use – that accolade falls to Venezuela, another oil-rich country under strict US sanctions. Russia is also interested in the scheme and has also called for national currencies to be backed by proven reserves in the past. The country is a major oil and gas producer and also holds significant reserves of gold and diamonds. Vladimir Gutenev of the Russian State Duma proposed a gold-backed cryptocurrency in August last year, and discussion on it has been on-going. Elvira Nabiullina, the head of the CBR, commented on Gutenev’s proposal recently, stating: “As for mutual settlements, we will consider, of course, a proposal on a cryptocurrency that is tied to gold. But, in my opinion, it is more important to develop settlements in national currencies.”

China will want to take a different path in promoting the internationalization of the RMB Yuan as a currency, however is amenable to accepting asset-backed cryptocurrencies on a Government to Government basis. The BRICS grouping of Brazil, Russia, India, China and South Africa are also examining the potential for the introduction of an asset-backed BRICS coin.

JP Morgan Bank also issued its first Cryptcurrency, the JPM Coin, on Monday. JPM Coin is a stablecoin in that each one is “redeemable for a single U.S. dollar.” Clients “will be issued the coins after depositing dollars at the bank; after using the tokens for a payment or security purchase on the blockchain, the bank destroys the coins and gives clients back a commensurate number of dollars.” Umar Farooq, JP Morgan’s Head of Blockchain Projects, commented “So anything that currently exists in the world, as that moves onto the blockchain, this would be the payment leg for that transaction. The applications are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this.” However it is uncertain whether JP Morgan have actually backed the currency up with any real assets.

What is apparent is that in part, US sanctions are driving new technologies into use at a faster speed than they otherwise would be as countries affected by Washington’s trade dynamics look at ways to isolate themselves from the US dollar and existing global payment systems. Quite how this will impact upon US trade and its global share of this in the future remains a large unknown, although it would appear shrinkage could be on the cards. But what is apparent is that new technologies such as Blockchain and Fintech are being taken up rather faster in commercial usage by many of the United States closest rivals and who possess assets that global consumers need. That, it appears, is rather too much of a driver for even the United States to stop, even if it is against its own national interests.

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