In recent weeks, power outages and severe air pollution have plagued Iran’s major cities. Though the country possesses some of the largest reserves of oil and gas in the world, underinvestment in the energy sector, mismanagement, and other issues have forced power companies to switch to using highly polluting fuel oil – called “Mazut” in Persian – to generate electricity, contributing to already high levels of urban pollution in Iranian cities. The government, however, rather than taking responsibility and blaming supply-side issues has instead pointed its finger at a relatively new phenomenon in Iran: large-scale Bitcoin mining.
Bitcoin mining “farms,” as they have come to be known, have popped up throughout Iran in recent years. They use large collections of computer servers to verify digital bitcoin transactions (i.e. “mine”), a highly energy-intensive process that can sap hundreds of megawatts from the power grid. With cheap, subsidized electricity and tacit or even full approval from the government, foreign companiesfrom countries like Turkey and China have also set up shop in Iran to mine the digital currency, taking advantage of these local competitive advantages much like a petrochemicals company would benefit from cheap feedstock by building a plant in a natural-gas producing country.
These farms are part of a bigger cryptocurrency movement that has taken hold in Iran. In recent years, both the Iranian government and regular citizens have sought to leverage cryptocurrencies to engage in international commerce without having to rely on the U.S.-dominated banking system – a system that in recent years has been shut off to Iranians because of sweeping U.S. economic sanctions. Isolation from the global financial system, inflation, low growth, and an overall poor economic situation have pushed Iranians to dabble in cryptocurrencies as an investment asset and a method of payment.
Looking at Iran’s dire economic situation, one can better understand why Iranians are increasingly turning to an asset like Bitcoin. Since the Trump administration withdrew from the Joint Comprehensive Plan of Action (JCPOA or “Iran Nuclear Deal”) in 2018 and reintroduced crushing sanctions against Iran, the country’s economy has collapsed. Partially a result of government mismanagement and structural issues, the Islamic Republic’s GDP declined by 5.4 percent in 2018 and 7.6 percent in 2019. Sanctions have also decimated demand for Iran’s oil, halting exports and cutting the government revenue necessary to fund infrastructure projects and pay public-sector wages, by more than 50% since 2018.
Inflation and a weakening national currency have had the most salient impact. Food price inflation, for example, reached 43 percent in May, with studies showing that Iranian households have even changed their diets to reduce consumption of increasingly expensive red meat, poultry, dairy, and other food products. The country’s currency, the rial, has taken a major tumble in recent years; in 2020 alone, it lostaround 57 percent of its value compared to the dollar. In May 2020, the government announced a bill to change the country’s currency from the rial to the toman (a super unit of the rial) by cutting four zeros off of the rial, ostensibly to ease the pressures of inflation and make transactions simpler.
Sanctions have also cut Iran off from the global financial system and hampered its ability to trade internationally. Companies like PayPal, Visa, MasterCard, and other online payment systems do not provide services in Iran, making it difficult for Iranians to transfer money and make purchases online. Dwindling foreign currency reserves and hesitation among foreign companies to engage in trade have made it particularly difficult for the country to import goods and conduct trade generally. For these reasons, the government and citizens alike have begun to look toward Bitcoin as a potential solution, not necessarily to solve these issues, but perhaps at least to help the country’s economy survive.