Legal Perspective on the Freezing of Cryptocurrency Exchange Accounts by the Central Bank

The Central Bank’s action in temporarily freezing accounts related to cryptocurrency exchanges in Aban (October–November) sparked numerous reactions from cryptocurrency activists and legal experts. This decision, made based on Article 42 of the Central Bank Law, ignited extensive debates regarding the legal interpretation of laws and criminology principles in Iran.

In early Aban, a headline shocked all cryptocurrency sector participants: “Freezing of Cryptocurrency Exchange Accounts by Order of the Central Bank.” Reports indicated that following a special meeting of the Central Bank’s Currency Deputy, an order was issued to temporarily freeze all financial transactions related to cryptocurrency exchanges and payment facilitators. It was stated that this action was coordinated with the Financial Intelligence Unit and was implemented based on Article 42 of the Central Bank Law. Additionally, it was noted that this measure was part of the Central Bank’s efforts to control and manage the foreign exchange market. The decision resulted in the complete suspension of deposits and withdrawals from cryptocurrency exchange-related accounts, though normal operations resumed after a while.

Examining article 42 of the Central Bank law; it states: “A – The Central Bank is obliged to report suspected cases of money laundering along with relevant information to the Financial Intelligence Unit of the Ministry of Economic Affairs and Finance and, after approval from that unit, proceed with freezing the accounts of suspected individuals and restricting banking services to them. Individuals whose accounts are frozen under this clause may submit their objections to the Central Bank.”

Since the action taken was based on this article, it is essential to determine whether the measure was consistent with its text or if a flawed and incomplete interpretation was applied.

At the beginning of this article, it states that “The Central Bank is obliged to report suspected cases of money laundering…” This raises the question: What criteria were used to determine suspicion of money laundering, and what evidence supported this suspicion? Under Iranian law, any claim must be substantiated with acceptable documents and proof and evaluated through the evidentiary process. Furthermore, Iranian law upholds the principle of personal liability for crimes and punishments, meaning that each person is held accountable only for their wrongdoing. Consequently, if suspicions of money laundering arise, only the specific individual involved should be investigated and restricted, rather than imposing a blanket ban on all participants in the sector.

Money Laundering Crimes and Legislative Shortcomings in Iran

A topic that needs to be addressed with careful consideration is money laundering itself. The crime of money laundering, which is referenced by the legislator in Article 42, is one of the crimes against economic security. Following the ratification of international conventions such as the Vienna (1998), Palermo (2000), and Merida (2003) conventions, and for the public interest of society, Iran’s Anti-Money Laundering Law was passed in 2007. However, in drafting this law, the necessary expertise and sufficient attention regarding its substantive elements and penalties were not thoroughly considered. As a result, first, many of the instances of criminal behavior overlap in meaning and application; second, they conflict with other criminal laws; third, money laundering and what is considered money laundering are treated as the same, and the subject of the money laundering crime, which is criminal proceeds, is narrowly defined, contrary to the aforementioned conventions. Additionally, no specific criteria are provided for determining the source of the crime.

A crime consists of three elements: material, mental, and legal. The mental element of money laundering can be established through explicit intent, implicit intent, or recklessness. However, recklessness is not explicitly recognized by law, creating challenges in applying individualized penalties and restitution of assets, which is treated as a financial penalty rather than a legal remedy. Money laundering refers to actions undertaken with the purpose of concealing the source of illicit proceeds and making them appear legitimate.

If criminal offenses are ambiguously defined in legislation, different interpretations may arise, making enforcement difficult or even impossible. Although Iran has joined international money laundering conventions, it has not effectively outlined the crime, penalties, or legal consequences in its domestic law, causing conflicts with other criminal statutes and inefficiencies in the judiciary.

Moreover, money laundering involves criminal proceeds used to obscure the original crime and make the assets appear lawful. While money laundering is a financial crime, it can also be classified as an economic offense threatening national security, particularly in cases of organized and transnational money laundering.

Iran’s Anti-Money Laundering Law (Article 3), based on the Vienna, Palermo, and Merida Conventions, restricts the definition of “criminal proceeds” to financial assets, whereas the broader term “proceeds” allows for a wider interpretation. This narrow definition leads to legal ambiguities and conflicting interpretations, which must be carefully addressed to prevent harm to financial and currency sector participants.

The Central Bank’s action in blocking cryptocurrency accounts has raised serious questions about the interpretation of the law and its implementation. Although this action was taken to manage the currency market, concerns have been raised about the violation of rights for those active in this sector due to its incomplete alignment with legal principles, such as the principle of personal liability for crimes.

The Lack of a Unified Cryptocurrency Law and Its Consequences

Another reason for repeated rushed actions is the absence of a centralized regulatory framework for cryptocurrencies. Additionally, the lack of precise oversight and expert-driven policymaking, combined with impulsive regulatory measures, can lead to market disruptions and harm stakeholders.

Iranian criminal law follows the principle of strict interpretation, meaning that penal laws must be interpreted strictly according to their explicit wording. Expanding legal provisions beyond their literal meaning or applying them to cases not explicitly covered by law is prohibited.

Strict interpretation ensures that laws remain within their intended scope and protect individual freedoms. However, expansive interpretation extends legal provisions beyond their explicit meaning, potentially violating personal liberties and conflicting with the principle of legality in criminal law.

Another interpretation applied to Iranian laws is extensive interpretation, a type of judicial interpretation where the implication of a law extends beyond its original scope and is applied to cases where the law is silent.

Extensive interpretation involves expanding the meaning of legal provisions as far as their flexibility allows, while adhering to fairness and judicial justice. In extensive interpretation, mere adherence to the literal wording of the law is insufficient; the underlying intentions and purposes of the legislator must also be considered. According to this method, a ruling established by the law for a specific matter is extended to similar cases and situations, as the legislator cannot foresee all human actions and behaviors or provide independent rulings for each one. Therefore, by relying on the spirit and objectives of the legislator, as well as customs and traditions, an extensive interpretation of the law is provided.

In accordance with the principle of legality of crimes and punishments, all criminal laws must be interpreted strictly and narrowly, and laws must be applied exactly as written, based on the wording and expressions used by the legislator to convey their intentions. This interpretation reflects the principle of innocence and is employed to safeguard the dignity and freedom of individuals. Regarding Article 42 of the Central Bank Law, which addresses the crime of money laundering, this rule is no exception, and it appears that an extensive interpretation of it or its extension to other authorized actors would not be permissible.

The lack of clarity in applying existing laws and the extensive interpretation of criminal laws can lead to legal evasion and the undermining of laws.

The Risk of Underground Cryptocurrency Activities

In private law, due to the greater flexibility of legal texts and the lack of emphasis on aspects of public order and social interests, judges can resort to this method to find appropriate solutions. However, in contrast, in criminal matters, which often involve public order and social interests, extensive interpretation leads to the deprivation of individual rights and freedoms and is incompatible with the principle of legality of crimes and punishments.

In the Central Bank’s action regarding the implementation of Article 42 of the Central Bank Law, it can be observed that an extensive interpretation of the law has been applied—a law that explicitly refers to one of the crimes under the Islamic Penal Code.

Another point to consider in this action is that if such measures become a common practice, the rule of law can no longer be respected. This is particularly significant given the strong emphasis in Iranian law on the protection of citizens’ rights. If a situation arises where the rights of cryptocurrency actors and exchange platforms are infringed, whether intentionally or unintentionally, rectifying such damages would not be easily resolved.

In various societies, governments aim to establish order and ensure compliance with the law in different matters by creating various incentives to encourage people to follow the law and deter unlawful behavior. However, if a suitable framework for activities such as cryptocurrencies is not established, these activities, instead of being conducted openly within society, will turn into underground crimes.

Conclusion

Laws serve to regulate relationships within society, and any flaws in their implementation can destabilize the legal framework. If enforcement agencies fail to interpret and apply laws accurately, expecting citizens to comply becomes unrealistic. To facilitate cryptocurrency adoption with minimal conflict, clear and precise legislation is needed, ensuring laws are enforced with due diligence and fairness.