Without addressing the root causes of issues, a policymaker can target cryptocurrencies, blaming them for everything from currency fluctuations to capital flight.
Sakichi Toyoda, the founder of Toyota, invented a method years ago called the “5 Whys.” This simple yet effective technique uncovers cause-and-effect relationships. Toyoda believed that by asking “Why?” five times in pursuit of a problem’s cause, we could likely arrive at its root. Unfortunately, we have recently been seeing major economic issues reduced to just a single “why.” As the latest example, we can turn to the topic of cryptocurrencies. These days, we hear statements like “Buying cryptocurrencies equals currency outflow.” But what does this kind of statement mean from an economic perspective?
From an economic perspective, currency outflow is neither inherently negative nor positive. Interestingly, the very nature of currency is to be used for outflows; otherwise, given that the rial is the national currency of Iran, what would we need foreign currency for? A simple search on Wikipedia for the definition of currency reveals the following: “Currency refers to any medium, such as banknotes, drafts, or checks, used in foreign transactions for payments.” In other words, any foreign exchange is essentially currency outflow.
However, currency outflow becomes problematic when it coincides with capital flight, and unfortunately, we are increasingly witnessing the conflation of these two concepts. From an academic perspective, there are various definitions of capital flight. For example, Michael Dooley defines capital flight as abnormal capital outflows that do not generate interest income for the country.
Capital Flight Crisis in Developing Countries
Capital flight has irreversible consequences for nations and is especially prevalent in developing countries. However, the key issue is the factors that lead to capital flight. Scientific studies list factors such as political instability, low investment returns, sanctions, lack of transparency in the investment environment in Iran, currency fluctuations, corruption, inflation, and economic and political instability as causes of capital flight.
What are the consequences of capital flight for a country? Generally, capital flight has an inverse relationship with economic growth. Some major impacts include increased currency exchange rates (due to rising demand for foreign currency to transfer capital out of the country), inflation, higher interest rates, and reduced investment. Each of these factors, in turn, exacerbates capital flight and further deteriorates the investment environment.
Moreover, in developing countries, this capital could reduce poverty and boost economic growth, but its outflow deals devastating blows to the country, potentially delaying its development by years. Ultimately, all of these effects reduce the overall welfare of the population, causing confusion and despair.
Capital Flight in Iran
What is the situation of capital flight in Iran? Answering this question is not straightforward, as various and often conflicting statistics exist. According to Masoud Khansari, the former president of the Iran Chamber of Commerce, there has been $45 billion in capital flight from Iran in the past four years alone. Moreover, according to a report by the Central Bank in 2021, more than $9 billion left Iran, with $6 billion in 2020, $7.6 billion in 2019, $16 billion in 2018, and around $20 billion in 2017. From 2001 to 2021, the Central Bank’s reports indicate $200 billion of capital flight. This situation becomes even more concerning when we realize that these figures come from official reports and that factors such as currency smuggling suggest that the actual numbers are likely higher!
Even today, capital flight is happening in various forms, from purchasing precious stones and jewelry to buying gold and foreign currency. These are all methods currently used to facilitate capital flight in our country. But what’s most disheartening is the attempt to blame cryptocurrencies for this capital flight, as if no target is easier to scapegoat than cryptocurrencies!
When we talk about the “5 Whys” technique, by the second or third “why,” not the fifth, we realize that cryptocurrencies are merely one of many ways capital leaves the country. Thus, efforts to combat the spread of cryptocurrencies or impose restrictions are misguided—they’re addressing the symptom, not the cause! Suppose policymakers genuinely wish to combat capital flight. In that case, they must address the underlying causes, such as inflation, economic fluctuations, political instability, and other issues mentioned earlier, rather than going after the tools that might be used to facilitate such outflows.
Scientific studies suggest that combating capital flight requires strategic planning for the capital market in Iran, developing tools to hedge against currency volatility, implementing sound and reliable macroeconomic policies with appropriate interest rates, and creating a stable and secure economic environment through political stability.
A Missed Opportunity for Bringing Foreign Currency In and Participating in the Global Market
The other side of the cryptocurrency coin is a reality that is often overlooked. Take a moment to visit co-working spaces. You’ll see many young people working with international companies worldwide and receiving their wages in cryptocurrency, which brings capital and foreign currency into the country. Additionally, many international private companies now use cryptocurrencies to receive payments due to sanctions, which also bring capital into the country. From this perspective, cryptocurrencies are a beneficial tool for a country like Iran.
Moreover, cryptocurrencies have become inseparable from the digital economy, flowing like blood through many modern digital businesses. Any restrictive policies toward cryptocurrencies would harm existing digital businesses and represent a missed opportunity, cutting Iran off from future technological advancements and research in this field despite having highly skilled human resources in this area.
Another significant opportunity that cryptocurrencies present for the Iranian economy is to bring innovative and knowledge-based Iranian companies closer to international markets. Many innovative Iranian companies are eager to enter the global market and expand their businesses. With tools like cryptocurrencies, many of the payment challenges faced by local businesses in international markets could be solved, allowing them to circumvent sanctions and enabling easier entry into international markets—a move that could bring substantial foreign currency into the country.
Additionally, given Iran’s inflationary economy and the state of its investment markets, some Iranians have turned to cryptocurrencies as an investment vehicle. For many users, cryptocurrencies are not used for payments or capital outflows but as an investment market, with returns ultimately converted into rials and spent domestically.
It is illogical to view cryptocurrencies solely as a tool for capital flight. In fact, with proper regulation and policy-making, cryptocurrencies could also become a great boon for the government.
Given this, it is unwise to consider cryptocurrencies purely as a means of capital flight. With appropriate regulation and thoughtful policy-making, cryptocurrencies could become a valuable asset for the government. During currency volatility and rising exchange rates, cryptocurrency platforms like Tether can help address users’ needs, reducing demand for foreign currencies and managing pressure on the dollar.
Policymakers and lawmakers now stand at a critical crossroads. They can ignore the root causes of the issues and merely target cryptocurrencies, blaming them for currency fluctuations, capital flight, and every related or unrelated problem. This would involve creating misguided restrictions on domestic platforms, pushing users toward foreign competitors or the black market, and leaving them vulnerable to fraud. Alternatively, they can take a wise, forward-thinking approach by addressing the root causes and capitalizing on this significant opportunity.
