The Shadow World of Cryptocurrency in Iraq

    The cryptocurrency landscape in Iraq is rapidly evolving through legal ambiguity and growing market interest.

   While the potential of digital currencies is evident, the sector faces challenges related to regulation, security, and illicit activities.  Here are the key developments, risks, and regulatory considerations.

Legal Status and Regulatory Framework

   The legal status of cryptocurrencies in Iraq remains ambiguous. Although there is no explicit ban on virtual currencies, the regulatory framework is not fully established, creating uncertainty for users and investors.

   The Central Bank of Iraq has issued warnings against dealing with virtual currencies, stating they are not legally protected and lack official recognition. The Central Bank’s Law No. 56 of 2004 restricts official currency to paper and metal issued by the bank. Additionally, the Anti-Money Laundering and Terrorism Financing Law No. 39 of 2015 may apply if virtual currencies are used in criminal activities.

Exchange Operators and Market Dynamics

   Several exchange operators have established a presence in Iraq to facilitate cryptocurrency transactions. Prominent among these are exchanges like Kurdcoin, Binance, ByBit, and OKX. These platforms are popular among Iraqi smaller users and investors for their user-friendly interfaces and diverse payment options. Kurdcoin, for instance, has been active since 2017 and reports significant trading activity.

   Despite the legal uncertainty, being established in Kurdistan and away from the control of the Federal government, these exchanges provide a gateway for Iraqi investors to engage with cryptocurrencies.

Illicit Activities and Security Concerns

   The cryptocurrency market in Iraq is not without its risks. One notable point is the one of exchanges companies has created their own cryptocurrency, aiming to capture a share of the international market. However, such exchanges are also associated with illegal activities, including money laundering and illicit trade. Some larger clients in Iraq, known for their history of corruption, use illegal cryptocurrency exchange companies to conduct money laundering and other illicit transactions. These transactions often involve purchasing art, real estate, or other assets that can be liquidated later.

   Additionally, there are allegations that significant sums of money from notorious thefts, such as the "heist of the century," have been transferred out of Iraq through cryptocurrencies. Originally reported at $2.5 billion, recent estimates suggest this amount may have risen to $4 billion, highlighting the scale of illicit financial movements facilitated by digital currencies.

Sanctions Evasion through Cryptocurrency

   With the lack of regulations and legal control in Iraq's cryptocurrency sector, some neighboring countries have found a way to avoid international sanctions by leveraging Iraq's regulatory gaps. The absence of a clear and enforced legal framework means that illicit transactions can be conducted with relative ease.

   These countries utilize Iraq’s less regulated environment to bypass sanctions, engaging in cryptocurrency transactions to move funds and conduct trade without directly breaching international restrictions imposed on their own economies.

   This exploitation of Iraq's regulatory vacuum not only underscores the need for comprehensive legislation but also highlights the broader implications of cryptocurrency's role in global finance and sanctions evasion.

International Coordination and Capacity Building

   International cooperation is crucial for developing effective cryptocurrency regulations. The Institute for Financial Integrity, in collaboration with the Central Bank of Iraq (CBI) and K2 Integrity, has launched a Financial Integrity & Cross-Border Payments Training Program. This initiative aims to enhance compliance and security within Iraq's financial sector through workshops and ongoing training.

   The program focuses on protecting the integrity of cross-border payments, facilitating sustainable foreign correspondent relationships, and addressing illicit financing risks. Key training topics include global compliance expectations, foreign correspondent banking regulatory requirements, and managing financial crime risks.

   However, the current training does not cover cryptocurrency transactions. It is essential for the three organizations to address this gap in future training sessions to better equip Iraqi financial institutions with the tools needed to handle the complexities of cryptocurrency.

Legislative and Regulatory Needs

   The evolving landscape of cryptocurrency in Iraq underscores the need for comprehensive national legislation. There is a pressing requirement to establish clear legal frameworks that differentiate between legal and illegal activities involving digital currencies.

   Recommendations from legal experts and workshops emphasize the need for new legislation that addresses the unique challenges posed by cryptocurrencies and ensures secure and beneficial usage.

Conclusion

   While the cryptocurrency market in Iraq is developing, it faces challenges related to regulatory clarity and market volatility. The presence of established exchanges and a growing user base suggest a potential for future growth and adoption as the landscape continues to evolve.

   However, the sector must address critical issues such as compliance with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) standards, as well as adhering to Know Your Customer (KYC) requirements to enhance security and mitigate risks associated with fraud and illicit activities.

Kadhum A. Jabbar

www.KadhumJabbar.com

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