Cryptocurrencies in Iraq

Cryptocurrencies in Iraq: Regulatory Dynamics and Legislative Gaps 

The Central Bank of Iraq (CBI) issued Circular No. (125/5/9) on 22 November 2021, explicitly prohibiting supervised financial institutions—including banks, non-bank financial intermediaries, and electronic payment service providers—from engaging in transactions involving virtual assets (Vas) or cryptocurrencies. The CBI underscored that such assets lack legal tender status, rendering them unenforceable as obligations redeemable for fiat currency or tangible commodities (e.g., gold). This prohibition was justified by systemic risks arising from the absence of a robust legal, regulatory, and technical framework governing virtual asset service providers (VASPs) in Iraq. 

On 26 March 2022, the CBI reaffirmed its stance through a follow-up directive, aligning with the Financial Action Task Force (FATF) Recommendations (2018–2022) on mitigating money laundering (ML) and terrorist financing (TF) risks associated with virtual assets. The CBI disseminated a risk-based guidance manual to regulated entities, mandating enhanced due diligence (EDD) protocols, internal policy reviews, and operational adjustments to ensure compliance. Crucially, the circular prohibited the use of payment cards, e-wallets, and other financial instruments for speculative trading or transactions involving cryptocurrencies. 

1. Key Compliance Obligations for Regulated Entities: 

1. Implementation of Risk Mitigation Measures: Adoption of administrative, legal, and technical controls to detect, prevent, and trace cryptocurrency-related transactions. 

2. Customer Awareness Programs: Mandatory disclosure of risks and legal repercussions (e.g., sanctions under Article 36 of the Iraqi Anti-Money Laundering and Counter-Terrorist Financing Law No. 39 of 2015).   Non-compliance triggers enforcement actions     including punitive measures against institutions and individual actors. 

2. Cryptocurrency Adoption in Iraq: A Parallel Economic Ecosystem 

Despite regulatory prohibitions, a decentralized network of Iraqi youth engages in cryptocurrency mining and peer-to-peer (P2P) trading, leveraging blockchain technology to generate liquidity. Post-Ethereum’s transition to proof-of-stake (PoS) in 2022, Iraqi miners shifted focus to Bitcoin (BTC) and other proof-of-work (PoW) coins like Ravencoin (RVN) and Ethereum Classic (ETC), utilizing application-specific integrated circuits (ASICs) and repurposed GPU rigs. Operational setups often exploit subsidized electricity, though the government intensified crackdowns in 2023, confiscating over 5,000 mining rigs to alleviate strain on the national power grid. 

Profits from these activities have enabled asset acquisition (e.g., real estate, cross-border enterprises), reflecting a disconnect between formal regulations and grassroots economic activity. Cryptocurrencies also serve as a hedge against dinar depreciation (10% devaluation in 2023) and stringent central bank controls on USD access. 

3. Global Regulatory Paradigms: Comparative Analysis 

Jurisdictional approaches to cryptocurrency regulation vary some are friendly, others are not:

  1.European Union: Enacted the Markets in Crypto-Assets (MiCA) regulation in 2023, establishing a harmonized framework for VASPs. 

  2.UAE: Launched the Virtual Assets Regulatory Authority (VARA) in 2023, expanding its 2021 Blockchain Strategy to enforce AML/CFT compliance. 

3. Institutional Adoption: 

4. U.S. Spot Bitcoin ETFs: Approved in January 2024 (e.g., BlackRock IBIT), attracting $30 billion in inflows and signaling institutional maturation. 

5.MicroStrategy: Holds 226,331 BTC (as of July 2024), exemplifying corporate treasury adoption. 

6. Iraqi Restrictive Posture: The CBI classifies cryptocurrencies as high-risk speculative instruments, likening them to Ponzi schemes due to volatility and opacity. 

4. Legal Ambiguities and Normative Challenges 

Iraqi regulatory framework lacks (lex specialist) legislation criminalizing cryptocurrency transactions. Instead, the CBI invokes Article 36 of Law No. 39/2015 to penalize VA-related activities, asserting that such dealings constitute ML/TF predicate offenses. However, legal scrutiny reveals interpretive gaps

1. Jurisdictional Scope of CBI Directives: The CBI authority extends only to regulated financial institutions. Non-institutional actors (e.g., individual miners, P2P traders) operate in a de facto permissible space absent explicit parliamentary prohibition. 

 

2. Definitional Analysis of “Funds”: Article 1(v) of Law No. 39/2015 defines “funds” inclusively, encompassing “digital money"cryptocurrency” and legal permissibility hinges on intent under Article 2, which criminalizes only transactions involving money which proceeds of a crime or if the transaction is used to concealment, conversion etc of assets he knew or should have known that they are proceeds of a crim...

One could reasonably deduce that Legitimate cryptocurrency holdings, transfers, lack prima facie illegality.

3. A less controversial take is the legality of the act of mining storing cryptocurrencies. Article 19(2) of the Iraqi Constitution and Article 1 of the Penal Code firmly states "There is no crime nor punishment except as provided by law." Furthermore, in criminal law, applying analogy to define crimes and impose punishments is prohibited to uphold the principle of legality, ensuring that no act is criminalized or penalized without explicit legal provision.  However, analogy is allowed in interpretations favoring the defendant, such as extending legal excuses, to protect individual rights and ensure justice.

Thus, criminalizing mining, storing or even P2P trading outside of the financial institutions is prohibited and cannot be adjudicated criminally without explicit statutory provisions. 

5. Conclusion: Toward a Coherent Regulatory Framework 

The CBI prohibitive measures, while aligned with FATF standards, expose systemic vulnerabilities Regulatory Arbitrage, Non-institutional actors exploit jurisdictional gaps, undermining AML/CFT efficacy.   Economic Disintermediation Restrictive policies stifle blockchain innovation, diverting liquidity to informal channels. 

Legislative reform “although it’s very difficult due to the nature of cryptocurrenc yet not impossible" is needed and it should prioritize:

1. Risk-Based Regulation: Differentiation between permissible VA use cases (e.g., remittances, asset tokenization) and illicit activities (e.g., ransomware, darknet markets). 

2. Licensing Regimes for VASPs: Mandatory registration, KYC/AML compliance, and transactional reporting for exchanges and custodial wallet providers. 

3. Public-Private Collaboration: Integration of distributed ledger technology (DLT) for transparent monetary policy execution, potentially via a central bank digital currency (CBDC). 

Absent parliamentary action, Iraq risks perpetuating a legal vacuum where cryptocurrency activities remain neither fully legitimized nor effectively deterred, exacerbating financial integrity risks. A balanced regulatory approach—calibrating innovation incentives with systemic safeguards—is imperative to align Iraq’s digital economy with global.

 AL-NESOOR LAW FIRM for legal consultation &services

  Attorney Saif wisam Hashi