Analysis | Crypto’s Future Could Look Like Iraq’s Past


The Iraqi dinar was ahead of its time. Years before Bitcoin was invented, American day traders were drawn to the viral economic narrative that Iraqi currency was a ticket to retirement wealth after the fall of Saddam Hussein. Economists and regulators warned it was a gamble, but bettors were still paying high fees to own an illiquid currency that some say could well become the most valuable in the world. Instead, it was devalued by 20% in 2020.

The dinar is once again on the minds of economists as the cryptocurrency market reels from its latest crash – with $2 trillion of value wiped from a market plagued by fraud, theft and high-profile corporate collapses including FTX and BlockFi. The parallels are not just in laser speculation, but in the historical development of the dinar as a medium of exchange. While optimists such as investor Bill Ackman see crypto making a comeback if the right technology use case presents itself, the experience of Iraq suggests that the survival of any form of currency depends more on trust in the institutions that support it.

In the 1990s, after the first Gulf War, there were effectively two Iraqs: a Saddam-controlled south and a north that was essentially a Kurdish protectorate backed by a no-fly zone. As a result, the dinar branched out into two paths. In the south, Saddam has taken to printing money to prop up an economy struggling with sanctions. New banknotes bearing his likeness, called “Saddam” or “printed” dinars, were produced locally in mediocre conditions. Inflation soared to an average of 250% between 1991 and 1995 as the money supply in circulation soared, former Bank of England chief Mervyn King noted in a 2004 speech.

In the north, where the new dinar did not circulate and bank cash was not expropriated by Saddam’s regime, the old “Swiss” dinar – so called because it was printed on Swiss-made plates – continued to be used. It lasted until the fall of Saddam, although no central bank or government gave it any value.

Having two fiat currencies in the same country was obviously a surprising development. That the Swiss dinar has continued and risen in implied value against its sibling is perhaps not so remarkable given the extent of currency mismanagement taking place in the south.

But the Swiss dinar hasn’t just risen against the printed dinar – it’s also seen a sharp appreciation against the US dollar, from 18 to the dollar in 2002 to 6 to the dollar when Baghdad fell in 2003. This suggests two of the deeper political phenomena were taken into account: that the north-south separation would become more enduring after the war and that the value of the Swiss dinar would be protected by new credible institutions even after the regime change. “In other words, the value of the Swiss dinar had everything to do with politics and nothing to do with the economic policies of the issuing government. [it] because such a government did not exist,” King said.

The relevance for crypto is that confidence in the long-term value of its multitude of tokens could hinge on the existence of credible institutions, which it increasingly lacks. The frequently reported technological opportunities offered by virtual currencies – programmable currency, smart contracts, instantaneous transfer of value via stablecoins – could represent only a handful of dust in terms of non-speculative mass adoption without the support of issuers and legitimate platforms. it is outside the closed circle of crypto.

This in turn could require an outside stamp of approval from the governments and central banks that crypto was created to disrupt. If crypto is to do more than serve the niche interests of anti-fiat enthusiasts or pump-and-dump traders, it may have to rely on the kind of settlement coin experiments run by JPMorgan Chase. & Co. or, possibly, centrally. – issued digital euros or digital dollars. This latter idea has drawn a lot of criticism, some of it justified, but it may also be what attracts the most non-get-rich-quick schemes.

Admittedly, crypto aficionados might push a different explanation for the development of the Swiss dinar. The currency was relatively technologically superior as it was harder to counterfeit than its poor quality sibling. And bitcoin’s digital goldbugs might say that what was worth protecting the Swiss dinar for was its development outside of Saddam’s state control. Meanwhile, exchanges and startups are trying to cobble together their own responses to the trust deficit — think Binance’s claims to provide audited “proof of reserves” — in a self-regulatory effort to keep government authorities at bay.

But the word of any offshore company or auditor is highly unlikely to trust crypto after debacles like FTX. The collective failure of due diligence by even sophisticated institutional investors in this space is perhaps even more embarrassing than the Iraqi dinar scams thrown at unsuspecting consumers. If there is a lesson to be learned from Iraq, it is that credibility is more important than technology – followers of a crypto test keep failing.

More from Bloomberg Opinion:

• Matt Levine’s Money Stuff: FTX’s BlockFi Rescue Didn’t Work

• FTX Crypto Bubble is the worst of its kind: Merryn Somerset Webb

• Want to know where the crypto is going? Remember 2008: Bill Dudley

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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