DIGITAL CURRENCY IN IRAQ: CRISIS OF CONFIDENCE.. THE BIGGEST OBSTACLE
In a very distinctive step aimed at modernizing the financial system, Baghdad is exploring the possibility of issuing a national digital currency, in an effort to reduce reliance on paper money and enhance financial inclusion.
However, despite the promising prospects of this step, the project faces a fundamental challenge represented by the lack of confidence of citizens in Iraqi banks, as a result of the accumulation of financial crises, administrative corruption, and weak banking services. Can such a step succeed in an environment that is ranked among the highest in the world in cash circulation outside the banking sector?
Crisis of trust: the biggest obstacle to digital transformation
Data from the Iraq Future Foundation indicate that 93 trillion Iraqi dinars, or about 87% of the total money supply, were circulating outside the banking system by the end of 2023, an increase of 30% over 2022. These figures reflect a financial culture that clings to cash, reinforced by citizens’ fears of the complexities of banking transactions, previous experiences of freezing accounts, burdensome bureaucracy, and even cases of embezzlement and corruption within some financial institutions.
This is clearly evident in the fact that employees whose salaries are domiciled in Ki-Card companies and private banks try to withdraw their salaries from the bank account as soon as it is launched. This means that citizens have lost confidence in the banking system to a great extent.
Some may not believe at all in digital transformations or the banking system, as dealing in it is done in numbers and not in kind.
Therefore, convincing the Iraqi citizen to give up his paper money in favor of a digital currency, managed by entities whose trust is still questionable, is a fundamental challenge to the success of the project.
It is worth noting that the structure of the banking sector suffers from a significant delay in keeping up with global financial management technology, i.e.: the large number of banks does not mean efficiency.
According to the latest data, Iraq has 81 banks, distributed as follows:
7 government banks (including one Islamic bank)
74 private banks, including 29 Islamic banks.
Despite this quantitative diversity, banking services are still insufficient to accommodate the financial needs of society, as most Iraqis rely on cash even for large transactions. In addition, the conflicting figures regarding the number of banks, and the lack of transparency in updating data, deepen the crisis of trust between citizens and the banking sector.
Conditions for Success: From Theory to Practice
To ensure the success of digital currency, a supportive environment must be created through a set of essential measures:
1. Enhancing transparency: through a strict oversight mechanism that ensures tracking financial transactions without compromising users’ privacy.
2. Independence of the supervisory body: avoiding political interference and establishing an independent oversight body with broad powers.
3. Economic incentives: such as providing tax benefits or financial incentives for early adopters.
4. Solid technical infrastructure: including a reliable internet network and secure and easy-to-use banking platforms.
Without these foundations, the project may turn into a mere theoretical experiment that lacks effective practical application.
Potential risks: Will Iraq repeat past mistakes?
Previous failures in financial policies, such as the unregulated reliance on the dollar and the subsequent chaos in the black market, cannot be ignored. If digital currency is not managed wisely, it may face serious challenges such as:
• Increased inflation if its issuance is not controlled and the money supply is not regulated.
• Exclusion of segments of society that are unable to deal with financial technology.
• Risks of cyber breaches in light of weak cyber infrastructure.
Between crisis and opportunity
Despite the obstacles, digital currency could represent a giant turning point towards a more advanced financial system in Iraq, by reducing corruption, enhancing financial inclusion, and improving tax collection mechanisms. But its success depends on a radical reform of the banking sector, the implementation of a broad awareness campaign, and a real political will to ensure financial transparency and justice. Turning this initiative into reality will not be easy, but it could be a necessary step toward a more stable and reliable digital economy.
(I do not believe we will see this anytime in the near future. It may happen after we investors in the dinar are way out of this investment and the RV has already taken place.)