Money has two jobs: settling transactions and preserving value. The rial still settles daily purchases and rent, but it does not preserve value. Point-to-point inflation is now close to 90 percent. This is not a natural phenomenon. It is a transfer of wealth from those who still hold rials to those who issue rials and spend them sooner. Twelve-month average inflation is lower, but it is the point-to-point figure that will cut the purchasing power of wages this very month. Households that hold dollars, gold and foreign assets have exited this path. Wage earners and pensioners have not. It is precisely this gap that officials would prefer not to see discussed much.
Official dollarization of the economy would shut the tap of deficit financing through money creation. The state would no longer be able to finance its deficit by printing money; a hard constraint would be placed on policy, and exchange-rate risk would be taken out of long-term contracts. The privilege of those who already have access to hard currency would also disappear. The state is not capable of doing this. Sanctions have cut off dollar clearing and correspondent banking. Bank balance sheets are laden with related-party loans and non-performing claims, and these items cannot be marked onto a hard-currency balance sheet without recognizing losses. A regime whose identity is opposition to the United States will not make the dollar legal tender. These are the state's constraints, not the household's.
A household will not need the country's foreign-exchange reserves to buy dollars. It will not need a swap line to hold gold. It will not need Washington's permission to sign a dollar contract. Whenever the state fails to provide a store of value, the household will find its own way to one. Hold rials only for a week's needs. Move the rest out of rials. Diversify: dollar banknotes and gold for the day the network or the exchange shop goes down; dollar stablecoins for the rest, with a clear understanding of the issuer, the platform and the sanctions risk. Holding dollars will not bring American inflation to the Iranian table. An Iranian family buys Iranian food, housing and services. The dollar is insurance against the rial. Over the past six months the dollar rose more than 60 percent against the rial, and consumer prices rose close to 50 percent. Dollar holders did not just stand still; they pulled ahead of those who kept all their assets in rials. As more prices are quoted in dollars, domestic prices will no longer lag behind the exchange rate; they will move with it. A restaurant in Tehran that writes its prices in dollars will not seem strange; the alternative is rewriting the menu prices again and again.
Staying in rials is not a neutral act.
The inflation tax will work only as long as people hold large rial balances. Shrink those balances, and the profit from printing money will shrink too. If money printing speeds up, the flight from the rial will speed up as well. The state will then inevitably face one of the explicit options: tax, borrow, cut spending or default. Inflation has so far been the silent option. Households are closing off that option. The very institutions that ask citizens to defend the rial are themselves pursuing digital dollars.
What will change the speed of this process is not only the store of value; it is payment. Dollar banknotes and gold are reasonably good for preserving value, but they are of little use for everyday exchange inside Iran. Stablecoins have so far been the opposite: if they can be obtained, they are useful for holding value, but difficult and risky for paying rent. This gap is not theoretical; it is a product of infrastructure. If there are platforms outside the sanctions net that ordinary people can open and use on a mobile phone, the two functions of money will come together in a single instrument. A household will then be able to hold dollar value at night and spend it in the morning, without converting back into a depreciating rial, without searching for a trusted money changer, and without relying on a correspondent bank that no longer exists. A seller who accepts the same stablecoin will need a smaller daily rial balance. The network effect will do the rest. The more shops, landlords and contractors price and settle in stablecoins, the less the rial will be needed, and the rial will remain only as residual legal tender. When value moves on the phone rather than through sanctioned remittance channels, capital controls will have less effect. Issuer risk, app security and sudden freezes will remain. But these are not the same as an annual tax of close to 50 percent. When people both keep their savings in dollars and make their payments in dollars, currency substitution will no longer be the choice of a minority with a surplus; it will become the everyday system of the urban economy. From that point, informal dollarization will leave its gradual phase and accelerate.
Inevitably, there are still limits. The state will still be able to harass exchange shops. A family whose income does not cover even part of the subsistence basket faces an income problem, not an asset-mix problem. For everyone else, the arithmetic is clear. Staying in rials is not a neutral act. It means an unhedged bet on a currency whose issuer, with 90 percent inflation, in effect taxes away a large part of its value. Iranians are already doing this, balance sheet by balance sheet and transaction by transaction. If the payment route improves, the process will only become faster and more irreversible.
