Iran's banks no longer serve citizens. They police them - analysis

The escalation of the 2026 conflict has fundamentally altered the Central Bank of Iran's (CBI) operational reality, turning it from a traditional monetary authority into an instrument of wartime economic survival. As the US and the European Union systematically dismantle Iran's access to the global financial system, the domestic regulatory framework has fractured. This has created a severe disconnect between the CBI's mandates, the survival of domestic financial services, and the daily economic reality of Iranian citizens, who bear the ultimate brunt of comprehensive financial isolation.At the core of the current regulatory crisis is the aggressive expansion of the US and EU sanctions architecture, which has effectively severed the CBI and Iranian commercial banks from international correspondent banking.Historically, the CBI managed domestic liquidity and foreign exchange (FX) stability through access to overseas reserves and the SWIFT messaging network. However, the sweeping designations by the US Office of Foreign Assets Control (OFAC) and parallel EU restrictive measures under the Common Foreign and Security Policy have neutralized these mechanisms.America's secondary sanctions regime, aggressively enforced during the 2026 escalation, has forced global financial institutions to choose between accessing the US dollar system or facilitating transactions involving Iranian entities. Consequently, global banks have engaged in wholesale “de-risking,” severing ties not only with designated Iranian banks but with any institution suspected of indirect Iranian exposure. For the CBI, this has meant the freezing of billions in foreign reserves and a total inability to conduct standard sovereign wealth management or cross-border clearing. Iran's central bank is now largely operating in a closed-loop domestic system, forcing it to rely heavily on internal fiat generation and restrictive FX circulars to maintain a semblance of market order.Capital under controlFor Iranian financial services, comprising commercial banks, credit institutions, and currency exchange bureaus (Sarafi), the regulatory environment is dictated by the CBI's desperation to prevent capital flight and hyperinflation. The CBI has instituted draconian capital controls through a barrage of emergency circulars. These directives heavily regulate the NIMA system (the domestic forex management system), forcing exporters to repatriate foreign currency at artificially suppressed government rates while severely rationing the foreign currency available to domestic importers.From an AML/CTF (anti-money laundering and counterterrorism financing) and compliance perspective, the domestic banking sector has been forced into an insular regulatory posture. With the Financial Action Task Force countermeasures already severely impacting the jurisdiction, the domestic banking architecture no longer attempts to align with international regulatory standards for cross-border integration. Instead, the focus has shifted entirely to preserving the regime. Domestic banks are increasingly mandated to monitor internal transactions not for traditional financial crime indicators, but to enforce state-mandated capital limits, track unauthorized FX trading, and prevent the outward smuggling of highly liquid assets such as physical USD, gold, and precious stones.Citizens payThe Iranian citizenry feels the most profound impact of this regulatory and sanctions triangulation. The CBI's inability to stabilize the rial, compounded by US and EU embargoes, has resulted in catastrophic hyperinflation. Retail financial services for ordinary citizens have severely degraded; purchasing power has collapsed, and traditional savings accounts yield deeply negative real interest rates.Furthermore, the theoretical protections built into the US and EU sanctions frameworks have failed the civilian population. While OFAC and EU regulations nominally contain general licenses and exemptions for humanitarian trade, specifically agricultural commodities, medicine, and medical devices, the reality of international banking renders these exemptions largely inert.The rigorous enhanced due diligence required to process a humanitarian transaction involving Iran is so commercially prohibitive and legally risky that tier-one Western banks routinely block them. Subsequently, Iranian citizens face severe shortages of critical imports, as domestic banks cannot secure the necessary letters of credit or correspondent channels to pay foreign suppliers.Turning to cryptoDriven out of the formal banking sector, Iranian citizens and small-to-medium enterprises are increasingly reliant on Informal Value Transfer Systems, such as hawala networks, to conduct basic cross-border transactions, receive remittances, or preserve wealth.To bypass the collapsed formal financial services sector, there is a pronounced migration toward decentralized digital assets. Citizens use cryptocurrencies not merely as speculative investments, but as essential tools for capital preservation and cross-border payments, circumventing both the CBI's capital controls and the OFAC dragnet.This creates a paradox for the Iranian regulatory framework. The CBI has historically exhibited hostility toward decentralized digital assets, attempting to tightly control crypto mining and criminalize unauthorized trading to prevent capital flight. However, the absolute nature of the US and EU blockade has forced a tacit, highly regulated acceptance of digital assets for import financing at the state level, even as the CBI attempts to suppress retail crypto adoption to protect the rial.The relationship between the CBI, domestic financial services, and Western sanctions is currently defined by a total systemic rupture. The US and EU sanctions architecture has successfully isolated the Iranian sovereign apparatus. Still, in doing so, it has forced the CBI to implement a highly restrictive, survivalist domestic regulatory framework. For Iranian citizens, the formal financial sector no longer functions as an engine for economic growth or stability, but rather as an enforcement mechanism for state capital controls, driving the population into shadow finances and decentralized networks in a desperate bid for financial survival.■The writer, a senior research fellow at the JCFA and a Dvorah Forum member, focuses her research on Iran and counterterror financing.