What Could Happen to Our IQD Banknotes Once Iraq Goes Digital

Iraq's Central Bank (CBI) is gearing up to introduce a digital dinar, marking a significant shift toward digital currency management. According to a report from Al-Iqtisad on March 17, this initiative is part of the country's broader efforts to modernize its financial system and reduce reliance on traditional paper currency. The digital dinar will function as an official electronic currency issued by the CBI, holding the same value as physical cash but traded exclusively through digital wallets and authorized financial platforms. Additionally, this move will distance Iraq from U.S. control over the Central Bank of Iraq, a stake the U.S. has held since its invasion in 2003.

CBI Governor Ali Al-Allaq has emphasized that Iraq’s financial and banking systems are undergoing fundamental transformations, stating that "paper currencies will decline, making way for digital payments issued by central banks." He confirmed that the bank is actively working toward launching its own digital currency, aligning with trends seen in other central banks worldwide.

Mustafa Mohammed, financial and banking affairs adviser to the prime minister and former Central Bank Deputy Governor, described the digital dinar as part of a global shift in payment systems.  He explained that the digital currency will carry the same legal status as physical money but will be embedded with digital rights, ensuring seamless transactions under the monetary authority's supervision.

One of the most significant economic impacts of this shift will be on exchange rates.  Mohammed predicts that the digital dinar will make the official exchange rate the only rate recognized, effectively eliminating the parallel market, which has long operated outside government oversight. With transactions moving to a controlled digital space, it will become nearly impossible to maintain a secondary, unofficial exchange market.

However, the success of the digital dinar hinges on two critical factors: public understanding and technological infrastructure. The prime minister's adviser highlighted the need for widespread awareness of how digital currency functions, along with robust information and communication technology systems to support the transition.

Economic expert Ziyad Al-Hashimi further clarified the difference between digital currencies and cryptocurrencies.

Unlike Bitcoin and other decentralized cryptocurrencies that derive value from supply and demand, digital currencies—such as the digital dollar, digital dirham, and soon, the digital dinar—are officially issued and regulated by central banks, ensuring greater stability.

Al-Hashimi reassured that Iraq’s digital dinar will be fully backed by the Central Bank. Like traditional currency, it will maintain a stable value but be available only in electronic form through banking wallets and accounts. This shift will reduce cash transactions and promote financial inclusion, encouraging more Iraqis to engage with the formal banking system.

A major economic advantage of this transition is its potential to eliminate cash hoarding, a widespread issue in Iraq. Many citizens keep large sums of money outside the banking system due to distrust in financial institutions.  This limits the circulation of funds and slows economic growth. By shifting toward a digital monetary system, the government aims to restore confidence in banks, increase liquidity, and stimulate economic activity.

Here's What Could Happen

With global economies increasingly embracing digital currencies, Iraq’s move toward a fully digital dinar represents a pivotal step in modernizing its financial landscape and aligning with international financial trends. However, the success of this transformation will depend on how well the country adapts to the new digital era.

The introduction of Iraq’s digital dinar could significantly impact foreigners holding IQD (Iraqi Dinar) banknotes, particularly those holding physical cash outside of Iraq. Here’s what to expect.

One. The transition from Physical to Digital.

Since the Central Bank of Iraq (CBI) plans to gradually phase out paper currency, foreigners holding IQD banknotes may eventually need to convert them into the new digital format. If Iraq fully transitions to a digital dinar, traditional paper notes could become obsolete over time. However, during the transition period, physical dinars will likely remain valid until a formal deadline is set.

Two. Exchange & Conversion Challenges.

Foreign holders of physical dinars may find it more difficult to exchange their IQD banknotes, especially if Iraq implements strict controls on the conversion process. The Central Bank may require foreign investors or individuals to open an account within Iraq’s banking system or use an approved financial institution to convert their banknotes into digital form.

Additionally, if the parallel (black) market disappears—as Iraqi officials predict—foreigners may no longer have access to informal exchange networks, forcing them to use official government-controlled exchange rates. This could limit speculation on the dinar’s value.

Three. Impact on Exchange Rates.

CBI’s plan to establish a single exchange rate for the digital dinar means that any potential fluctuations in the parallel market—where some foreigners have historically traded IQD—will likely disappear. If Iraq enforces a fixed exchange rate, it could reduce speculation on the currency’s future appreciation, affecting those who hold dinars in hopes of an increase in value.

Four. Foreign Accessibility to the Digital Dinar.

The big question is whether non-residents will be able to own and trade digital dinars freely. Iraq could take one of two approaches:

• Open Access: Foreigners may be able to open digital dinar accounts via authorized international banks or Iraqi financial institutions.

• Restricted Access: Iraq may limit digital dinar ownership to Iraqi residents or businesses operating within Iraq, making it difficult for outsiders to hold or trade IQD.

Since Iraq is still in the early stages of launching its digital currency, the specifics of foreign ownership and accessibility remain uncertain.

Five. Future Exchange & Legal Implications.

If Iraq phases out paper dinars completely, foreigners holding physical IQD may need to exchange them within a set timeframe before they become worthless. If exchange restrictions are imposed, it may limit liquidity for foreigners trying to sell their IQD.

Additionally, if Iraq follows the path of other countries implementing digital currencies, it may introduce new regulations on currency transfers, further restricting foreigners' interaction with the IQD.

Foreigners holding IQD banknotes should monitor Iraq’s central bank policies closely to see how they will be allowed to convert or exchange their physical dinars. If digital dinars are restricted to residents, those holding physical IQD outside Iraq may need to cash out sooner rather than later. However, if Iraq opens access to digital accounts, it could provide a modernized way for foreigners to hold and trade IQD, but only through officially sanctioned channels.