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Update: Read "The Scam That Won't Die" for more information and timely commentary about the Iraqi Dinar controversy.

The Iraqi dinar "investment" opportunity is a scam that has been around for a few years and has recently been regaining much of its former popularity. The opportunity is pitched as a way to profit from a nearly worthless Iraqi dinar that is "sure" to appreciate in the future. The scammers promise that millions of dollars in profits are virtually guaranteed if you buy the dinar at today's values (about 1,000 dinar to one US dollar) and then exchange the dinars back for dollars at a later date once the dinar exchange rate has improved.

However, there are some fundamental problems with the Iraqi dinar scam that potential buyers should be aware of before they begin investing in one of the most illiquid currency markets in the world.

Lack of Registration

It is illegal in the US and in most other major economies to market an investment without appropriate securities registration. The scammers get around this requirement in two ways. First, it is technically legal to sell hard currency for its numismatic value. In other words, it is possible to sell hard currency as a "collector's item." Second, some dealers will register with the US Treasury as a money service business (MSB). 

Registering as an MSB is something that dinar dealers will do to put on the appearance of registration and government oversight. However, the difference between a legitimate MSBs and dinar dealers is that a real MSB is not marketing an investment. So ask yourself; if a business has to lie to get around registration, are they really making a legitimate offer?

Dinars Are Sold on Misleading Hype

The potential value of an investment in dinar is often illustrated with references to what happened to the Kuwaiti dinar following the first Gulf War and the German deutschmark following World War II. These would be good examples except neither one was a free-floating currency at the time, so the value was mostly a function of policymaking and official currency management. It is also a fact that no rational investor would base an investing decision on two instances of past data (more than 60 years in the past) without considering all the times this investing strategy did not pay off.

Will the Iraqi government pursue a policy of currency appreciation in the future? Since an appreciating currency makes funding your brand new government and paying off past debts more expensive, it seems unlikely. An economy in Iraq's situation is more likely to experience a currency crash or intentional devaluation than a sudden and dramatic reflation.

In fact, more recent currency history would seem to show that it is more likely that the dinar will depreciate further in the near term. The fallacy that dinar dealers are relying on is that a growing economy will result in a stronger currency. That is not the case. As the recent examples of Venezuela, Turkey, and Mexico show, a growing economy is as likely to be accompanied by an inflating (weakening) currency as not.

Many dinar dealers refer to the value of the Iraqi dinar prior to the 1990 Kuwaiti invasion (One dinar = $3+ US dollars) as evidence that the potential for the dinar is theoretically unlimited. They don't mention that the pre-1990 dinar has been demonetized (worthless) and that its value was arbitrarily set by an autocratic regime led by Saddam Hussein. Following the embargo, the ability for the Iraqi government to manage its currency's value collapsed and it spent the next ten years at 2,000 - 3,500 dinar to the US dollar.

By John Jagerson of LearningMarkets.com

Update: Read "The Scam That Won't Die" for more information and timely commentary about the Iraqi Dinar controversy.