As direct hostilities between Iran and Israel remain paused after last month’s exchange of strikes, diplomatic fallout continues. One of the most consequential moves came from the Israeli Defense Ministry’s recent decision to proscribe the Central Bank of Iran, marking the first time a national monetary authority has been designated as a terrorist organization. Though it may appear symbolic, this decision creates an additional avenue for Israel to further weaken the Islamic Republic, while establishing a significant new global precedent.

Iranian Banks Already Under Siege

The Central Bank of Iran and several Iranian commercial banks are already subject to significant international restrictions. These include sanctions by the United States, European Union, United Kingdom, implemented due to the Bank’s involvement in violating international import restrictions, money laundering, and financing proscribed terrorist organizations including the Islamic Revolutionary Guard Corps (IRGC). Such measures have compounded Iran’s ongoing economic and monetary crises, along with limitations on its sale of petroleum. Endemic cronyism, embezzlement, and other forms of corruption have further hindered the Bank’s performance.

As the Bank’s foreign currency reserves steadily deplete, Iran has sought to manage debt and maintain critical foreign trade using barter agreements and similar bilateral arrangements. Given the mixed success of these efforts, Tehran has also looked to deepen financial ties with major partners, by seeking membership in the BRICS New Development Bank, integrating into the Russian MIR payment network, and funneling exports through illicit networks connected to China to circumvent sanctions.

Since Masoud Pezeshkian assumed the presidency last year, alleviating these issues has been a key priority for the Islamic Republic. Through late 2024, Pezeshkian’s administration sought sanctions relief through negotiations with the European Union. During talks with the United States in recent months, improving the Bank’s position also emerged as a key priority. This led Iran to indicate that it would implement international guidelines on corruption, money laundering, and terrorist financing – which it hoped would clear the way for renewed integration into the global financial system. Iran made little material progress on this front, even before talks with Washington broke down.

A New Tactic Emerges

In theory, proscription would greatly intensify the structural issues and isolation facing the Islamic Republic, by effectively criminalizing any relationship with the Bank – enabling punitive measures against much of the Iranian economy. These potentially include blocking transactions, seizing assets, and prosecution. However, Israel’s ability to enforce such measures have clear limitations, not least due to its lack of unilateral economic leverage over Iran.

Therefore, the most significant effect of proscription is establishing a legal and strategic basis for kinetic action against the financial infrastructure of the Islamic Republic. Israel has previously employed this approach in its conflict with Hezbollah. For example, in October 2024, airstrikes were carried out against bank offices considered to be affiliated with the organization, in an effort to disrupt its funding network. Should the ceasefire between Iran and Israel break down, it is likely that the Islamic Republic’s financial network will be similarly targeted, following this pattern.

This evolving approach has already been tested. During last month’s conflict, Israel reportedly backed covert proxy cyberattacks against Bank Sepah, which is affiliated with the IRGC, and Iran’s Nobitex crypto-currency exchange, which has a key role in Iran’s illicit petroleum trade. These actions severely disrupted online transfers and other banking services, while wiping out $90 million in holdings, demonstrating the impact of these tactics if employed at a larger scale.

Israel could also use the threat of such actions to re-establish deterrence vis-à-vis Iran. Through proscription, Israel is sending a clear signal that it would be willing to incorporate direct, overt operations against funding networks into its tactical repertoire. As the First Vice President of the Islamic Republic recently asserted, the Central Bank of Iran is a key element of the regime’s “economic front,” and would be vital in managing a wartime economy in the event of a more protracted conflict against Israel or the United States. Given the already weak state of the Iranian economy, a blow against this infrastructure could be especially devastating.

Starting a Trend?

It has also been noted that the Bank’s proscription by Israel may also prompt third countries to reconsider their interactions with Iranian finance, both in the region and further afield. This would work to Israel’s advantage, by prompting multilateral enforcement of the proscription’s provisions.

The clearest means for Israel to achieve this is through diplomatic pressure on its allies, encouraging them to adopt similar designations or increase scrutiny on the Iranian financial sector. Banks in some Western states, including Germany and the United Kingdom, have reportedly maintained relationships with financial entities in Iran until recently – creating a potential point of leverage for Israeli proscription. This could become a particularly important issue as European states consider whether to use the “snapback” mechanism to trigger United Nations sanctions against Iran – especially since these sanctions apply to the Iranian banks.

Some Gulf states, already balancing security concerns toward Iran with commercial interests, could face heightened pressure to sever financial ties, altering regional trade and investment dynamics. The United States, which has long linked the Central Bank of Iran to terror financing, could also take a similar action to Israel, particularly if there is a return to escalation. Should other countries follow suit, Iran’s already fragile banking system would face heightened isolation, which would likely undermine its ability to rearm its military forces and proxies.

Global Implications

More broadly, Israel’s move sets a normative precedent that could reshape how states view the involvement of national monetary authorities and financial institutions in sponsoring terrorism. If it proves effective at undermining Iran’s financial infrastructure, this tactic could be perceived as a novel tool for states to exert financial pressure, build deterrence, and engage in hybrid warfare. This could signal a shift toward more assertive proscriptions against the central banks of other regimes. For the United States and Europe, this could include Cuba (a designated state-sponsor of terror), or Venezuela. Ukraine, which has already conducted cyberattacks against Russian financial institutions, could see value in similar proscriptions.

Ultimately, the unprecedented nature of Israel’s move means the outcomes remain uncertain. While it may prove an effective means of increasing pressure on Tehran, it also carries significant risks and possible unintended consequences. Such a move could provoke retaliatory cyber or kinetic actions from Iran against sensitive elements of the Israeli economy, as has already been attempted. More broadly, designating central banks as military targets risks substantial global financial disruptions and the further politicization of monetary policy, with wide-reaching implications for global markets. If this strategy gains traction as a means of waging hybrid warfare, policymakers must carefully weigh the appeal of heightened economic pressure against the dangers of mounting instability and disruption.