Cryptocurrency Regulation in Bahrain Prior to 2023

Bahrain, as part of its ambition to become a leading FinTech hub in the region, implemented comprehensive regulations to govern and license crypto-asset services. This proactive stance towards cryptocurrency regulation was spearheaded by the Central Bank of Bahrain (CBB), reflecting the country’s commitment to fostering a secure and innovative financial technology environment.

Regulatory Framework and Sandbox Initiative

The Central Bank of Bahrain included the regulatory framework for crypto-assets in Volume 6 of the CBB Rulebook, governing Capital Markets. This move came after the implementation of a regulatory sandbox in June 2017, which allowed various cryptocurrency-related entities to test and refine their technology-based products and services in a controlled environment. The sandbox initiative facilitated innovation without the immediate burden of the usual regulatory and financial requirements. Following public consultations in January, the CBB issued the final regulations in February, laying down a structured approach for the supervision and operation of crypto-asset services​​.

Key Definitions and Regulations

The CBB’s regulations aimed to minimize the risk of financial crime and illegal use of crypto-assets. The rules covered licensing and supervision of regulated crypto-asset services, including trading, dealing, advisory, and portfolio management in accepted crypto-assets. Key definitions under these regulations included:

Crypto-assets: Defined as virtual or digital assets (tokens) on a blockchain, protected by cryptography. These are classified into payment/exchange tokens, utility tokens, asset tokens, and hybrid tokens.

Accepted crypto-assets: Payment tokens or cryptocurrencies permitted by the CBB for regulated crypto-asset services.

Regulated crypto-asset services: Activities like order reception and transmission, execution of orders on behalf of clients, dealing on own account, portfolio management, custodian services, investment advice, and operation of crypto-asset exchanges.

Crypto-asset service licensee: An entity licensed by the CBB to carry out regulated crypto-asset services in Bahrain​​.

Licensing Requirements and Categories

Entities wishing to conduct crypto-asset related activities in Bahrain needed to obtain a license from the CBB, falling under one of four categories, each with specific permitted activities. The application process required a business plan, application forms for shareholders and controlled functions, and adherence to a non-refundable application fee and an annual license fee based on operating expenses. The CBB had a 60-day timeframe to decide on these applications​​.

Capital and Operational Requirements

The regulations mandated minimum capital requirements for crypto-asset service licensees, varying according to the licensing category. These requirements were set to ensure the financial integrity of the licensee’s operations. Key personnel assuming controlled functions in a licensed entity required the CBB’s approval. This oversight extended to overseas crypto-asset service licensees operating in Bahrain, who were required to maintain a local management presence and premises in Bahrain​​.

Criteria for Accepted Crypto-Assets

The CBB pre-approved crypto-assets for services, considering factors like technological experience, issuer’s anti-money laundering measures, and the underlying blockchain infrastructure. Licensees had to submit details of each crypto-asset they proposed to use, and these assets needed to be approved as part of the formal application process​​.

Transactional and Client Requirements

Transactions could only be undertaken with registered clients, who had to be legal entities or natural persons above 21. A formal agreement stipulating various aspects such as regulatory status, fee details, and services provided was mandatory between the crypto-asset licensee and their clients. This agreement also included provisions for dispute resolution and crypto-asset risk disclosure​​.

Other Regulatory Provisions

The regulations also encompassed provisions for professional indemnity coverage, technology standards, cybersecurity risk requirements, counterparty risk, reporting, and notification requirements. This comprehensive regulatory framework signified Bahrain’s openness to fintech firms dealing in crypto-assets and marked a significant step in integrating blockchain technology into the region’s financial landscape​​.

In conclusion, prior to 2023, Bahrain established a detailed and structured regulatory environment for cryptocurrencies, focusing on minimizing risks and promoting innovation. This regulatory landscape positioned Bahrain as a progressive player in the field of cryptocurrency and blockchain technology, aligning with its vision of becoming a regional FinTech hub.