Crypto Asset Exchange – Bahrain
Cryptocurrencies gained traction all across the world since its inception, considering this growth in popularity and use, industry experts, praise its potential. This digital currency went from being a mere concept to virtual reality. In the Gulf Region, Bahrain and Abu Dhabi are a leading hub for digital currencies, Blockchain and cryptocurrencies. On the other hand, many gulf countries and countries all across the world are skeptical about the integration of cryptocurrencies within their economy.
Considering this skepticism, governments are taking steps to regulate crypto assets in order to diversify their economies and attracting cryptocurrency firms. In keeping with this aim of development, it should be kept in mind that, these digital assets are accompanied with a lot of risks; therefore, it becomes important to strike the right regulatory balance so that the risks harmonize with the aim of economic growth.
After extensive deliberation, planning and identifying the potential threats that can arise in dealing with crypto assets the Central Bank of Bahrain has emerged with Regulations in order to regulate digital capital markets, more specifically crypto assets.
The Central Bank of Bahrain is responsible for regulating the capital markets in the country, now inclusive of cryptocurrency and Blockchain companies. In early 2019, the CBB approved the final rules and regulations in the CBB Rulebook under Volume 6 that would permit cryptocurrency usage in the Kingdom. The Rules cover areas like licensing, capital requirements, risk management, control environments, anti-money laundering/ anti-counterfeiting, countering funding terrorism, business conduct standards, reporting rules and cybersecurity regulations.
Despite the growth of this digital currency, banks and financial institutions are still iffy about the advantages of digital currencies and are therefore reluctant to use the same. Studies conducted all across the world have shown the potential that this digital currency holds and the fact that it is capable of impacting sectors beyond the financial sector such as the education sector, supply chain etc. Under the Rulebook, the crypto assets are defined as virtual, digital assets or tokens operating on a Blockchain platform that is protected by cryptography. These crypto-assets are offered by Crypto Asset Platform Operators or CPOs; these CPOs act as a principal or agent that facilitates custody of crypto assets on behalf of their clients.
Crypto Regulatory Sandbox
The term crypto regulatory sandbox is very common in the world of Fintech. This term basically refers to space wherein companies that engage in Fintech transactions can test out their code before deploying it globally. This is a sandbox, and the companies are exempt from some regulations so that they can test out their innovations without the fear of breaking the law.
In Bahrain, there are about 30 companies that have been approved for the Regulatory Sandbox by the CBB; these companies comprise of CPOs and exchanges. The Bahraini Regulatory Sandbox allows companies to test their technology and innovation solutions in the financial and/ or the Fintech sector.
The CBB Regulations divide types of crypto assets services into four categories according to the capital requirements for each category. Further, it also enumerates the different set of services that the CPO can provide. The categories are enumerated hereunder;
- The first category is concerned with entities that act as an investment advisory to potential investors and provide services like receipt and transmission of orders.
The Rulebook also imposes certain obligations on the Licensee:
- the Licensee is not entitled to hold any money or assets that belong to the client concerned;
- the Licensee shall refrain from receiving fees and commission from any party other than the client;
- the Licensee must not operate a crypto asset exchange; and
- the minimum capital requirement, in this case, is BHD 25,000.
- Entities that provide; portfolio management services, crypto-asset custody, investment advisory, or are accepted as an agent in that sphere fall under this category.
- The Licensee may deal as a principle, which means that the agent may act on behalf of the client and hold and control the assets of the client. However, this does not allow the Licensee to deal from their own account.
- The minimum capital requirement, in this case, is BHD 100,000.
- This category involves entities that act as a principal and an agent and trade-in accepted crypto assets, including activities like portfolio management, investment advisory and crypto-asset custody.
- In this category, the Licensee may deal in their own account and conduct dealings as a principle, however, these cannot operate a crypto-asset exchange.
- The minimum capital requirement, in this case, is BHD 200,000.
- This category is concerned with entities that operate a licensed crypto-asset exchange, including services concerned with custody services for crypto assets.
- The Licensee, in this case, may not engage in matched principal trading and must not execute client orders against proprietary capital.
- The minimum capital requirement, in this case, is BHD 300,000.
These CBB must ensure, at its discretion, the financial integrity of the Licensees considering their ongoing business operations. The capital requirements encompass paid-up share capital, not inclusive of losses, this paid-up share capital must be deposited to local Bahraini banks and evidence thereof are to be presented to the CBB as and when requested.
In addition to capital requirements, the Licensee is supposed to maintain professional indemnity insurance at a minimum of BHD 100,000 by an insurance firm approved by the CBB.
The CBB lays down eligibility criteria for investors who wish to register themselves with the licensees; the applicant must be a legal person either incorporated in the Kingdom of Bahrain or overseas in accordance with the law at the time being in force; a natural person may also register themselves as long as they are above the age of 21.
The CBB recognizes and regulates the following types of services with respect to crypto-assets:
- Regulated crypto-asset services;
- Execution of orders on behalf of clients;
- Dealing on own account;
- Portfolio management;
- Crypto asset custodian;
- Investment advice; and
- Crypto asset exchange.
The CBB further also lays down the activities that are excluded from regulation:
- Creation or administration of crypto assets;
- Development, dissemination or use of software for creation or mining of crypto assets; and
- Loyalty program.
No person is entitled to conduct activities mentioned above, in the market within the territory of Bahrain without obtaining a license from the CBB.
Further, the CBB also lays down requirements concerning the legal status of the applicants, as follows:
- In case of category 1, 2 and 3 – the applicant must be a Bahraini Limited Liability Company; or a branch resident in Bahrain of a company incorporated under the laws of its territory of incorporation; or a Bahrain Joint Stock Company.
- In the case of category 4 – the applicant must be; a Bahraini Joint Stock Company or a branch resident in Bahrain of a company incorporated under the laws of its territory of incorporation.
Any person desirous of obtaining a license must duly submit an Application for a License accompanied by a cover letter duly signed by an authorized signatory. This letter is to be submitted to the CBB and addressed to the Licensing Directorate. The documents to be accompanied with the Application for License are as follows:
- Application for authorization of Shareholders;
- Application for approved persons;
- A comprehensive business plan;
- In case of an overseas company, a copy of the commercial registration, license from a competent authority or any such equivalent document;
- In case of an existing Bahraini company, the commercial registration certificate;
- Certified copy of the Board resolution, confirming its decision to seek CBB license;
- A copy of the MOA and AOA; and
- Any other such documents that are mentioned in the CRA 1.2 of the CBB Regulations Volume 6.
Once all the documents mentioned above are in order and submitted to the concerned authority, the CBB will review the same and duly inform and advise the applicant in writing about either of the following:
- Granting application without conditions;
- Granting application with conditions; and
- Refusal of application, in this case, the CBB is required to clearly state the grounds under with the application was refused.
By law, the CBB is required to announce the decision and inform the applicant about the acceptance or refusal within 60 days of submission of all such documentation required by the CBB. Once approved, the decision to grant license shall be published in the Official Gazette and in two local newspapers, one in English and one in Arabic.
The applicant seeking grant of license has to pay a non-refundable application license fee of BHD 100 at the time of submission of the application to the CBB. It is to be noted that an approved person is not required to pay any such applicable fees.
Accepted Crypto Assets
The authority to determine the suitability of crypto assets lies with the CBB. Therefore, only after the approval of the CBB with respect to the acceptability of the crypto assets will the Licensee be able to deal in the same. Further, certain factors are considered by the CBB for approving crypto assets as under-regulated crypto-asset services, as follows:
- The track record, reputation and technological experience of the issuer and the software developers;
- The issuer’s cybersecurity systems and controls;
- Availability of a reliable multi-signature hardware wallet solution;
- Protocols and underlying infrastructure;
- Whether the crypto assets have been traded on any sidechains;
- Other crypto-asset exchanges on which the crypto asset has been traded; and
- All such factors that are enumerated under CRA 4.3.3 .
Ongoing obligations and Disclosures
In CRA 4.1 to 4.12, the CBB imposes certain obligations upon the licensees, including but not limited to; ensuring fair, transparent and orderly dealings of activities, managing risks associated with the business and operations, providing clients with sufficient information to facilitate decision making, maintain fair treatment of clients and take into consideration the complaints submitted by clients.
As part of establishing a trustworthy relationship with clients, the Licensee must disclose any such risk that may arise and may come to the knowledge of the Licensee regarding the crypto assets. This information must be disclosed in a clear and conspicuous manner along with the rights and liabilities imposed on the client, in both the Arabic and English language.
Further, the Licensee is required to:
- Maintain proper records and books in connection with the crypto-assets;
- Maintain confidentiality of all client information; and
- Maintain records of telephonic conversations and electronic communications, and all such matters as may be required by the CBB.
Many countries have banned cryptocurrencies considering its dubious presence. The rationale behind this is that crypto-assets can easily turn into a treacherous scheme to defraud investors. The problem with cryptographic assets is that, since it is in the digital form, once stolen it cannot be traced, one example of such a theft is Coin Check which was the world’s biggest crypto theft, thereafter, there have been numerous scams and hacks within the crypto world. Therefore, it is totally understandable where the skepticism against the use of cryptocurrencies arises.
On the flipside, billions of people all over the world have benefitted from dealing in crypto-assets and entering the financial market. This market is in a somewhat grey area all over the world; however, countries are striving to regulate the use of these assets through guidelines and regulations that would allow them to make use of crypto-assets to benefit the economy.