On 21 February 2019, the Central Bank of Bahrain ("CBB") published a new Module on 'Crypto-Assets' ("CRA Module"). As the CBB recognises that the market for crypto-assets is growing both in the Kingdom of Bahrain (Bahrain) and globally, the CRA Module has been published as part of the CBB's recent initiative to nurture Bahrain's financial technology ("FinTech") ecosystem and to help mitigate against the risk of financial crime and illegal use of crypto-assets within or from Bahrain.
The purpose of the CRA Module is to provide the CBB's Directive relating to trading, dealing, advisory services, portfolio management services in accepted crypto-assets as principle, agent, custodian and as a crypto-asset exchange within or from Bahrain.
Within the CRA Module, the CBB provides clarity on its requirements in a number of areas including but not limited to the following:
Licensing and procedure
All persons marketing or undertaking activities within or from Bahrain which is comprised of regulated crypto-asset services must obtain a license from the CBB ("Licensee").
'Regulated crypto-asset services' include one or more of the (i) reception and transmission of orders; (ii) execution of orders on behalf of clients; (iii) proprietary dealing; (iv) portfolio management; (v) crypto-asset custodian who safeguards, stores, holds or maintains custody of or arranging on behalf of clients and provides investment advice; and/or (vi) the use of a crypto-asset exchange on which accepted crypto-assets may be transacted in accordance with the exchange rules.
The rules set out different categories of licenses that may be applied for and the corresponding procedure relating to the submission of the required documentation, among other requirements.
The minimum capital requirements, comprised of paid-up share capital, unimpaired by losses, are identified for the different categories of Licensees. The minimum capital requirements must be paid into local Bahraini retail banks and evidence of such deposits may be requested by the CBB. In addition, the CBB may, at its discretion, require to ensure the financial integrity of the Licensee and its on-going operations.
Measures to safeguard interests
The same requirements applicable to the segregation and handling of clients' assets and money rules set out in the CBB Module "Market Intermediaries Representatives" apply to the CRA Module. In addition, the CRA Module sets out a number of disclosure requirements on the Licensee to the client on the general terms and conditions associated with its products and services as well as terms of the transactions including consent and confirmation requirements.
The CBB has incorporated rules to ensure that network security best practices are put into place. Licensees must have measures and procedures in place which comply with network security best practices as well as ensure that the board provides oversight and accord sufficient priority to manage technology related and cyber security risks. This is fundamental in order to ensure that 'encrypted safe custody accounts' and cryptocurrency wallets are secure and retrievable. In addition, the CRA Module sets out insurance requirements to protect against incidents, hacking or theft.
The CRA Module sets out the process for all material outsourcing contracts ensuring that adequate controls are in place and that the CBB's advance written approval is obtained ahead of any new material outsourcing arrangement (if non-material, written notification will suffice). Ultimately, Licensees must be able to evidence that they have business continuity plans in place, they have not outsourced their regulatory obligations with respect to outsourced activities and they remain responsible for all functions and activities that are outsourced.
It is important to note that although Bahrain is the first in the Gulf Cooperation Council to publish its rules on crypto-assets, the United Arab Emirates' ("UAE") Securities and Commodities Authority has announced that it will introduce regulations for initial coin offerings in the country by mid-2019. In addition, the UAE and the Kingdom of Saudi Arabia collaborated on their launch of a joint pilot cryptocurrency initiative to enable easier cross-border transactions. This is an exciting space to watch in the region and the publication of the CRA Module will most definitely lay the foundations for start-up FinTech companies to flourish in Bahrain.