The Central Bank of Bahrain (CBB) has published final rules allowing for the regulation and licencing of dealing, advisory, and portfolio management services in accepted crypto-assets and as a cypto-asset exchange.
The announcement means the CBB is the latest financial regulator in the Middle East to develop an onshore regulatory framework for cryptoassets. Last year, the Abu Dhabi Global Market (ADGM) launched its framework to regulate cryptoasset activities, while the UAE’s Securities and Commodities Authority (SCA) has approved a plan to regulate ICOs and recognise them as securities.
The new CBB rules (189-page / 383KB PDF), which have been incorporated into Volume 6 (capital markets) of the CBB Rulebook, are aimed at ensuring these activities are "brought within the regulatory perimeter and are subject to comprehensive regulatory and supervisory measures", the CBB said.
Marie Chowdhry, a Middle East-based financial regulation expert at Pinsent Masons, the law firm behind Out-Law.com, said: "The regulations are part of recent initiatives by the CBB to nurture Bahrain's fintech [financial technology] ecosystem and position the country as a fintech and innovation hub in the region".
"The Bahrain Fintech Bay reports that there are eight cryptocurrency exchange companies under the CBB 'regulatory sandbox', representing 30% of the total companies registered. These new, 'tech friendly' regulations lay the foundations for FinTech and start-up companies to flourish in the Kingdom" she said.
The CBB established a regulatory sandbox initiative in June 2017, providing financial technology firms and startups with a space in which to test innovative new ideas. It began consulting on its draft regulatory framework for crypto-assets and platforms in December 2018.
Crypto-assets are virtual, digital assets or tokens operating on a blockchain platform and protected by cryptography. The new CBB rules accommodate four main crypto-asset types, each with different capital and regulatory requirements. These are payment tokens, or 'cryptocurrencies', used for acquiring goods or services; utility tokens, which can be used within a specific application or service; asset tokens, which represent legally grounded assets such as debt or shares; and hybrid tokens, which possess features of more than one of these types.
The CBB rules incorporate licensing, governance and minimum capital requirements; risk management rules; anti-money laundering and terrorist financing (AML/CFT) provisions; standards of business conduct; conflict of interest rules; reporting requirements; and cyber security requirements. They also cover supervision and enforcement standards, including those applicable to a platform operator acting as principle, agent, portfolio manager, adviser or custodian.
The rules set out the need for enhanced due diligence by firms when signing up new clients; minimum professional indemnity insurance requirements; and minimum information requirements for clients. Additional rules apply to firms licensed by the CBB as crypto-asset 'exchanges'. These cover order matching; pre- and post-trade transparency; measures to avoid market manipulation and market abuse; and conflicts of interest.
London-based cryptocurrency expert Jennifer Craven of Pinsent Masons said that the CBB's publication was a positive step, but that more needed to be done to safeguard the crypto sphere.
"The CBB's new rules show how, internationally, further steps are being taken to safeguard investments in crypto by putting regulations in place," she said. "This news comes after the FCA recently announced that consumer harm from cryptoassets has been overstated, and it will be interesting to see how this plays out in the Middle East in light of the new rules."
"Despite the FCA announcement, more should be done to ensure that the recent QuadrigaCX scandal, in which Canada's biggest cryptocurrency exchange lost $150 million worth of assets, is not repeated. More global regulatory attention is needed to keep up with new innovations in the crypto world, and in the fight against fraudsters. Enforcing rules and regulations should enhance due diligence and lower the risk of investors being defrauded. This will also better enable the process of tracing and recovering stolen monies for victims of fraud, particularly as encrypted safe custody accounts should be more easily retrieved," she said.
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