When Bahrain becomes the first country in the MENA region to regulate a digital cryptocurrency exchange, the landmark will signal both the region’s digital sophistry as well as the regulator’s readiness to engage with the thorny issues afflicting the $134 billion sector.
Only a handful of countries have specified rules for the trading of these digital assets. Regulator attitudes range from outright bans on their trade and holding to recognising them as property. In the UK, for example, cryptocurrencies are not considered legal tender although their exchanges must be registered and any gains and losses are taxed.
In this scenario, Bahrain is one of the few nations to emerge as a testing ground for cryptocurrencies and their management. One of the most established financial centres in the Gulf, Bahrain has also reinvented itself as a centre for financial technology and its Bahrain FinTech Bay is the largest of its kind hub in the Mena region.
Accordingly, its lessons could help other jurisdictions, whether in the UK or elsewhere.
In 2017, the Central Bank of Bahrain (CBB) established a regulatory sandbox to help crypto-linked start-ups trial and refine innovative products, while minimising risks to customers and giving regulators time to enact legislation as required.
Cryptocurrency exchange Rain is the first company to exit this sandbox and is now just a short time away from launch, its promoters said recently. The Middle East-focused exchange is currently in the process of applying for the relevant licence to enable sophisticated investors, Islamic institutions and top-tier family offices to trade and store cryptocurrency in a Shari’ah-compliant manner.
Rain will open the Islamic markets to cryptocurrency with a Shari’ah-compliant exchange and a suite of cryptocurrency investment opportunities. A major milestone in the cryptocurrency and Islamic markets the company is now very public launch.
Rain’s graduation follows new statutes from the Bahrain Central Bank aimed at bringing cryptoassets within the regulatory perimeter. The guidelines cover areas such as licencing, risk management, governance standards and cybersecurity measures.
The CBB’s introduction of the rules relating to cryptoassets is in line with its goal to develop comprehensive rules for the fintech eco-system supporting Bahrain’s position as a leading financial hub in the MENA region.
Rain is only one of several firms in the CBB’s programme, according to Dalal Buhejji, the senior manager of business development and financial services at the Bahrain Economic Development Board. Perhaps because of cryptocurrencies’ start as a parallel payment system and their use in money laundering, the new regulations have been welcomed by fintech entrepreneurs.
Regulated assets raise investor confidence, people who use cryptocurrencies will feel more comfortable knowing there is a regulatory body in place. Last June, the CBB issued its first sandbox licence to the digital asset exchange Palmex, a company that provides multiple trading pairs including DubaiCoin, Bitcoin, Ethereum and XRP.
A few months later, the Switzerland-based financial technology firm X8 AG announced plans for a crypto exchange with a Shari’ah-compliant component, and said it was in talks with exchanges in Bahrain and other Mena cities.
Bahrain has repeatedly stressed the merits of blockchain technology while underscoring the importance of cybersecurity. Its positive environment for blockchain assets is expected to catapult the GCC nation into an elite club of crypto-friendly states that include Gibraltar, Malta and Lichtenstein.
The Kingdom’s prominent role in the knowledge economy will also likely attract investors from other markets. Not only do Bahraini financial services companies having established ties with emerging and developed nations such as India and the UK, but setting up and doing business in the financial services sector here is also 35 per cent cheaper than elsewhere in the Gulf, according to the consultant KPMG.
In December, the EDB signed a Memorandum of Understanding (MoU) with the government of India’s Maharashtra state, home to Mumbai, to establish a framework for fintech co-operation between the two countries. A similar agreement is being discussed with Digital Jersey to give the British financial centre access to Bahrain’s Islamic fintech expertise.
Final talks are due to be held in April with a possible MoU in May. Bahrain is already a strong market for many British firms and the two nations’ financial sectors could thrive in a post-Brexit partnership.
Bahrain has a history of championing new business sectors from the time it was the first place on the Arabian Peninsula where oil was discovered in commercial quantities. In continuing to leverage that tradition of innovation, the island is fast establishing a reputation for leadership in the digital finance arena.