Central Bank of Bahrain issues draft regulations on Crypto-asset platform operators

In a regional-first, the Central Bank of Bahrain (“CBB”) has issued for public consultation, draft regulations to govern and license “Crypto-asset Platform Operators”. The regulatory framework will be included in Volume 6 of the CBB Rulebook that governs Capital Markets.

The draft rules come off the back of the implementation by the CBB of a regulatory sandbox in June 2017. Since the creation of the regulatory sandbox, various crypto-currency related entities have availed of the opportunity and entered the sandbox, thereby working closely with the CBB in testing and refining their technology based innovative products, services and platforms, in a controlled virtual space without being immediately burdened by the usual regulatory and financial requirements which would otherwise apply to their activities.

The CBB has invited consultations on the draft regulations and comments/feedback may be provided to the CBB through email until 13 January 2019.

We have summarised the key features of the draft regulations for you below:

Key Features:

• The regulations cover rules for licensing and supervision of crypto-asset services; including those provided by a crypto platform operator (as a principal, agent or custodian) within or from Bahrain.

• Crypto assets have been defined as virtual or digital assets/tokens operating on a blockchain platform and protected by cryptography. Tokens have been further classified into:
  1. payment tokens (cryptocurrencies);
  2. utility tokens (for specific application);
  3. asset tokens (debt or equity claims on the issuer); and
  4. hybrid tokens (mixed features of above-mentioned tokens).
• The regulations allow crypto asset platform operators incorporated in overseas jurisdictions to obtain a license and operate within Bahrain as “Overseas crypto asset platform operators”.
• Anyone who wishes to market or undertake crypto asset related activities for business within or from Bahrain will need to obtain a license from the CBB:

“Marketing” is envisaged to include any promotion, offering, announcement, advertising, broadcast or any other means of communication carried out to induce purchase, exchange or acquisition of financial services in return for a payment or other consideration.

“Activities” are deemed to be undertaken in or from Bahrain when the platform/person is incorporated in Bahrain or directly solicits clients within Bahrain.

• The regulations exclude the following activities from the definition of “regulated crypto-asset services”:
  1. creation or administration of crypto-assets;
  2. development, dissemination or use of software for the purpose of creating or mining crypto-assets; or
  3. transmission of crypto-assets.

• Operators will be able to combine two or more regulated crypto-asset services and obtain a license from the CBB for the same.
• The CBB has set out a 60-day timeframe to decide on applications for licenses.
• Operators may even appoint a representative (such as a law firm or professional consultancy) to prepare and submit applications on their behalf.
• The CBB has set out an annual license fee that can range between BHD 2,000 – BHD 6,000, depending on the operating scale of the applicant.

• Persons assuming “Controlled functions” in a CBB regulated crypto-asset platform operator require CBB’s written approval. “Controlled functions” include:
  1. Director;
  2. Chief executive or General Manager;
  3. Head of functions;
  4. Chief Information Security Officer;
  5. Compliance Officer; and
  6. Money Laundering Reporting Officer.

• For overseas crypto-asset platform operators, prior approval from the CBB is required for the “branch manager” (or equivalent) in Bahrain in addition to the same “Controlled functions” described above.

• A crypto-asset platform operator in Bahrain must be either:
  1. incorporated as a Bahraini joint stock company; or
  2. a branch resident in Bahrain of a company duly incorporated under the laws of its jurisdiction;
     • An application for a branch of an overseas crypto-asset platform operator will invite the CBB’s scrutiny of the operator’s shareholders, management structure, financial position, its activities and the regulations governing them;
     • Overseas crypto-asset platform operators must maintain a local management presence, have premises in Bahrain and must seek CBB approval if some of its “Controlled functions” are not Bahraini residents.

• All Crypto-asset platform operators in Bahrain must maintain a minimum capital requirement of an amount not less than BHD 500,000:
  1. An overseas crypto-asset platform operator must also calculate its minimum capital requirements in accordance with those that would apply to it if it were a Bahraini joint stock company.

• Under the regulations, the CBB will allow licensed operators to undertake services only for “accepted crypto-assets”:
  1. The CBB will pre-approve crypto-assets by taking into account various factors like market capitalisation (excess of USD 4 billion), security, traceability/monitoring, connectivity, market demand/volatility, type of distributed ledger used, innovation and practical applicability/functionality.

• Eligible investors (or prospective clients) must be a legal entity duly incorporated in Bahrain or in accordance with laws of the home jurisdictions, or a natural person above the age of 21.
• The regulations also set out provisions relating to technology standards, cyber security risk requirements, reporting and notification requirements, etc.

How we can help

Given the new regulations, Al Tamimi & Company would be delighted to assist you with any enquiries relating to the regulations and any licensing applications. Please do not hesitate to contact:

Rad El Treki
Head of Corporate Structuring – Bahrain
r.eltreki@tamimi.com

Natalia Kumar
Senior Associate, Banking & Finance
n.kumar@tamimi.com