Сrypto license in Bahrain

Сrypto license in Bahrain

The Central Bank of Bahrain (‘CBB’) has announced comprehensive legislation to oversee and license ‘Regulated crypto-asset services’ in Bahrain (crypto license in Bahrain), in keeping with its ambition of becoming the region’s premier FinTech centre. Volume 6 of the CBB Rulebook, which controls Capital Markets, contains the regulatory framework.

The regulations are the result of the CBB’s June 2017 adoption of a regulatory sandbox. Various crypto-currency-related entities have taken advantage of the opportunity and entered the regulatory sandbox, allowing them to work closely with the CBB in testing and refining their technology-based innovative products, services, and platforms in a controlled virtual space without being burdened by the usual regulatory and financial requirements that would otherwise apply to their activities.

The CBB held public consultations and received feedback on the draft regulations in January of 2022, after which it released the final regulations (‘Regulations’) in February. The essential components of the Regulations are discussed below.

About the Regulations 

The CBB adopted the Regulations in order to reduce the danger of financial crime and illicit use of crypto-assets, as the market for crypto-assets continues to grow and gain popularity around the world. The Regulations establish rules for the licensing and supervision of ‘Regulated crypto-asset services’ (defined below), which include trading, dealing, advisory, and portfolio management services in ‘Accepted crypto-assets’ (defined below) as principal, agent, custodian, or crypto-asset exchange within or from Bahrain.

Key Definitions

1.Crypto-assets are virtual or digital assets (‘tokens’) that operate on a blockchain network and are secured via encryption. Tokens are further divided into:

  • payment/exchange tokens (cryptocurrencies);
  • utility tokens (for specialized applications);
  • asset tokens (debt or equity claims on the issuer); and
  • hybrid tokens (a combination of the aforementioned) (mixed features of above-mentioned tokens).

2.An accepted crypto-asset is a payment token (or crypto-currency) that has been approved by the CBB for use by a Crypto-asset service licensee to provide a Regulated crypto-asset service.

3.The provision of regulated crypto-asset services includes any of the following activities:

  • Order reception and transmission; that is, receiving and transmitting orders to buy and/or sell Accepted crypto-assets, as well as transmitting such orders to a third party for execution.
  • Order execution on behalf of clients; that is, finalizing agreements on behalf of clients to buy and/or sell one or more Accepted crypto-assets.
  • Dealing on one’s own account; that is, trading using one’s own money to complete transactions in one or more accepted crypto-assets.
  • Portfolio management; that is, maintaining a client’s portfolio of Accepted crypto-assets and having the authority to invest in one or more Accepted crypto-assets on their behalf.
  • Crypto asset custodian; that is, on behalf of a customer, securing, storing, holding, or maintaining custody of Accepted crypto-assets.
  • Investment advise; that is, providing a customer with a customised and individualized suggestion to buy, sell, trade, or hold Accepted crypto-assets according on the client’s circumstances.
  • Crypto-asset exchange; that is, a CBB-licensed exchange operating in Bahrain where Accepted crypto-assets are traded, converted, or exchanged in compliance with the crypto-asset exchange’s rules.

4. A crypto-asset service licensee is a person and/or establishment licensed by the CBB to provide Regulated crypto-asset services in Bahrain under these Regulations.

5. Any promotion, offering, announcement, advertisement, broadcast, or other form of communication used to induce the purchase, exchange, or acquisition of financial services in exchange for a payment or other compensation is referred to as marketing.

6. Crypto-asset-related activities are considered to be carried out in or from Bahrain if the person or establishment is incorporated in Bahrain or directly solicits clients in Bahrain.

Licensing Requirements for crypto license in Bahrain

Anyone wishing to promote crypto-assets or engage in crypto-asset-related business within or outside Bahrain must first obtain a crypto license from the CBB in Bahrain. If they want to provide one or more Regulated crypto-asset services, they must apply for a license under one of the four categories listed below:

Category 1 Category 2 Category 3 Category 4
  • Reception and transmission of orders.
  • Investment advice.
  • Trading in Accepted crypto-assets as an agent.
  • Portfolio management
  • Crypto-asset custody service.
  • Investment advice.
  • Trading in Accepted crypto-assets as an agent.
  • Trading in Accepted crypto-assets as a principal.
  • Portfolio management.
  • Crypto-asset custody.
  • Investment advice.
  • Operate a licensed crypto-asset exchange.
  • Crypto-asset custody service.

Applications for a license must be submitted using the CBB’s specified form and must include (among other things) the following information:

  • a business plan that specifies the type of operation to be carried out;
  • paperwork for all shareholders and subsidiaries to fill out; and
  • all “controlled functions” application forms (further discussed below in this article).

Applicants can combine two or more Regulated crypto-asset services and apply for a license from the CBB if the services are in the same category and there is no conflict of interest.

Aside from the non-refundable application cost of BHD 100, licensees will be charged an annual license fee of 0.25 percent of their operating expenses, which can range from BHD 2,000 to BHD 6,000, depending on the applicant’s operating scale. The CBB has 60 days to decide on license applications, according to the Regulations.

An applicant must be either:

  • incorporated as a Bahraini joint stock company; or
  • a branch resident in Bahrain of an overseas firm lawfully incorporated under the rules of its home jurisdiction in order to be licensed as a Crypto-asset service licensee.

The Regulations also allow individuals and/or businesses dealing in crypto-assets that are incorporated in other countries to seek a license and operate in Bahrain as ‘Overseas crypto-asset service licensees.’ The CBB will examine an Overseas crypto-asset service licensee’s shareholders, management structure, financial status, operations, and the Regulations (in its home country) that govern its crypto-related activities if it applies to open a branch.

The possibility for applicants to choose a representative (such as a law firm or professional consultancy) to prepare and submit applications on their behalf is an important part of the licensing process.

Capital Requirements 

In Bahrain, all crypto-asset service licensees must meet a minimum capital requirement, which varies depending on the licensing type (described above):

Licensing Category Minimum Capital (BHD)
Category 1 25,000
Category 2 100,000
Category 3 200,000
Category 4 300,000

If it is deemed necessary to safeguard the financial integrity of the licensee’s operations, the CBB may, at its discretion, require a licensee to hold additional capital in an amount and form it specifies.

An Overseas crypto-asset service licensee must also calculate its minimum capital requirements in the same way as a Bahraini joint stock company would.

Approved persons

Persons assuming ‘controlled functions’ in a CBB regulated Crypto-asset service licensee require the CBB’s written approval. ‘Controlled functions’ include:

  • Director;
  • Chief executive or General Manager;
  • Head of functions;
  • Chief Information Security Officer;
  • Compliance Officer; and
  • Money Laundering Reporting Officer.

Prior authorisation from the CBB is necessary for the branch manager (or equivalent) in Bahrain for Overseas crypto-asset service licensees, in addition to the same ‘restricted functions’ specified above.

If some of the workers performing the ‘controlled functions’ are not based in Bahrain, the Overseas crypto-asset service licensee must get CBB clearance.

Accepted crypto-assets

The CBB will enable Crypto-asset service licensees (including Overseas crypto-asset service licensees) to provide services exclusively for Accepted crypto-assets under the Regulations. The CBB will pre-approve crypto-assets based on a number of factors, including:

  • the issuer’s technological experience, track record, and reputation;
  • the issuer’s anti-money laundering, counter-terrorism financing, and cybersecurity systems and controls;
  • the asset’s availability of a reliable multi-signature hardware wallet solution; and
  • the protocol and underlying infrastructure of blockchain technology (i.e. whether it is a separate blockchain with a new architecture system and network or it leverages an existing blockchain for synergies and network effects).

Security, traceability/monitoring, resolution mechanisms, geographical distribution, connectivity, market demand/volatility, type of distributed ledger used, relevant consensus pool of the distributed ledger, innovation and practical applicability/functionality, and whether the crypto-asset has been traded on any Dark-net marketplaces will all be considered by the CBB in addition to the aforementioned factors.

Applicants must give the details of each crypto-asset that will be used for their Regulated crypto-asset service when applying for a crypto license in Bahrain. As part of the formal application process, the use of these crypto-assets must be approved.

Investors who are eligible

Only when they have been registered as clients can crypto-asset service licensees conduct transactions with/on behalf of individuals or businesses. A legal company lawfully incorporated in Bahrain (or in accordance with the rules of the home jurisdictions) or a natural person over the age of 21 are both eligible investors (or prospective clients).

Regulated crypto-asset services can only be provided if the Crypto-asset license and its clients (i.e. investors) enter into an agreement that includes (among other things):

  • the name and address of the Crypto-asset service licensee or the parent company (in the case of an Overseas crypto-asset service licensee);
  • the regulatory status of the Crypto-asset service licensee;
  • the terms of entering into, terminating and amending the client agreement;
  • details of fees, costs and other charges and the basis upon which such costs will be imposed;
  • details of the services and products to be provided by the Crypto-asset service licensee;
  • details of conflict of interests;
  • provisions for complaints handling procedures and/or dispute resolution procedures; and
  • the crypto-asset risk disclosure (as mandated by the CBB under these Regulations).

Other prerequisites

Professional indemnity coverage, technological standards, cyber security risk requirements, counterparty risk, reporting and notification requirements, and other elements are also included in the Regulations.

The introduction of these new Regulations signals that Bahrain is now open for business to fintech firms dealing in crypto-assets from around the world, and it paves the way for these businesses and startups to enter the GCC region, which offers a plethora of untapped opportunities in the field of blockchain technology.

If you still have questions about obtaining a crypto license in Bahrain or another jurisdiction you are interested in, contact our specialists for detailed advice or write to us in the CRM form at the bottom of the page, our specialists will answer you online. You can also see our offers in category ready-made companies and licenses for sale.

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