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CRYPTO ASSETS NEWSLETTER - APRIL, 2019

INTRODUCTION

 

In February this year, the Central Bank of Bahrain (CBB) introduced a Crypto Asset Module in Capital Markets volume of its Rulebook. The Module contains the rules concerning trading, dealing, advisory services, portfolio management services in accepted crypto-assets as a principal, agent, custodian or crypto-asset exchange within or from the Kingdom of Bahrain (“Module”).

The Module in conjunction with other parts of the Rulebook on (a) Users’ Guide b) High-level Controls (corporate governance); c) Market Intermediaries and Representatives; d) Anti-Money Laundering and Combating Financial Crime; e) Dispute Resolution, Arbitration and Disciplinary Proceedings; f) International Cooperation and Exchange of Information forms the complete mechanism for issuance of crypto assets in Bahrain.

In this month’s newsletter we summarize the Module issued by CBB and accordingly analyze the requirements for obtaining a license.

 

Regulated Crypto Assets

 

The module classifies the activities which qualify as Regulated Crypto Asset Services. Marketing or undertaking of any of the Regulated Crypto Asset Services shall require a ‘license’ to be obtained from CBB. Licensees can undertake Regulated Crypto-Asset Services in Accepted Crypto-Assets only, after seeking prior written approval of the CBB. The factors for qualification of a crypto asset as an accepted crypto asset have been laid down in CRA – 4.3.3.

Undertaking of any of the following activities shall qualify as a Regulated Crypto Asset Service and shall accordingly require a license from CBB. (a) reception, transmission, execution of orders on behalf of the client for buying and selling the Accepted Crypto-Assets; (b) dealing of own account in Accepted Crypto-Assets; (c) custodianship; (d) Portfolio Management.

However, the following activities do not constitute Regulated Crypto Asset Services and shall accordingly be exempted from requirement of a license under this Module - (a) the creation or administration of crypto assets; (b) the development, dissemination or use of software for the purpose of creating or mining a crypto asset; or (c) a loyalty programme.

 

Categories of License

The Licenses have been divided into 4 (four) categories.

Category 1 includes license for reception and transmission of orders and providing investment advice in relation to Accepted Crypto-Assets;

Category 2 includes license for trading as an agent, portfolio management, crypto asset-custodianship, and investment advice.

Category 3 includes license for trading as an agent and principle, portfolio management; crypto-asset custody; investment advice.

Category 4 includes license for operating a licensed crypto-asset exchange; and crypto-asset custody services.

(It is pertinent to note that while undertaking the activities in Category 2, licensees may hold or control client asset and client money but must not deal as a principal or operate a crypto-asset exchange. While under Category 3 in addition to holding and controlling client’s money they may also deal as a ‘principal’, but shall not operate a crypto asset exchange.)

 

Application for License

Applicants are required to submit the forms (CRA 1.2.1) in the prescribed format along with the required documents as per the checklist provided in the Module (CRA 1.2.4). In accordance with CRA 1.2.2 CBB is will take a decision within 60 (sixty) calendar days of an application being deemed complete (i.e. containing all required information and documents).

The CBB may refuse to grant a license if (a) the requirements of CBB and Module are not met; false or misleading information has been provided; the CBB believes it necessary in order to safeguard the interests of potential clients;

 

License Fees

A non-refundable license application fee of Bahraini Dinar 100 at the time of submitting the formal application to the CBB shall be required to be paid. Other fees payable shall include the variable Annual License fees of 0.25% of the operating expenses of the company. The first annual license fees shall be Bahraini Dinar 2000 payable at the time of obtaining the license.

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LEGAL STATUS

The legal status of a licensed crypto-asset service licensee under the Module must be:

  1. A Bahraini joint stock company (B.S.C.); or
  2. A branch resident in Bahrain of a company incorporated under the laws of its territory of incorporation.

In case the application is for establishing a branch of an overseas entity then such an application will be considered by CBB after extensive review. The CBB may also provide an initial ‘in principle’ confirmation that the applicant appears likely to meet the CBB’s licensing requirements, subject to the remaining information and documents being assessed as satisfactory.

Further the Licensee is required to appoint one person to undertake the function of Chief Executive or General Manager. Chief Executive or General Manager must be a resident in Bahrain. A Licensee shall also require a prior approval from CBB to appoint other personnel in ‘controlled functions’ like Director; Chief Executive or General Manager; Head of function; Chief Information Security Officer; Compliance Officer; and Money Laundering Reporting Officer (MLRO).

 

Minimum Capital Requirements

The licensees are required to deposit the minimum capital (as listed below) in retail bank in Bahrain. The minimum capital requirement as per each of the categories is as enlisted below:

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

 For the purposes of calculation of minimum capital requirement of an overseas applicant the applicant shall be deemed to be a joint-stock company incorporated in Bahrain and the sums shall be calculated accordingly. Further the Licensee is required to abide by multiple other obligations applicable to them in accordance with CRA 3 and CRA 4 of the Module.

 

Eligible Investors

Licensees are required to apply for the registration of clients they wish to deal with. Such a client is required to be:

  1. a legal person incorporated either in the Kingdom of Bahrain or in an overseas jurisdiction under the law of its place of incorporation; or
  2. a natural person above 21 years of age. Other requirements shall include obtaining of a consent form and bank account details of the client for the purposes of registration.

The Licensee is also required to ensure that a client’s money is segregated from any other accounts of the Licensee.

 

Other Requirements

Other requirements shall include adequate risk disclosures, technology governance and cyber security (CRA 5); risk management (CRA-6); anti money laundering and combating of financial crimes (CRA 6), and Corporate governance (CRA 7)

 

 

CONCLUSION

Central Bank of Bahrain is the first central bank in the Middle Eastern region to have introduced such a directive. An exciting space to watch and will surely support the FinTech and Blockchain ecosystem in the region with two key players - ADGM in UAE and CBB in Bahrain taking a lead on it.

 

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Authored by Akshata Namjoshi (Senior Associate) with inputs from Soumya George (Principal Associate).

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