Cryptocurrency in the Middle East – Bahrain
Whilst the cryptocurrency market has quickly expanded internationally, the Middle East is a challenging market for exchanges, brokers and issuers to penetrate. Typically, Middle Eastern jurisdictions have long been reserved about the modern Fintech market, which is partly enhanced by Islamic Banking laws disallowing similar transactions.
Further to our insight into Abu Dhabi's foray into cryptoassets in our May article, the last month has shown a breakthrough in the Bahrain cryptocurrency industry, with steps being taken to encourage crypto-related activities in the wider region and potentially paving the way for other Middle Eastern jurisdictions to follow suit.
On 31 July 2019, a Bahrain based cryptocurrency exchange secured its Crypto-Asset Module (CRA) licence, making it the first exchange to do so in the Middle East. A cryptocurrency exchange is a medium which allows the trading of cryptocurrencies which facilitates alternative financial investment. Rain, founded in 2016, was approved by the Central Bank of Bahrain (CBB) and in the same week secured $2.5 million worth of funding (including from large Fintech players such as, BitMEX). After a regulatory sandbox process lasting two years, Rain was finally able to launch in Bahrain (following a "sandbox" regulatory process).
In the Fintech industry a "sandbox" regulatory process relates to the process adopted by innovators to test smaller and niche business models before any strict regulations are applied. This regulation process was first adopted by the FCA in 2016, when they began exploring the Fintech market; its great advantage therefore lies in enabling smaller business ideas to flourish in competitive markets. However, the potential downfall is that it provides limited protection to consumers, as the regulators are not involved during the "sandbox" process. On application in the Middle East, the process seems successful in being able to expand the cryptocurrency market into a previously difficult area.
To legally facilitate the licensing of such crypto exchanges, the CBB released a paper in February 2019, entitled "CRA module", outlining the regulations to be abided by in order for exchanges, like Rain, to gain their licence. This process has been implemented to allow efficient operation of such exchanges, whilst deterring financial crime and corruption in relation to crypto assets.
The future of crypto activity in the Middle East:
- Since Rain entered the CBB licence process, other Middle Eastern cryptocurrency exchanges have also applied, namely BitOasis, based in Dubai. They are hoping to be approved and obtain their CRA licence this year.
- Iran has also recently authorised crypto-mining, showing promise for market.
- The Securities and Commodities Authority in the UAE has pledged to release guidelines to regulate initial coin offerings during 2019.
- Saudi Arabia, the UAE and Bahrain have embarked on a joint initiative to make cross-border crypto payments and transactions much easier across the countries.
It is promising to see big cryptocurrency investment companies, like BitMEX, supporting countries that are new to the market become active Fintech players in the cryptocurrency market. These investments will significantly promote diversity and globalise the digital asset market. This is promising for the future of crypto activities in the Middle East, and goes some way to meeting the increasing demand for financial technology.
Within the last year, Middle Eastern jurisdictions have shown wider recognition of the crypto market's prominence. It will be an interesting area to follow (with particular reference to whether the regulatory position will change as the market becomes more open).