BAHRAINS CENTRAL BANK ISSUES NEW CRYPTOCURRENCY REGULATION

The Kingdom of Bahrain is rapidly emerging as a key player in the Middle East's burgeoning cryptocurrency landscape. The Central Bank of Bahrain ( CBB ) acknowledges there is a demand in the market for crypto-assets where people in Bahrain are dealing, selling, and holding positions in crypto-assets. Hence, in April 2025, the CBB issued amendments to the Crypto-Asset Module ( CRA Module ) Volume 6 (Capital Markets) of the CBB Rulebook to keep up withIn a move designed to foster innovation while safeguarding financial stability, the Central Bank of Bahrain (CBB) has unveiled significant amendments to its Crypto-Asset Module (CRA Module) in March 2025.This update, a direct response to the dynamic evolution of the crypto-asset markets, underscores Bahrain's commitment to providing a robust regulatory framework for digital currencies. Manama, Bahrain . The Central Bank of Bahrain has issued amendments to its Crypto-assets ( CRA ) Module in March 2025, following a consultation process with the industry stakeholders. The amendments aim to cater to the ongoing developments in the crypto-assets markets and comply withThe revised regulations, born from extensive consultations with industry stakeholders, aim to address emerging challenges and capitalize on the opportunities presented by crypto-assets.The CBB's proactive approach reflects a deep understanding of the growing demand for digital assets within Bahrain, where individuals are actively engaging in buying, selling, and holding cryptocurrencies.These amendments not only refine existing rules but also introduce new supervision and enforcement standards, setting a precedent for responsible crypto innovation in the region. Welcome to this edition of Law Update, where we focus on the ever-evolving landscape of financial services regulation across the region. As the financial markets in the region continue to grow and diversify, this issue provides timely insights into the key regulatory developments shaping banking, investment, insolvency, and emerging technologies.Bahrain is actively positioning itself to be a hub for crypto innovation.These changes impact everything from cryptocurrency exchanges to digital token offerings, and stablecoin regulations.

Revised Crypto-Asset Regulations in Bahrain

The Central Bank of Bahrain's recent amendments to its CRA Module represent a comprehensive overhaul of the regulatory landscape governing crypto-assets.These changes are not merely cosmetic; they fundamentally reshape how crypto-related businesses operate within the Kingdom. The Central Bank of Bahrain (CBB) has played a pivotal role in this, establishing guidelines that facilitate the growth of digital currencies while safeguarding the financial system. One of the key features of Bahrain s cryptocurrency regulation is the licensing framework for crypto-related businesses, including exchanges, wallet providersThe new regulations cover a wide spectrum of activities, from the licensing of crypto exchanges to the issuance of digital tokens, ensuring a more secure and transparent environment for all participants.

Key Amendments to the CRA Module

So, what exactly has changed?Here's a breakdown of the critical updates implemented by the CBB:

• Enhanced Supervision and Enforcement: The CBB has introduced stricter supervision and enforcement mechanisms to ensure compliance with the new regulations.This includes regular audits, enhanced reporting requirements, and the ability to impose penalties for non-compliance.
• Order Matching and Transparency Guidelines: Cryptocurrency exchanges licensed by the CBB must adhere to stringent guidelines concerning order matching, pre and post-trade transparency, market manipulation prevention, and conflict of interest management.This promotes fair and efficient trading practices.
• Regulation of Digital Token Offerings (DTOs): The scope of regulated crypto-asset activities has been expanded to include Digital Token Offerings.Any DTOs with security-like characteristics will now be subject to CBB oversight, providing greater investor protection.
• Development of Stablecoin Regulations: The CBB is actively developing regulatory rules for the issuance of stablecoins, aiming to minimize transaction costs and broaden financial inclusion.These rules will likely address reserve requirements, redemption mechanisms, and other critical aspects of stablecoin operations.

These amendments signal a clear commitment from the CBB to fostering a well-regulated and secure crypto ecosystem in Bahrain. The regulation also establishes new supervision and enforcement standards. Cryptocurrency exchanges licensed by Bahrain s central bank will now also have to respect guidelines concerning order matching, pre and post-trade transparency, market manipulation and market abuse avoidance, as well as conflicts of interest.By addressing key areas such as market integrity, investor protection, and financial stability, the new regulations aim to build trust and confidence in the digital asset space.

Impact on Cryptocurrency Exchanges

The updated CRA Module places significant emphasis on the operations of cryptocurrency exchanges licensed within Bahrain.These exchanges now face stricter requirements designed to enhance market integrity and protect users. The Central Bank of Bahrain has expanded the scope of its regulated crypto-assets activities to include Digital Token Offerings under the new amendments. As a result, any digital token offerings with security-like characteristics will be regulated by the bank. Read more: First hotel in Bahrain to accept crypto paymentsThe focus is on ensuring fair trading practices, preventing market manipulation, and promoting transparency in all operations.

Specific Requirements for Exchanges

Let's delve into the specific guidelines that cryptocurrency exchanges must now adhere to:

• Order Matching: Exchanges must implement fair and transparent order matching algorithms to ensure that orders are executed in a timely and efficient manner.
• Pre and Post-Trade Transparency: Exchanges are required to provide clear and comprehensive information about trading activity, both before and after trades are executed.This includes data on order books, trade volumes, and price movements.
• Market Manipulation and Abuse Avoidance: Exchanges must have robust systems and controls in place to detect and prevent market manipulation and abuse.This includes monitoring trading activity for suspicious patterns and taking appropriate action to address any violations.
• Conflicts of Interest: Exchanges are required to identify and manage any potential conflicts of interest that may arise in their operations.This includes disclosing any relationships with issuers of crypto-assets and ensuring that employees do not engage in insider trading.

These requirements aim to create a level playing field for all market participants and prevent unscrupulous actors from exploiting the system.By promoting transparency and accountability, the CBB hopes to foster a more trustworthy and reliable environment for cryptocurrency trading in Bahrain.

Regulating Digital Token Offerings (DTOs)

One of the most significant aspects of the new regulations is the inclusion of Digital Token Offerings (DTOs) within the CBB's regulatory purview. The Central Bank of Bahrain (CBB) has begun developing regulatory rules for the issuance of stablecoins - cryptocurrencies pegged to the value of traditional assets such as national currencies. The implementation of these rules is expected to reduce transaction costs and expand financial inclusion for the population.This reflects a growing recognition that DTOs can pose unique risks to investors and the financial system.By regulating DTOs with security-like characteristics, the CBB aims to provide greater protection for investors and prevent fraudulent schemes.

What Constitutes a Security-Like DTO?

The key question is: what exactly does it mean for a DTO to have ""security-like characteristics""?While the CBB has not provided a definitive list, it is likely to consider factors such as:

• The expectation of profit: If investors are purchasing tokens with the expectation of receiving a return on their investment, the DTO is more likely to be considered a security.
• Common enterprise: If the proceeds from the DTO are used to fund a common enterprise, and investors rely on the efforts of others to generate profits, the DTO is more likely to be considered a security.
• Voting rights or ownership stake: If the tokens confer voting rights or an ownership stake in the underlying project, the DTO is more likely to be considered a security.

DTOs that are deemed to be securities will be subject to the same regulatory requirements as traditional securities offerings, including registration requirements, disclosure requirements, and restrictions on marketing and sales.This will help to ensure that investors have access to the information they need to make informed decisions and that they are protected from fraud and abuse.

The Path to Stablecoin Regulation

The Central Bank of Bahrain is actively working on developing regulatory rules for the issuance of stablecoins.This initiative reflects a recognition of the potential benefits of stablecoins, such as reduced transaction costs and increased financial inclusion, as well as the potential risks, such as illicit finance and systemic risk.

Potential Benefits of Stablecoins

Stablecoins, cryptocurrencies pegged to the value of a traditional asset like the US dollar, offer several potential advantages:

• Reduced Transaction Costs: Stablecoins can facilitate faster and cheaper cross-border payments, particularly in regions with limited access to traditional banking services.
• Increased Financial Inclusion: Stablecoins can provide access to financial services for unbanked and underbanked populations, enabling them to participate in the digital economy.
• Greater Price Stability: Compared to more volatile cryptocurrencies, stablecoins offer greater price stability, making them more suitable for use in everyday transactions.

Key Considerations for Stablecoin Regulation

The CBB's stablecoin regulations are likely to address several key areas:

• Reserve Requirements: Stablecoin issuers will likely be required to hold reserves of the underlying asset (e.g., US dollars) to back the value of the stablecoin.
• Redemption Mechanisms: Clear and transparent redemption mechanisms will be essential to ensure that stablecoin holders can easily convert their stablecoins back into the underlying asset.
• Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF): Stablecoin issuers will be subject to strict AML and CTF requirements to prevent the use of stablecoins for illicit purposes.
• Cybersecurity: Robust cybersecurity measures will be necessary to protect stablecoin infrastructure and prevent hacks and thefts.

By addressing these key areas, the CBB aims to create a regulatory framework that fosters responsible innovation in the stablecoin space while mitigating potential risks.

Bahrain's Vision for a Crypto-Friendly Future

The Central Bank of Bahrain's proactive approach to cryptocurrency regulation reflects a broader vision of establishing Bahrain as a leading hub for digital innovation in the Middle East.By providing a clear and comprehensive regulatory framework, the CBB aims to attract crypto businesses to Bahrain and foster the growth of the local crypto ecosystem.

Advantages of Bahrain's Regulatory Environment

Bahrain's regulatory environment offers several advantages for crypto businesses:

• Clarity and Certainty: The CBB's regulations provide clarity and certainty for crypto businesses, allowing them to operate with confidence.
• Supportive Ecosystem: Bahrain has a supportive ecosystem for startups and entrepreneurs, including access to funding, mentorship, and talent.
• Strategic Location: Bahrain's strategic location in the Middle East makes it an ideal base for serving regional markets.
• Government Support: The Bahraini government is committed to supporting the growth of the crypto industry.

How to Navigate the New Regulations

For businesses looking to operate within Bahrain's crypto regulatory framework, here’s some actionable advice:

1. Consult Legal Experts: Engage with legal professionals specializing in crypto regulations to understand the specific requirements applicable to your business.
2. Review the CRA Module: Thoroughly review the updated Crypto-Asset Module Volume 6 (Capital Markets) of the CBB Rulebook.
3. Develop Compliance Programs: Implement robust compliance programs that address AML/CTF requirements, data privacy, and cybersecurity.
4. Engage with the CBB: Maintain open communication with the Central Bank of Bahrain to stay informed about regulatory developments and seek clarification on any questions.
5. Prioritize Security: Implement strong security measures to protect user data and prevent cyberattacks.

Looking Ahead: The Future of Crypto in Bahrain

The recent amendments to Bahrain's cryptocurrency regulations mark a significant step forward in the country's journey towards becoming a hub for digital innovation.By embracing a balanced approach that promotes innovation while safeguarding financial stability, the Central Bank of Bahrain is creating a favorable environment for the growth of the crypto industry.The CBB clearly acknowledges the growing demand for crypto assets and aims to accommodate this demand responsibly.

Common Questions About Bahrain's Crypto Regulations

Here are answers to some frequently asked questions about Bahrain's crypto regulations:

Q: What types of crypto-asset activities are regulated in Bahrain?

A: The CBB regulates a wide range of crypto-asset activities, including cryptocurrency exchanges, wallet providers, and Digital Token Offerings (DTOs) with security-like characteristics.

Q: What are the requirements for obtaining a crypto license in Bahrain?

A: The requirements for obtaining a crypto license vary depending on the type of activity you plan to engage in.Generally, you will need to demonstrate that you have a sound business plan, adequate capital, and robust compliance programs.

Q: What is the CBB's approach to stablecoin regulation?

A: The CBB is actively developing regulatory rules for the issuance of stablecoins, focusing on reserve requirements, redemption mechanisms, and AML/CTF compliance.

Q: Where can I find more information about Bahrain's crypto regulations?

A: You can find more information about Bahrain's crypto regulations on the Central Bank of Bahrain's website.

Conclusion: Embracing Innovation with Prudence

Bahrain's new cryptocurrency regulations demonstrate a commitment to fostering a vibrant and responsible digital asset ecosystem.By expanding the scope of regulatory oversight to include Digital Token Offerings and actively developing stablecoin regulations, the CBB is proactively addressing emerging challenges and opportunities in the crypto space.The emphasis on enhanced supervision, transparency, and market integrity underscores the importance of building trust and confidence in digital currencies.While regulations introduce compliance obligations for crypto businesses, they also provide clarity and certainty, paving the way for sustainable growth and innovation.Ultimately, Bahrain's approach offers a model for other countries seeking to navigate the complexities of the evolving crypto landscape, blending innovation with prudence to unlock the full potential of digital assets while mitigating potential risks.Key takeaways include the emphasis on compliance, the expansion of regulatory scope to DTOs, and the development of stablecoin regulations.If you are interested in participating in the Bahrain crypto landscape, consult with legal professionals to navigate these changes effectively.