Bahrain: Chasing Crypto Gold | Global Finance Magazine

The Kingdom of Bahrain, Dubai and the Emirate of Abu Dhabi are locked in a three-way race to become the Gulf’s cryptocurrency hub as distributed ledger and blockchain technology becomes ubiquitous. Although Dubai appears to be leading the way, the Central Bank of Bahrain (CBB) has won plaudits for regulations based on international best practice. In fact, much of the crypto regime is based on European directives, especially when it comes to money laundering. The Kingdom is also creating a niche that incubates fintech startups.

Bahrain has more than 120 fintechs, with payments and crypto being the most concentrated sectors. Manama was once the region’s banking epicenter, a position it has since relinquished. However, Bahrain is still home to 367 financial institutions with a workforce of over 13,700 employees in the industry, according to the government-backed Bahrain FinTech Bay. The banking heritage is reflected in the CBB’s reputation for quality oversight, which defines its approach to crypto and fintech regulation. Innovation is also important. Bahrain claims to be the first country in the world to launch a data jurisdiction law.

“If it’s an American company hosting their data in Bahrain, only an American court will have jurisdiction over that data. That’s unique,” said Khalid Humaidan, executive director of the Bahrain Economic Development Board (EDB), during a panel discussion at this year’s World Economic Forum held in January in Davos.

Regulation is becoming increasingly important amid a global crackdown on rogue activity. In February, the Paris-based Financial Action Task Force confirmed last year’s decision to place the United Arab Emirates (UAE) on its “grey list” of countries subject to increased monitoring for deficiencies in anti-money laundering and terrorist financing controls. That could hinder Dubai’s ability to retain its status as a crypto hub among the top five crypto cities alongside London, New York, Singapore and Los Angeles, as recently rated by crypto tracker Recap.

Recap’s report ranked Dubai – seen by some as overly accommodating to virtual asset service providers – second globally. But the report has been criticized for not including Bahrain in its ranking after the steady flow of positive news. For example, in January, Bahrain attracted international headlines when CBB and EDB lent their support to the official launch of Binance’s dedicated platform – Binance.bh. The CBB Governor and EDB CEO attended the glittering event at the Bahrain Institute for Banking and Finance. Recap did not respond to Global Finance’s request for comment.

Last year, Binance, the world’s largest crypto exchange by trading volume, was granted a Category 4 license by the CBB as a crypto asset service provider – effectively a crypto exchange – and now employs around 200 people locally. Binance’s co-founder and CEO, Changpeng Zhao, widely known as CZ, also attended the event, leading some analysts to speculate that Bahrain has become Binance’s de-facto headquarters.

Binance declined to comment, saying in an email that it has major offices in Dubai and Paris. Still, Binance’s difficult relationship with US regulators could pose a reputational risk to Gulf jurisdictions such as Bahrain and the United Arab Emirates.

But can Bahrain stop the UAE’s crypto push and become the region’s crypto hub? It has stood out when it comes to security. CBB takes a forward-looking approach to blockchain solutions while remaining vigilant in licensing, said Tameem Al Moosawi, Binance Bahrain’s General Manager. As a result, the Kingdom is already ranked first among Gulf Cooperation Council (GCC) countries and seventh globally on the 2022 Solidus Labs Global Crypto Regulation Index, for its proactive approach to crypto asset regulations. “The key to that competitive edge,” he says, is “Bahrain’s willingness to come together with other parties to drive innovation in a safe environment.”

“What puts the country at the center of industrial development in the region,” adds Al Moosawi, “is its ongoing efforts to work with industry players, regulators, policy makers and financial institutions to build an agile and robust regulatory framework.”

Gulf crypto stalwarts such as CoinMENA and EazyPay, each regulated by the CBB, are setting down a regional footprint. Bahrain’s real estate sector is also embracing crypto payments as Bin Faqeeh, the latest local firm to accept bitcoin, follows condos.com and Pacaso. Innovation is fundamental to gaining leadership, and the CBB recently revised its regulatory sandbox framework to allow fintechs to test and experiment with ideas and solutions. According to Bahrain FinTech Bay, CBB has also introduced a virtual innovation platform called FinHub973. Launched in October 2020, it offers more than 430 application programming interfaces for developing banking and financial solutions.

Still, many international jurisdictions have turned hostile to cryptocurrencies as bankruptcies continue to pile up, creating a massive loss of confidence among investors, said Mohamad Ibrahim, CEO of XS.com, a multi-asset broker. Ibrahim believes investors seek a safe environment with transparent regulatory and legal frameworks. “Especially for Bahrain, the central bank … is very proactive with regard to the use of cryptocurrency, which gives the country an advantage in attracting crypto firms.”

Nevertheless, the competition is fierce. “The Bahraini authorities are trying hard to make Bahrain stand out from its Gulf neighbors and … this includes the desire to be a crypto hub,” said Redmond Ramsdale, head of Middle East Bank Ratings and Islamic Banking at Fitch Ratings. “Any increased business activity and investment from these areas will benefit the banking system in terms of growth potential; but it is too early to know whether this will be meaningful, due to strong competition.”

What about the banks?

Bahrain’s crypto ambitions could be a precursor to deeper integration between conventional banking and nascent crypto and fintech sectors. Such developments can drive consolidation and accelerate digital transformation. In the Middle East Bank’s Outlook 2023, Fitch notes that while the business environment is likely to remain healthy, Bahrain is overbanked. But the agency remains cautious about how likely consolidation might be and whether a round of M&A is inevitable.

Fragmentation in the Bahraini banking system is greater than in its regional peers, with many banks resulting in intense competition and weak pricing. Bahraini authorities support M&A, but it is profitable and a lack of common shareholders prevents obvious tie-ups.

Binance’s Al Moosawi says it is beneficial to have one entity – the CBB – that regulates trade finance, funds, crypto exchanges and companies under one umbrella. “The key components to further deepening the ties between conventional banking and blockchain projects are maintaining a collaborative approach to regulation, prioritizing security and compliance, and attracting skilled professionals to the region,” he explains.

Yet regional rival Abu Dhabi appears equally determined to seal its position as a blockchain hub. In February, the UAE capital said it would launch a $2 billion initiative to support Web3 startups. The program will be based on the Hub71 digital assets ecosystem in the Abu Dhabi Global Market financial district. First Abu Dhabi Bank’s research and development arm, Fabric, will be the anchor partner. In a prepared statement, the UAE’s press agency, WAM, said the exchange of digital assets and service providers is part of an initiative to speed up the discovery, trading and custody of digital assets.

Bahrain’s continued dependence on oil revenue casts a long shadow. Its budget-balancing breakeven price for crude oil is the highest among the GCC nations – $125 per barrel. Fitch predicts it will decrease to $104 in 2023 and $92 in 2024, but oil dependence remains high, at about 70% of government revenue. Mitigating factors include non-oil GDP growth expected to reach 2.7% this year against a backdrop of 3.2% overall in 2023. Yet managing a debt burden of around 118% of GDP remains a challenge for the kingdom’s economic well-being .

Amid the crypto competition, the Gulf has been an expensive place to do business, especially for banking and financial institutions. Nevertheless, Bahrain can use that situation to its advantage. In addition to its quality of life benefits, Bahrain remains a cost-effective location. According to KPMG’s Cost of Doing Business in the GCC report, annual operating costs for financial institutions in Bahrain are up to 27% cheaper than in other GCC countries.

The 2022 report measures the direct and indirect costs of running a financial institution in Dubai, Abu Dhabi, Saudi Arabia and Bahrain.

The race to become the Gulf’s crypto and fintech epicenter is on. But as some US regulators increasingly view cryptoassets as a systemic threat, only time will tell which jurisdiction in the Gulf will endure as regulatory and supervisory controls take center stage globally.