Bahrain goes all in to be the Gulf’s crypto hub. 

Author: Mark Townsend

The Kingdom of Bahrain, Dubai and the emirate of Abu Dhabi are locked in a three-way race to become the Gulf’s go-to cryptocurrency hub, as distributed ledger and blockchain technology become ubiquitous. Though Dubai appears to be leading, the Central Bank of Bahrain (CBB) has won plaudits for regulations based on international best practices. Indeed, much of its crypto regime is modeled on European directives, particularly regarding money laundering. The kingdom is also carving out a niche incubating 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 legacy is reflected in the CBB’s reputation for quality supervision, which defines its approach to crypto and fintech regulation. Innovation matters too. Bahrain claims to be the first country in the world to roll out a data-jurisdiction law.

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

Regulation is becoming increasingly important amid a global clampdown on rogue activity. In February, the Paris-based Financial Action Task Force reaffirmed last year’s decision to place the United Arab Emirates (UAE) on its “grey list” of countries subject to increased monitoring for deficiencies in controls against money laundering and the financing of terrorism. 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—in second place globally. But the report has been criticized for not including Bahrain in its ranking following the steady stream of positive news. For example, in January, Bahrain attracted international headlines when the CBB and the EDB lent their support to the official launch of Binance’s dedicated platform—Binance.bh. The CBB governor and EDB chief executive 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 large offices in Dubai and Paris. Yet Binance’s fractious relationship with US regulators could pose a reputational risk to Gulf jurisdictions such as Bahrain and the UAE.

But can Bahrain halt the UAE’s crypto juggernaut and become the region’s crypto hub? It has set itself apart regarding security. The CBB has a forward-thinking approach to blockchain solutions while remaining vigilant in granting licenses, says 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 advantage,” he says, is “Bahrain’s willingness to come together with other parties to drive innovation in a safe environment.”

“What is putting the country at the center of industrial development in the region,” adds Al Moosawi, “is its ongoing effort to collaborate with industry players, regulators, policymakers and financial institutions to build an agile and solid regulatory framework.”

Gulf crypto stalwarts such as CoinMENA and EazyPay, each regulated by the CBB, are putting down a regional footprint. Bahrain’s real estate sector also embraces crypto payments as Bin Faqeeh, the latest local firm accepting 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, the CBB has also introduced a virtual innovation platform dubbed FinHub973. Launched in October 2020, it offers more than 430 application programming interfaces for development of banking and financial solutions.

Yet, many international jurisdictions have become hostile to cryptocurrencies as bankruptcies continue to pile up, stoking a massive loss of confidence among investors, says Mohamad Ibrahim, group CEO of XS.com, a multiasset broker. Ibrahim believes investors seek a safe environment with transparent regulatory and legal frameworks. “For Bahrain in particular, the central bank ... is very proactive in regard to cryptocurrency use, giving the country an advantage in attracting crypto firms.”

Yet competition is fierce. “Bahraini authorities are trying hard to make Bahrain stand out from its Gulf neighbors and ... this includes its desire to be a crypto hub,” says 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 Banks?

Bahrain’s crypto ambitions could be a precursor to deeper integration between conventional banking and nascent crypto and fintech sectors. Such a development could drive consolidation and speed digital transformation. In its Middle East Banks Outlook 2023, Fitch notes that although the business environment is likely to remain sound, Bahrain is overbanked. But the agency remains cautious about how probable consolidation may 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 power. The Bahraini authorities support M&A, but sound profitably and a lack of common shareholders prevent obvious tie-ups.

Binance’s Al Moosawi says having one entity—the CBB—regulating trade financing, funds, crypto exchanges and companies under one umbrella is advantageous. “The key components to further deepening ties between conventional banking and blockchain projects are maintaining a collaborative approach to regulation, prioritizing security and compliance, and attracting talented professionals to the region,” he explains.

Still, regional rival Abu Dhabi looks 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 at 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 press agency, WAM, said digital asset exchanges and service providers are part of an initiative to speed digital asset discovery, trading and custody.

Bahrain’s continuing dependence on oil revenue casts a long shadow. Its budget-balancing breakeven price for crude is the highest among the GCC nations—$125 a barrel. Fitch forecasts it will ease to $104 in 2023 and $92 in 2024, but oil dependence remains high, at about 70% of government revenues. 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 to the kingdom’s economic well-being.

Amid the crypto contest, the Gulf has been an expensive place to do business, particularly for banking and financial services institutions. Yet, Bahrain may leverage that situation to its benefit. In addition to its quality-of-life advantages, Bahrain remains a cost-effective location. According to KPMG’s Cost of Doing Business in the GCC report, annual operating costs for financial services institutions in Bahrain are up to 27% cheaper than in other GCC countries.

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

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