Control frameworks to combat the risk of crypto assets through money laundering and terrorist financing
Licensing two companies … and the Central Bank attaches great importance to protecting the rights of investors
The Minister of Finance and National Economy, Sheikh Salman bin Khalifa Al Khalifa, revealed that the volume of trading in digital currencies “encrypted assets” through trading platforms licensed by the Central Bank of Bahrain amounted to about 143 million and 320 thousand dinars during the first quarter of this year, an increase of about 300% of the trading volume in the first quarter of last year, which amounted to 41 million and 886 thousand dinars, and more than 50 times the beginning of trading in the third quarter of 2019, which was estimated at 2 million and 775 thousand dinars. In his answer to a question by MP Ahmed Salloum regarding digital currencies, the Minister of Finance confirmed that the Central Bank of Bahrain adopted the term crypto assets instead of digital currencies in order to make the concept clear to the investor that these assets do not represent legal currencies supported by governments, but rather are high-risk investment assets. He added that with regard to legislation related to the organization of the business of crypto asset service providers, the Central Bank issued a chapter of crypto assets belonging to the chapters of the sixth directive volume on capital markets, which represents the regulatory and supervisory framework for supervising providers of crypto assets services, adding that this chapter contains the necessary rules to combat Money laundering and terrorist financing risks associated with encrypted assets, in accordance with the recommendations of the Financial Action Task Force (FATF) and following international best practices in this regard.
The minister explained that providers of crypto asset services must comply with all requirements stipulated in the Central Bank of Bahrain and Financial Institutions Law of 2006, and the rules and regulations in general, adding that for these activities to have legal cover, the Central Bank of Bahrain issued on April 1, 2019 Decision No. 28 of 2019 amending Regulation No. 1 of 2007 to add services of crypto assets to the schedule of services subject to bank supervision.
He mentioned that the activities organized by the bank and stipulated in the regulation consist of receiving and coordinating requests for the sale and purchase of accepted encrypted assets, transferring these requests to a third party for their implementation, trading in crypto assets accepted for the benefit of their accounts, trading in encrypted assets accepted as an agent in favor of clients’ accounts, and managing Investment portfolios in encrypted assets, providing trustworthy services for encrypted assets, providing consultations in the field of encrypted assets, and operating the crypto assets market, pointing out that the activities of offering encrypted assets, mining encrypted assets and the loyalty program, are excluded by the bank.
The minister indicated that no natural or legal person can practice any of these activities in Bahrain without obtaining the necessary license from the bank and fulfilling all the requirements stipulated in the exchange laws and rules, adding that the licensing categories for providers of crypto assets services are divided into four categories according to the licensed activities. By the bank for each class, and the licensees can engage in one or more activities of the organized crypto assets.
The obligations of the crypto asset service providers licensed by the bank include, but not limited to, the delivery of periodic reports, including the company’s annual report, audit and review reports related to accounts and systems, including the report of weaknesses, penetration testing, compliance with anti-money laundering and anti-terrorism controls, and requesting the approval of the bank. In matters stipulated in the separation of encrypted assets, including the appointment of accredited persons with competence and experience and who are required to reside in Bahrain, and any fundamental changes such as those related to the structure of the company and its activities such as the termination or transfer of its business or those resulting from control, mergers and acquisitions, distribution of profits to shareholders, and change The name or headquarters of the company, changing the capital, carrying out activities outside Bahrain, external contracting, appointing auditors, displaying any encrypted asset for circulation, etc.
The obligations also include notifying the bank in writing of everything stipulated in the separation of encrypted assets, which includes notification of everything that would affect the bank’s supervisory role, such as the failure of the licensee to fulfill one of the bank’s requirements, direct notification of suspected transactions, and notification of any financial breach or any A procedure that may affect the company’s ability to fulfill its financial obligations towards customers and self-regulating companies, and any legal action taken against persons approved by the company.
And commitment to the requirements of the bank for the minimum capital, the provision of the necessary technical systems with the highest standards of cybersecurity and the appropriate maintenance of records, and the launch and provision of the bank with the company’s policies related to the various aspects of its work such as risk assessment and control policies and business continuity plans, and the obligation to provide services to the qualified investor only, in accordance with the terms of separation of encrypted assets, And adherence to the highest standards to ensure integrity and transparency in trading, protect the rights of investors and maintain the confidentiality of customer information.
Sending a monthly summary to clients of all their trades, and complying with the required disclosure requirements mentioned in the chapter on encrypted assets, such as publishing the decision to waive the license or suspending the activities or services provided and all information that would serve the investor to be aware of taking decisions, and to adhere to all controls against money laundering and terrorist financing And to notify the bank directly of any suspicion of fraud or money laundering attempt, and to separate the company’s assets and clients’ assets and keep them in separate accounts with matching the clients ’assets in the custody of the licensees compared to the records and investigating any differences.
Crypto asset service providers must request the approval of the Central Bank before offering any encrypted asset for trading, in accordance with the criteria that the bank follows to evaluate the request, and at the present time the crypto assets accepted for trading through the licensees include:
Bitcoin, Ethereum, Litecoin, Ripple, Bitcoin Cash, providing the bank with periodic reports on daily trades and maintaining an adequate record of all trades, adhering to enhanced due diligence procedures for all clients, and adopting a biometric verification department integrated with customer acceptance systems. Client and / or client funds: Maintaining a professional compensation insurance policy that covers the loss of money, loss or damage to any other assets or property belonging to the licensee or in his custody in accordance with the separation of encrypted assets. The Minister of Finance pointed out that the Central Bank attaches great importance to protecting the rights of investors, and has formed regulatory frameworks on this basis, and ensures the separation of encrypted assets from the rules entrusted with protecting the rights of investors in crypto assets and obligating licensed service providers to adhere to the highest necessary standards, including the rules. Related to keeping clients’ assets in separate accounts, adhering to risk control, maintaining professional compensation insurance, ensuring business continuity and smooth transfers of funds and encrypted assets.
Also, licensed crypto asset service providers must adhere to the standards necessary for creating, managing, storing and copying private and public encryption keys in line with the best prevailing international standards and practices, taking care, as much as possible, to store them in offline wallets so that they are not vulnerable to any potential breach.
In addition, licensees must establish and document measures relating to persons who have rights to operate encryption keys and take the necessary arrangements to ensure that no one person is singled out for these rights to ensure that they can be accessed in the event of any unexpected occurrence. The bank responds promptly to customer complaints submitted against any of the licensees, and is keen to follow up until a satisfactory solution is reached.
In addition to office supervision, the bank conducts field monitoring of the licensees through periodic or surprise inspection visits if required. As part of the development of the financial system in the field of financial technology, innovation and digital transformation in the Kingdom of Bahrain, the bank has established a specialized unit in the field of financial technology called “Unit Financial Technology and Innovation »To conduct market research on innovations occurring in the financial sector and to develop strategies for making effective use of emerging technology. The bank has issued a framework for the experimental supervisory environment, which allows affiliates, including potential crypto asset service providers, to experiment with their services and systems on a limited scale in cooperation with the Financial Technology Unit before requesting a license to practice the activity. As for the licensed companies, the bank granted licenses to two companies to practice asset services. Crypto, namely Rain Management, which has been licensed as a provider of crypto asset services, Class 3 since July 2019, and Coin MENA, which was recently granted a license under Category 2, and started its business last March.