Cryptocurrencies in Bahrain: A Brief Overview

Bahrain is actively developing its cryptocurrency market and aiming to become a regional hub for crypto-asset trading. The Central Bank of Bahrain (CBB) which is the main national watchdog of the crypto market is creating regulations to oversee crypto-asset services in the country. As of April 2023, Bahrain housed around 120 FinTech companies, with payment solutions providers, and blockchain and crypto-related enterprises accounting for a high proportion of the market.

Current Status of Cryptocurrencies

The CBB issued a legislative framework in 2019 to oversee «Regulated crypto-asset services». In March 2023, the CBB issued amendments to its Crypto-assets Module, intending to comply with industry best practices and enhance investor protection. These amendments also included digital token offerings in the country’s framework of crypto-asset activities. The CBB examines the underlying economic purpose, structure, and characteristics of digital tokens to determine if they qualify as securities. The regulatory framework also allows crypto-asset licensees to engage in additional services not within the stipulated regulated crypto-asset services.

The CBB's regulations aim to minimize the risk of financial crime and illegal use of crypto-assets. The rules cover licensing, governance, minimum capital, control environment, risk management, AML/CFT, standards of business conduct, and cyber security for crypto-asset services.

The governing law defines 4 types of crypto tokens:

• payment tokens, to which refer the majority of common cryptocurrencies, including Bitcoin and Ether;

• asset related tokens,

• utility tokens;

• hybrid tokens, which may include diverse characteristics from all classes mentioned above.

Also, as we wrote earlier the Central Bank of Bahrain (CBB) is in the process of finalizing regulations to govern the issuance of stablecoins in/from the Kingdom of Bahrain. The proposed legislation intends to enhance the central bank's ability to oversee and track blockchain-based transactions.

Virtual Asset Service Providers (VASPs)

To legally offer crypto-related services in Bahrain, companies must obtain a crypto license by developing a business plan and providing information about the applicant, its shareholders, and its AML/CFT measures. Foreign entities can obtain licenses for operating crypto exchanges in Bahrain after completing the company registration process.

There are four categories of license for VASPs. Depending on the category, companies can offer services such as receiving and transmitting orders, trading as an agent, managing portfolios, and custodial services.

A Category 4 license specifically allows companies to operate a licensed crypto exchange. This Category allow holders to exchange and store crypto assets, and requests compliance with the strictest requirements among others.

Companies can combine two or more regulated crypto-active services if they fall within the permitted list of services and such combination does not create a potential conflict of interest.

In addition to global crypto exchanges that gained license from the CBB, such as Binance and Crypto.com, several local crypto platforms operate in the country, first of all – Rain and CoinMENA. Also it is possible to count EazyPay – a Gulf crypto company regulated by the CBB that is putting down a regional footprint.

Tax Regulations Related to Cryptocurrencies

In Bahrain, the taxation of cryptocurrencies is still developing, with no specific laws explicitly addressing digital assets. However, the tax authorities generally treat cryptocurrencies as commodities or assets for tax purposes.

Individuals are subject to income tax on profits from cryptocurrency transactions, with rates ranging from 0% to 25%. Businesses dealing in cryptocurrencies pay corporate income tax at a flat rate of 15%. As of now, there are no specific tax provisions targeting income earned from crypto assets. This means that income generated through activities such as trading, investing, or holding cryptocurrencies is not subject to income tax or capital gains tax.

Using cryptocurrencies to purchase goods or services is treated as a barter transaction. The value of the cryptocurrency is considered the purchase price, and any gain or loss is subject to income tax.

As far as Bahrain recognizes four types of tokens the VAT treatment may depend on the type of the token. Payment tokens and asset tokens are usually exempt from VAT, but Utility tokens may be treated as multipurpose or single-use vouchers. Hybrid tokens' also taxation depends on the circumstances and may represent multiple or composite supplies of goods or services.

As already mentioned, Bahrain is actively developing as a cryptocurrency hub, providing services in accordance with the most stringent international standards. However, competition with stronger global crypto market participants, such as UAE or Hong Kong may hinder this development. Nevertheless, Bahrain is a great example of a pioneer country in the legalization of cryptocurrencies with their successful integrations in the country’s economy.