Population: 1.7 million

Wealth in domestic bank deposits: 52 billion USD (September 2023)

Offshore expatriated wealth: 6.2 billion USD

Main offshore banking locations: N/A

Number of individual brokerage accounts: N/A

Crypto adoption (% of population): 13,000 (0,9%)

TLDR

Bahrain upholds an open and well-regulated investment environment underscored by principles-based legislation administered by the Central Bank of Bahrain (CBB). Overseas financial products require approval and can only be distributed by CBB-authorized entities. The regime focuses on balancing innovation with integrity, protecting subsets of investors through qualification criteria while also furthering its ambition to be a regional fintech hub. Regulations concerning crypto-asset providers are principles-based and aligned to global best practices. Bahrain also maintains a fixed exchange rate regime and does not impose controls over capital flows. Recent enhancements in areas like private securities rules, family office guidelines and crypto-asset provider oversight reinforce Bahrain’s position as a forward-looking financial jurisdiction.

Exchange controls

Bahrain upholds a free market economy and its exchange rate policy centers around a fixed peg between the Bahraini Dinar (BHD) and the US Dollar. The Central Bank of Bahrain manages the foreign exchange market to maintain this rate but does not impose administrative controls over capital movements or market interest rates. Licensed retail banks have access to a foreign exchange facility for buying/selling BHD against USD. A 5% reserve requirement on BHD deposits also applies. Additionally, an FX Swap Facility helps ensure smooth functioning of interbank money markets. Overall, the framework aims to support an open, stable monetary environment.

Distribution rules for foreign investment products

The regulations governing the distribution and marketing of overseas financial products and services in Bahrain fall under the jurisdiction of the Central Bank of Bahrain (CBB). The CBB oversees Bahrain’s banking industry and financial securities market as the primary regulator.

Entities looking to sell or promote foreign investment offerings in Bahrain must adhere to licensing prerequisites outlined in the CBB Rulebook Volume 4. As per the regulations, conducting investment activities like dealing, advising, arranging deals, portfolio management, custody services etc. are considered regulated services. Only CBB-authorized financial institutions holding valid Category-1 or Category-2 investment firm licenses can undertake these regulated activities.

Conventional retail banks with CBB issued licenses may also distribute foreign investment products subject to approval. The rules explicitly prohibit the marketing of any financial instruments without proper CBB licensing or exemptions. Regulation No. 16 of 2012 reinforces this, allowing the CBB to impose financial penalties for unauthorized promotions.

Additionally, the offering documents and securities related to overseas products need to be registered with the CBB irrespective of whether they target institutional players or retail investors in Bahrain. Approval requirements apply to both public issuances and private placements.

The relevant regulations can be found in Volumes 4 and 6 of the CBB Rulebook. Volume 4 focuses on investment business regulations while Volume 6 deals with issuance and offering of securities. The rules outline requirements concerning private offerings made to no more than 100 accredited investors as well as public subscription methods. Issuers planning IPOs need to meet an additional set of shareholder and organizational criteria.

Bahrain upholds stringent standards concerning investor qualifications. Private offers can only be made to qualified investors meeting certain wealth and sophistication thresholds. Recently in Sept 2023, the CBB also introduced bespoke regulations for family offices serving multiple families. Those expanding services across families must secure CBB investment business licenses under the new regime.

Qualified investors

Bahrain classifies investors into qualified (accredited) and non-qualified categories under regulations administered by the Central Bank of Bahrain (CBB).

The eligibility criteria for accredited investors focuses on individual net worth and entity asset thresholds. To qualify, individuals must have a net worth of at least $1 million excluding their primary residence. Similarly, corporate entities such as companies, partnerships and trusts need to demonstrate financial assets available for investment exceeding $1 million.

Certain entities like national governments, central banks, supranational agencies and state pension funds have automatic accredited status under the rules.

Additionally, individuals and legal entities can opt to be treated as qualified investors if they satisfy at least two of the following requirements:

• Execution of substantial trading transactions worth $200,000 or above in the preceding 12 months.
• Ownership of a financial asset portfolio comprising cash holdings and other instruments valuing $500,000 or higher.
• Professional experience of minimum one year in the financial services sector entailing knowledge relevant to the concerned transactions.

The distinctions between qualified and non-qualified investors have implications on investment product offerings in Bahrain. For instance, private placement offerings can only be marketed to accredited counterparts. These private offers also need to meet certain criteria concerning minimum investment amounts, participation limits capped at 100 accredited investors, restrictions on resale intent etc.

On the other hand, public offers including Initial Public Offerings (IPOs) have more stringent requirements in areas like issuer eligibility, securities transferability, listings, custody infrastructure and underwriting. Nonetheless, public offers also require approval from qualified investors prior to extending to retail investors.

Cryptocurrency regulation

Bahrain pioneered cryptocurrency oversight in the region by instituting a crypto-asset framework in 2019. It takes a flexible approach aligned to evolving global standards. Licensing requirements stipulate 60-day processing times. Applicants must either incorporate locally or open a Bahrain branch. Amendments in March 2023 bolstered consumer protection and integrity. Multiple government blockchain pilots are also underway spanning identity, trade finance, real estate registration and other areas. The Central Bank aims to balance innovation with financial stability as Bahrain pursues a FinTech hub strategy.