The Kingdom of Bahrain stands out as a leading blockchain innovator, not only in the Middle East but across the globe. Blockchain forms part of a general Government ambition to pivot the economy towards increasingly profitable digital technologies, further developing the Kingdom’s sophisticated financial services industry, and moving away from dependence on oil-based industries.
Bahrain FinTech Bay
The Government has been and continues to be proactive in promoting private sector innovation in the blockchain space. It has spearheaded the creation of the leading FinTech Hub, the Bahrain FinTech Bay. This is the largest FinTech Hub in the Middle East, bringing together governmental bodies, financial institutions, corporates, consultancy firms, universities, associations, media agencies, venture capital and FinTech start-ups.
In May 2019, Fenergo, a leading provider of digital Client Lifecycle Management (CLM) solutions for financial institutions began work with Bahrain’s Electronic Network for Financial Transactions (Benefit) to design and implement a national Know Your Customer (KYC) utility that incorporates blockchain technology. Under the programme, financial institutions that subscribe to Benefit will be able to instantly complete KYC and Anti-Money Laundering (AML) compliance procedures when onboarding new individual and corporate customers through Fenergo’s eKYC hub and rules engine utilising blockchain.
Bahrain is the first fully integrated port in the region within the IBM’s TradeLens platform. TradeLens is a blockchain-based digital platform that empowers businesses and authorities along the supply chain with a single, secure source of shipping data, enabling more efficient global trade.
Blockchain-based vehicle registration system
Bahrain’s General Directorate of Traffic (GDT) announced in May 2018 a new project to introduce a blockchain-based vehicle registration system. The Blockchain project is part of the government approach to offer high-quality services and the use of global technology in regulating the registration of vehicles. The project is part of plans to benefit from modern technology in enhancing services and reinforce the role of the private sector. GDT is currently looking for a technical partner to focus on the system’s design and implementation.
Interview with Mohamed Al-Khalifa, Head of Sector, Bahrain EDB
Has Bahrain introduced any specific regulations or initiatives to deal with blockchain/DLT? Could you expand on what you think the right level of regulation should be?
In Bahrain, there are two spaces where you see a lot of activity regarding blockchain. One is the public sector and the other is the financial services sector.
From a regulatory perspective we have not seen much of a need to regulate blockchain outside of the financial sector. At the end of the day, blockchain is a tool within a technology stack, and is very much at an early stage of development.
We have taken the view that overregulating the industry at a wide scope so soon could hinder its development and introduction of services.
Therefore, we typically treat the regulation around blockchain as we would treat any other technology regulations; so, requirements around the technology would fit within the structure of our country’s laws, such as data privacy standards and electronic transaction rules, as opposed to blockchain-specific regulation.
Within financial services, on the other hand, we have a more defined rule set, but which is still being refined alongside the industry as opposed to ahead or behind it. Specifically, in financial services, the way this works is through a regulatory sandbox that has been implemented in Bahrain. It is fully onshore, unlike many other regulatory sandboxes in the region. The Bahrain FinTech Bay is the single largest onshore FinTech hub in the region. Around 40% of the applicants to the sandbox since January 2018 are dealing with crypto-assets. There seems to be a clear interest from industry in dealing with crypto and blockchain technology in financial services. Of that group that is currently sitting in the sandbox, one company (Rain) that has graduated is the first licensed crypto-currency exchange in the region, and is fully sharia-compliant. Further, a Rulebook has been developed alongside this where the regulator is essentially learning with the company and issues rules and regulations that the company is then required to fall within as soon as they graduate from the sandbox and receive preliminary approval.
Beyond this, from a regulatory perspective, it is more about enabling infrastructure rather than blockchain-specific regulation. From an infrastructure perspective, Bahrain is the first country to issue model law on electronic transferable records, which is a standardized ruleset for how electronic records, including crypto assets, can be accounted for. Additionally, Bahrain has begun to issue Open Banking regulation becoming one of the first countries to mandate Open Banking (which came into force in June 2019). This will have an impact on companies using blockchain technology and crypto-assets, that wish to interconnect banking services and provide value-added services for citizens.
We have established an e-KYC platform. This is a fully blockchain-based electronic KYC platform. The product will initially be consumable by the banks, however is intended to encompass a broader range of the private sector in its second phase of deployment. The platform is the result of a combination of effort between the Central Bank of Bahrain, the IGA (government CIO), the Bahrain Economic Development Board, and Benefit, the national switch, which is an organization that sits between all banks in Bahrain. They manage much of the underlying technology layer that underpins financial services in the country, including point of sale devices, ATMs, and interbank transfer technology. The e-KYC platform is expected to bring consumer lifetime KYC costs down from the current $8000 in lifetime KYC costs, to about $1.2 per transaction. This should therefore disrupt this industry and provide more companies the ability to create value-added services.
As far as the public sector is concerned, the Bahrain government is not looking to regulate but rather act as a consultant in terms of tactically promoting where we believe blockchain can be meaningful as a tool within a wider spectrum of tools. We are tactical in terms of our approach to the intersections between blockchain and government services and, work with decision makers to consider how best to bring them online. This is usually done with a risk-based assessment. We ask ourselves: does blockchain really add value here? How does it add value and, if it does, is the item mission critical? If it is, then do we have a fallback strategy in case of failure? This thinking has enabled us to approach policymakers, regulators, and institutional leaders, and speak to them about the benefits of the blockchain as a tool, on their own terms.
Is there one particular Bahrain minister appointed to lead on this issue?
We have taken a consultative approach between both the public and private sector. We do not have a particular entity that I can singularly point out as responsible for everything blockchain-related. Blockchain public policy in Bahrain revolves around the relationship between:
- the Central Bank, which regulates financial services;
- the CIO of the government, which regulates e-government services on the whole;
- the Office of the First Deputy Prime Minister, which functions as an administrative body between all the government agencies and enables us to have focus as well as prioritization; and
- the Bahrain Economic Development Board, in terms of its ability and position to consult with industry and then promote particular areas which we believe will meaningfully affect our economic strategy moving forward to 2030.
Wider adoption / Use cases
Which specific use cases/applications are being implemented in Bahrain?
The University of Bahrain has joined a small group of universities globally, including MIT, on their Blockcert platform. This issues blockchain-based university certificates. There is a fundamental problem experienced globally among regulators and employers not being able to verify the veracity of a university certificate. Blockchain enables us to work directly with universities on a solution that is going to be meaningful to both employers and regulators in verifying certification.
In customs, Bahrain is the only directly integrated port in the region within the pilot phase of IBM’s TradeLens platform. The solution offers synergies between blockchain and customs in terms of lowering the amount of paperwork and costs, and increasing efficiency and transparency across the global supply chain. The reason TradeLens was chosen was due to the ‘network effect’ that IBM created in this space. From a risk-based perspective, a customs-based transaction on a blockchain enables us to do verification on a ‘per item basis’, whereas the historical track record for the entire flow of those transactions can remain in a relational database. It is very much business as usual where blockchain is only being used at the verification stage. So the risk assessment proves to be much lower in terms of risk and the added value proves to be much higher.
The last area Bahrain is exploring publicly is vehicle registration. We have issued a tender for our entire vehicle registration system to be blockchain-based. This does not mean we will suddenly move away from a relational database. The records will most likely remain stored in the typical form. However, what will change is the ability for vehicle owners to hand over the verification to a wider section of the private sector, including insurance, regulators, banks. We believe that consumers, given ultimate ownership of their vehicle records, will be able to easily transfer those records related to the entire lifecycle of the car and be able to attest that all the records in the ledger are verifiable.
I would add that while I have mentioned specific company names, we very much assessing each implementation and continuing to ask ourselves if that particular tool is the right one. If it is not, we are going to be open to re-thinking our partners and exploring new opportunities in the space.
What do you consider to be key factors in successfully implementing widespread blockchain/DLT adoption?
- Be tactical i.e. ensure that, from a risk-based perspective, you are always calculating for failure, but at the same time, promoting innovation;
- Give ownership and control to the individual entity responsible for it. On top of this, come towards them on a consultative basis, rather than with stringent requirements that do not meet the organisation’s needs.
Do you see any major political challenges preventing wider adoption?
Bahrain’s economy was historically heavily reliant on trade in dates, then based on pearls, followed by oil and then financial services, and since 2004, triggered by our deregulation of the telecom sector (the first in the region to do so), the approach has been about digitizing the country. So, on the whole what you see is that Bahrain is a unique environment where everybody collectively understands and successfully is able to participate in opportunistically shifting a greater focus in in the economy to different industries, and becoming regional leaders in each. Across the government and the citizens, there is a willingness and interest in engaging with new technologies, new industry and going all in to make it successful. So rather than political pushback, there tends to be a lot of forward-thinking ideas at a senior level. Beyond the senior level, the challenge tends to be at the technical level, where the administrators responsible for pushing out these innovations have to be brought in. Sometimes, there is some friction there and we spend a lot of time ensuring they are fully bought into the national strategy.
On the Gulf Cooperation Council (GCC) level, which makes up most countries in our particular sub-region, including Saudi Arabia, Kuwait, UAE, Bahrain, Oman and more, faces challenges such as synergizing our efforts and standardizing them to facilitate greater cross-border flows.
The key is to ensure that blockchain, in order to truly be successful, is not occurring in one country exclusively but allows businesses to easily passport between different jurisdictions.
The benefit of the blockchain is intrinsically linked to the ‘network effect’. It is easy to solve this effect at the local level but it becomes substantially more difficult once you start going outside. Bahrain is very much engaged, both in the private and public sector, in terms of promoting emerging technologies at the regional level.
Ethical or sharia law concerns or opportunities around the use of blockchain?
Bahrain essentially has the most robust and comprehensive data privacy rules in the region. This is largely due to the fact that we adopted and synergised very strong existing set of standards into Bahrain, which makes it easier for local and international companies to familiarise themselves and be compliant. These are based on 1995 to 1998 European Directive. From a privacy perspective, any new technological developments will always raise ethical concerns. Our role is to promote the industry to have strong governance standards and, at a governmental level, learn best practices model and to share our views on this. We work with regulators, global non-profit bodies, entities such as the World Economic Forum, and we maintain a shared dialogue with all of them, with respect to all forms of emerging technologies in Bahrain.
When it comes to sharia law compliance, it is based around how financial services regulators define the way interest is derived from financial products. Some blockchain-based companies are working with the Central Bank to ensure that their products match these compliance requirements. There is a compliance board that certifies whether the regime the company has chosen is certifiable or not. The opportunity in this space across the Muslim world is substantial, as many people see opportunities in emerging technology but want to ensure it is culturally and religiously in line with their beliefs.
What is the plan in the short to medium term (next 5 years)? How do you see the space evolving in the next 5 years?
‘Engagement’ is the name of the game. It’s a new technology where all stakeholders are learning. It would be presumptuous of anyone to say that they have a clear pathway forward. It is about engaging in this space with the market players, adapting regulation and continuing to consult with industry and government to promote best practices. This will create an environment that is conducive to growth. With respect to an overarching plan that has a clear vision of how blockchain is going to affect Bahrain moving forward, the space is too new to establish this. What we are committed to is actual projects and implementation rather than pilot projects or stagnation through over strategizing. Implementation means being tactical and pragmatic in working with industry to create the right environment for those use cases to really exist in an actual and tangible fashion. Bahrain wants to be real about what blockchain can really do, not only talk or strategize, but put things into effect.
Relation with other countries
What lessons or transferable experiences can you share to help other countries follow your lead?
While Bahrain is very much a leader in the space, in terms of relative effect and tangible result, it would be presumptuous for us to assume that we are ahead of the world. We are definitely, from an implementation perspective, in a very strong position. From an on-shore regulatory perspective, we are very much in line with international best practices and a recognized leader in the region. We believe we are creating the right environment. In terms of how much we can help the rest of the world, I believe we are all learning and we are therefore happy to share how we have approached this space, what the industry has taught us, how we respond to this, and to broadly consider real technology solutions that have real network effects. Whether that is cross-border payments, enhancing certificate verification, or looking at focused issues that are localized regional problems to us, but global in scale, such as how emerging technology can positively affect the lived realities of ‘unbanked’ persons. As a country that is very much in the midst of this learning experience, we want to share, but we want to ensure that when we do, our knowledge is built on tangible projects that are already active.
I am optimistic in terms of the amount of activity that we see globally. A lot of countries are active in this space.
As major regulators shift their requirements to be much more receptive at how they handle blockchain, you will begin to see a quick uptake in the technology’s adoption.