Bahrain: The Fintech Kingdom?

VCs, listen up: Bahrain’s Economic Development Board has just launched a $100 million ‘superfund’ to attract startups and investors. As the Gulf’s smallest and least oil-rich state, Bahrain is intent on becoming the region’s top fintech destination and is aggressively spearheading a broader push into blockchain, Islamic fintech and cryptocurrencies. With a fintech market estimated at $1.5 trillion (and growing), Manama is on to something. But can a government not known for its tech savviness actually deliver?

Indeed, much has been made of the disruptive effects blockchain can bring to almost every layer of economic activity, from currencies, trade and banking to advertising and even immigration. It’s no wonder that analysts and investors are increasingly recognizing blockchain — and the digital ledger technology (DLT) that powers its decentralization — as the next great frontier of global finance.

Thanks to its seemingly endless economic promises, MENA countries have been racing to tap into the blockchain wave and diversify their economies away from hydrocarbons and commodity exports. In the Middle East and North Africa, spending on blockchain solutions is expected to more than double this year.

A similar drive towards blockchain investment is underway in the United Arab Emirates (UAE), where officials in Dubai have made available a $300-million startup fund. The UAE already uses blockchain to record its national health records, and the country aims to be “fully powered by blockchain” by 2020. Last February, Dubai gold trader Regal RA DMCC became the first company in the Middle East to get a license to trade cryptocurrencies. The licence allows DMCC to store Bitcoin, Ethereum and other cryptocurrencies in a vault on its premises; none of the data is connected to a network and is fully insured, adding a buffer against hacking that has cooled traditional investment in cryptocurrency. It’s worth noting that DMCC views cryptocurrency as a commodity rather than a method of payment. Other projects like Abu Dhabi’s RegLab, launched in 2016, attest to the region’s determination to shape what Reuters refers to as “the future of money”.

As for Saudi Arabia, the region’s biggest economy, its Capital Markets Authority has indicated soft regulations may be pending, and several cryptocurrency-oriented companies already offer services in the Saudi kingdom, including Paxful, which offers diverse payment methods, and BitOasis. A sandbox program has been implemented in the country to enable startup pilot projects that use emerging technologies, while the country’s Islamic Development Bank has directed its researchers to develop blockchain-based products. As part of the latter project, the Islamic Research and Training Institute is exploring how blockchain platforms conform with Islamic finance.

Against this backdrop, Bahrain’s move, while definitely welcomed by the technology’s proponents, fits into a wider (and predictable) regional pattern. But the kingdom is already leading the pack.

With its superfund and crypto-friendly legislation, Manama joins just a handful of countries around the world to have set up a regulatory sandbox to test cryptocurrency and DLT solutions for data storage and transactions, as well as Islamic fintech – a burgeoning sector that’s mixing 21st century cryptography with 7th century religious texts. By design, Islamic finance adheres to Sharia-compliant principles, ethics and objectives. Using a faith-based framework, Islamic finance prohibits association with alcohol and non-halal products. These methods have been utilized in Gulf and Asian countries for decades, but blockchain and DLT have the potential to make Islamic fintech products — from insurance to investment to digital marketplaces — available globally for the first time. Perhaps the single most disruptive component of Islamic fintech growth will be its prohibition of usury fees such as interest, an enticing proposal for other global customers.

The unique regulations governing the superfund make it the only one in the region not to put restrictions on selling solutions outside of select financial zones. Underpinning this commitment, Bahrain has implemented a crowdfunding regulatory framework under a system that permits startups to “test innovative products, services, business models and delivery mechanisms without the burden of heavy regulations and licensing.” As a result, Startup Bahrain, the public face of the kingdom’s fintech drive, boasted the arrival of London-based cash management company Tramonex and Dubai’s NOW Money last year as a signal that its crypto-regulatory framework has struck the right balance for fintech entrepreneurs and investors.

The sheer number of blockchain and cryptocurrency projects springing up in the Middle East attests to the region’s early adoption of what many are calling the biggest tech breakthrough since the Internet. And if cryptocurrency really is the future of money, it seems Bahrain and other Gulf states are on the right path.