Hatim Q Zu’bi, Zu’bi & Partners, Attorneys & Legal Consultants: Viewpoint

Viewpoint: Hatim Q Zu’bi

In June 2017 the Central Bank of Bahrain (CBB) announced plans to develop a regulatory sandbox, establishing Bahrain as a leader in the Middle East’s financial technology (fintech) landscape. The regulatory sandbox is a virtual space and framework that facilitates the development of fintech through safe testing of innovative products, services, business models and delivery mechanisms, without the automatic application of regulatory and financial consequences. In other words, financial products and services based on new technologies, or modifications of existing technologies, are tested in the sandbox without the burden of time-consuming regulations and licensing. Those that prove successful may subsequently apply for the relevant licence from the CBB.

Through its regulatory sandbox framework, the CBB has given both existing licensed financial institutions and newcomers a chance to experiment with innovative financial products for a specified period of time, in an environment where actual products and services are provided to customers, but where the risks to those customers and to the local economy are clearly defined and mitigated. The aims of the sandbox are to promote effective competition, encourage innovation, embrace new technology and ultimately improve customer experience.

The CBB has set out eligibility criteria for the sandbox that include innovation, customer benefit and technical testing. The products and services tested should be significantly different from current offerings on the market, as evidenced by extensive market research and comparisons with competing technology. Customer benefit may be direct or indirect, but must be quantified and fully identifiable. Lastly, the solution proposed should have already been tested in a laboratory environment for technical soundness. A fee of BD100 ($265) is payable to the CBB on application for a regulatory sandbox licence, and the CBB aims to respond to such applications within 15 days.

The ability to test a product or service in the regulatory sandbox is granted by the CBB on a case-bycase basis. It may, for example, choose to control the number of volunteers or the criteria for volunteer eligibility. The duration of the testing period is nine months with a maximum extension of three months. Applicants that are granted a regulatory sandbox licence will be required to report to the CBB, following a pre-agreed schedule, on test progress, milestones achieved and the likelihood of achieving target outcomes. The applicant must also share a proposed exit strategy with the CBB, including plans for scale-up and deployment of the fintech solution in question, as well as a final progress report, which has to be submitted within one month of completion of the test period. The applicant must also be able to demonstrate to the CBB that they have sufficient resources to compensate customers for any losses that could be incurred during the testing period. All intellectual property rights in relation to the products, services or solutions developed before or during the regulatory sandbox period belong to the applicant.

Establishing its role as a key player in the cutting-edge worldwide fintech industry, the CBB has now authorised regulatory sandbox applications submitted by Wahed Invest, BitArabia, Belfrics, Tramonex, Nowex WLL and Rain Financial. In June 2018 Palmex, a digital asset exchange, became the first and only cryptocurrency exchange in the MENA region to receive a sandbox licence from the CBB.

It remains to be seen whether the products and services tested within the framework of the sandbox thus far will be deemed successful. However, there is no doubt that the CBB’s regulatory sandbox and other developments – such as the launch of Bahrain FinTech Bay, MENA’s largest dedicated fintech hub, by the Bahrain Economic Development Board – have broken new ground in the region and positioned Bahrain as a forerunner in the ever-changing fintech world.