Professional Documents
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Giorgio Torre
/giorgiotorre1234/
Foreword
In an era characterized by rapid technological advancements, the In the second chapter, one delves into the heart of the matter,
financial landscape is constantly evolving, presenting both opportunities presenting the Digital Tokens Framework devised by the Central Bank of
and challenges. Recognizing the transformative potential of digital Bahrain. Drawing upon extensive research, industry expertise, and global
assets, the Central Bank of Bahrain has taken a proactive approach in best practices, I will outline the regulatory and operational guidelines
developing a comprehensive framework that harnesses the power of necessary for the issuance, trading, and custody of digital tokens. This
digital tokens while ensuring the stability and integrity of Bahrain's chapter aims to provide clarity and certainty to market participants,
financial ecosystem. fostering trust, and fostering innovation within Bahrain's financial sector.
This deck serves as a guide to understand the essence of digital tokens, In the final chapter, will be presented the conclusions drawn from our
the framework designed to regulate them, and the strategic comprehensive study and outline strategic recommendations and
recommendations and roadmaps for their effective implementation. It is roadmaps for the future. These recommendations encompass key areas
structured into three chapters, each providing unique insights and such as market development, investor protection, technology adoption,
perspectives: In the first chapter, the foundation for understanding the and international collaboration. By incorporating these
world of digital assets is laid down. I will explore the fundamental recommendations into their strategic planning, policymakers, financial
concepts, technologies, and market dynamics shaping the landscape of institutions, and market participants can position Bahrain as a leading
digital tokens. Through a concise yet comprehensive overview, this deck hub for digital asset innovation and pave the way for a prosperous
aims to familiarize readers with the key features, benefits, and risks future.
associated with this emerging asset class.
Panoramic over the types of digital assets
03 Token vs Coin
07 Cryptocurrency
08 Stablecoin
09 CBDCs
10 Security Token
Giorgio Torre
Digital Assets CBB Digital Assets Framework Conclusions
Credit Debt
• Set the max chargeable IRs Commercial Banks Real case
• Set guidelines for liquidity
Central Banks
To i ncrease
i nflation Business Cycle
6 5 4 (short-term cycle)
Taxes Depression (IRs are not Recession Spending slows, GDP 3-6 years
enough anymore) (brea kdown point) contra cts
Long-term cycle
7
Governments How Economies work – Debt life cycle 70-110 years
01
Source: “Digital Assets – Guide for Central Banks” – Giorgio Torre
Digital Assets CBB Digital Assets Framework Conclusions
# High-level goals Today’s monetary system Crypto universe (to date) Future monetary system (vision)
1 Safety and stability – money needs to perform Sovereign currencies ca n offer pri ce stability, Cryptocurrencies do not perform money’s Innovations grounded i n trust i n the central bank feature
fundamental functions: as a store of value, unit of a nd public oversight has helped achieve fundamental functions, and stablecoins need s table s overeign currencies and safe payment systems.
account and medium of exchange. s a fe/robust payment systems. to i mport their credibility.
2 Accountability – public mandates and regulation Supervision, regulation and oversight tackle Crypto a nd DeFi create a parallel financial Cl ea r mandates and regulation balance ri sks and benefits
should ensure that key nodes in the system are ri s ks, promote competition and protect s ys tem to ci rcumvent regulation, with no s o a s to harness i nnovation and stimulate efficiency.
accountable and transparent to users and society. cons umers, but public mandates may need to a ccountability to the general public.
a da pt to change.
3 Efficiency – the system should provide low-cost, fast Domestic payments are often expensive and Hi gh congestion a nd rents l ead to costly New pa yment s ystems can significantly reduce payment
payments and throughput. fi nancial i nstitution collect rents. tra nsactions and new speculative incentives. cos ts and rents, s upporting economic a ctivi ty.
4 Inclusion – the system should ensure universal access Ma ny people lack access to transaction Crypto a nd DeFi have not yet s erved to New s ervi ce provi ders and interfaces can address barriers
to basic services at affordable prices a ccounts a nd digital payment i nstruments. enhance financial i nclusion. to i ncl usion a nd better s erve the unbanked.
5 User control over data – data governance Us ers trust intermediaries to keep data safe, Tra nsactions a re public on the blockchain – New da ta a rchitectures ca n give users privacy a nd control
arrangements should ensure users’ privacy and but they do not have sufficient control over whi ch will not work with “real names”. over thei r data.
control over data thei r data.
6 Integrity – the system should avoid illicit activity such Pa yment s ystems are subject to extensive Ps eudo-anonymity i s prone to abuse by i llicit New technologies can help to better prevent illicit activity
as money laundering, financial of terrorism and regul ation, but i llicit a ctivi ty persists i n cash a ctors , and the DeFi sector is ri fe with fraud a nd i mprove on today’s s ystems.
fraud. a nd a ccount fraud. a nd theft; i dentification is needed.
7 Adaptability – the system should anticipate future Pa yment s ystems are adapting to demands, Progra mmability, composability a nd Progra mmability, composability a nd tokenization can be
developments and users’ needs and foster nut a re not yet a t the technological frontier. tokenization give s cope for new functions. offered i n a CBDC or though tokenized deposits.
competition and innovation.
8 Openness – the system should allow for seamless Des pite progress, cross-border payments are DeFi is by nature borderless and allows Mul ti -CBDCs arrangements and other reforms mean
cross-border use. s till slow, opaque and expensive. gl obal transactions, but without a dequate chea per, faster a nd safer cross-border tra nsactions.
overs ight.
02
Goa l broadly fulfilled Room for i mprovement Not generally fulfilled
Digital Assets CBB Digital Assets Framework Conclusions
Token vs Coin
Despite the overlapping of some functionalities within the context of blockchain and DLT-based system use, tokens and coins represent different entities, based on their scope
COIN TOKEN
• Deemed to a financial asset with the sole function of making payments. • Created on top of existing blockchainsthat already have a native
currency.
• Displays most of the following characteristics:
• Can be generated and destroyed (“burned token”) based on the specific
a) Fungibility: one unit is equal to another need.
b) Divisibility: each unit can be divided into smaller units
c) Acceptability: widely accepted as a medium of exchange • Supports the processes of transactions, validation, vote rights (DAOs)
d) Limited supply: total number of units is capped and constant and ownership transfer.
e) Uniformity: all versions of a denomination share the same value
f) Portability, meaning that units can be transferred and exchanged • Can represent non-physical assets such as stocks, bonds physical assets
g) Durability: units can be used multiple times without losing value. such as real estate properties, cars (security tokens) or
services/subscriptions/ticketing systems (service tokens).
• Native to their blockchains, meaning that they were created at a given
blockchain's launch, to be used specifically on said blockchain.
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Digital Assets CBB Digital Assets Framework Conclusions
Fungible tokens are identical to each other and, therefore, can be used and transacted interchangeably.
NON-FUNGIBLE FUNGIBLE
Non-fungible tokens (NFTs) are unique and non- CYPTOCURRENCY STABLECOIN CBDCs SECURITY TOKEN
interchangeable assets stored and transmissible on Cryptocurrency assets are Stable-coin assets are crypto CBDC assets are on-chain Security tokens are on-chain
blockchain, and can represent digitally native items or either the native asset of a tokens that are designed to representations of a fiat representations of traditional
physical items that exist in the real world (e.g., supply blockchain or created as part mirror the price of a fiat currency. Digital fiat assets securities that exist off-chain.
chain products). of a platform that is built on currency like the US dollar are tokenized fiat legally
an existing blockchain. recognized as cash and are
backed by fiat currency.
COIN TOKEN
TOKEN
04
Source: “Digital Assets – Guide for Central Banks” – Giorgio Torre
Digital Assets CBB Digital Assets Framework Conclusions
Characteristics of assets
Characteristics Definition Examples
NON-FUNGIBLE
Items are concepts that Services, ID, subscriptions
UTILITY TOKEN SECURITY TOKEN
Intangible represent things.
“ASSET” TOKEN
Built using a common ERC-20 tokens (for Ethereum),
Fungible standard. currency
Used for services, access and NFTs for identity and ownership
Type of objects that are Birth certificate, passport,
Non-fungible subscriptions. (decentralized identity).
unique academia certificates
Asset tokenization
FUNGIBLE
Asset Class Definition
Representation of digital objects that express the purpose of
Payment token acting as a medium of exchange or unit of account and
(“crypto-coi n”)
implemented at a protocol level, for example, BTC, ETH. Direct expression of crypto-liquidity. Used to represent (on-chain) off-chain
Used for payments. assets.
On-chain representation of an off-chain asset but instead is a
Security-token representation of ownership of a physical asset (for example
(“asset” token)
gold or oil, car, house) or non-physical assets (securities etc.)
INTANGIBLE TANGIBLE
Representation of digital objects that provide the right to access
Utility-token or utilize the value derived from it, for example, a service or
subscription.
05
Source: “The Economy of Tokens” – Gi orgio Torre
Digital Assets CBB Digital Assets Framework Conclusions
authorizes 1
A non-fungible token (NFT) is a unique digital identifier that Crea tor
cannot be copied, substituted, or subdivided, that is recorded
in a blockchain, and that is used to certify authenticity and deploys Data storage
Blockchain
ownership. The ownership of an NFT is recorded in the
3
blockchain and can be transferred by the owner, allowing
2
NFTs to be sold and traded. NFTs can be created by anybody, Mi nter NFT Smart Contract
and require few or no coding skills to create. NFTs typically a ccount
ID Owner URL
contain references to digital files such as photos, videos, and Minter Wallet Meta data
audio. Because NFTs are uniquely identifiable assets, they 1 APIs
differ from cryptocurrencies, which are fungible. Owner 2
a ccount
4
Proponents of NFTs claim that NFTs provide a 3 5
public certificate of authenticity or proof of ownership, but
the legal rights conveyed by an NFT can be uncertain. The
ownership of an NFT as defined by the blockchain has no Minter Wallet
inherent legal meaning and does not necessarily
grant copyright, intellectual property rights, or other legal
rights over its associated digital file. An NFT does not restrict Properties of NFTs
the sharing or copying of its associated digital file and does
not prevent the creation of NFTs that reference identical files.
1 Uniqueness
NFTs can be fractionalized, where a business model of 2 Represents ownership
royalties can be implemented in the primary and secondary
markets. 3 Tokenize real world assets
06
Source: EY
Digital Assets CBB Digital Assets Framework Conclusions
Cryptocurrency
Cryptocurrency is decentralized digital money that is based on blockchain technology and secured by cryptography. Cryptocurrencies are not controlled by the government or
central regulatory authorities. As a concept, cryptocurrency works outside of the banking system using different brands or types of coins – Bitcoin being the major
player. Cryptography is the method that secures data from unauthorized access by the use of encryption techniques. Most of the claims that blockchain makes, like privacy and
immutability, are enabled through cryptography. Any digital store of value or medium of exchange (currency) that’s stored on the blockchain and can be used for investments,
payments and creating a coin to fund a project (ICOs, crowdfunding etc.).
Anatomy of a crypto-transaction
PEER NODE
Wallet - Verifies transaction
- Adds transaction to mempool
Pri va te Key
- Broadcasts transaction
- Process is repeated for each node receiving the transaction
MINER NODE
- Receives transaction
- Validates transaction
User signs Sends signed - Attempts to add the block (by solving the cryptographic puzzle
transaction transaction – mining)
to nodes - Process is repeated by every miner node receiving the
transaction from peer nodes
dApp
MINER NODE
- Selects transaction with highest gas fees
Stablecoin
08
Supra Oracles - The ultimate guide to stablecoins
Digital Assets CBB Digital Assets Framework Conclusions
CBDC
CBDCs can be used for local settlements and cross-border payments and transfers.
CBDC corresponds to a new form of money issued by central banks, and
more specifically, a new form of digitalized money. It can also be called a INDIRECT CBDCS The CBDS is indirectly issued
‘govcoin' (for government coin), a term coined by The Economist. by the central bank and the
indirect CBDC represents a
claim on a intermediary.
The creation of a CBDC implies the creation of a new element in the Intermediaries handle retail
payments, the central bank
monetary base, which is composed of:
Commerci al Bank wholesale payments.
(a) Coins and banknotes, or cash, that constitute central money lent to
commercial banks at a certain policy rate. With this money, banks can DIRECT CBDCS The CBDS is a direct claim on
offer credit to households and enterprises against interest rates. the central bank, which keeps
real-time records and
(b) Reserves, held by commercial banks to the central bank. This aims to updates balances. Private
sector companies may still
guarantee a reserve of funds for these banks in case of a systemic develop token-based variants
crisis, like the 2008 financial crisis. When considering a CBDC, central or digital banknotes.
banks assess the addition of this new form of money to the rest of the
monetary base and the impact it may have on their issuance.
HYBRID CBDCS A direct claim on the central
bank is combined with a
According to the principle of fungibility, a balance must be maintained in private sector messaging
the monetary base between cash, reserves and CBDC, which must be layer. Payments are handled
issued and circulated at parity. Furthermore, the central bank must by intermediaries. The central
bank has the capacity to
guarantee an equality in its balance sheet between this monetary base, Pa yment s ervice provider restore retail payments if
which represents liabilities and assets, including gold, foreign reserves and intermediaries are under
securities. technical stress.
Security Token
A security token is a unique token issued on a permissioned or permissionless blockchain, representing a stake in an external asset or enterprise. Entities like government and
businesses can issue security tokens that serve the same purpose as stocks, bonds, and other equities. Security tokens have as main application the so called “asset tokenization”,
where physical and non-physical, liquid and non-liquid assets can be tokenized and sold on the primary and secondary market. Indeed, the security token can represent both:
tokenized versions of stocks (equity), and bonds and tokenized versions of real world assets (real estate, property, plant, and equipment, etc.)
Issuer Investors
Tokenized securities
10
Source: “The Economy of Tokens” – Giorgio Torre
2. CBB Framework
13 Activities Permitted
14 Categories of License
17 Licensing Process
18 Legal Aspects
Giorgio Torre
Digital Assets CBB Digital Assets Framework Conclusions
The term ‘Crypto-Asset’ is defined under CRA Rules as “virtual or digital assets or tokens operating on a blockchain platform and protected by cryptography”. The definition is
inclusive and covers broadly four types of Crypto-Assets, namely: (i) Payment Tokens; (ii) Utility Tokens; (iii) Asset Tokens; and (iv) Hybrid Tokens.
Tokens (synonymous with cryptocurrencies) that are virtual currencies which are intended to be used, now or in the future,
Payment Tokens as a means of payment for acquiring goods or services or as a means of money or value transfer. Payment Tokens give rise
to no claims on their issuer and are usually decentralized. For example, Bitcoin.
Tokens that are intended to provide access to a specific application or service but are not accepted as a means of payment
Utility Tokens for other applications.
Tokens that represent assets such as a debt or equity claim on the issuer. Asset Tokens promise, for example, a share in
future company earnings or future capital flows. In terms of their economic function, Asset Tokens are analogous to
Asset Tokens
equities, bonds or derivatives. Tokens which enable physical assets to be traded on the blockchain also fall into this
category.
Hybrid Tokens Tokens that have features of one or more of the above three types of tokens.
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Digital Assets CBB Digital Assets Framework Conclusions
Activities Permitted
Rule 1.1.1 of CRA Rules stipulates that “no person may market or undertake, by way of business, regulated Crypto Asset services within or from Bahrain, without obtaining a license
from the CBB”. Rule 1.1.6 of CRA Rules recognizes the following activities as regulated activities that require a license from CBB:
Defined under CRA 1.1.6 as “the reception from a client of an order to buy and/or sell one or more accepted crypto-assets and the
1 Reception and transmission of order
transmission of that order to a third party for execution.”
Defined under CRA 1.1.6 as “acting to conclude agreements to buy and/or sell for one or more accepted crypto-assets on behalf of
2 Execution of orders on behalf of clients
the clients.”
Defined under CRA 1.1.6 as “trading against proprietary capital resulting in conclusion of transactions in one or more accepted
3 Dealing on own account
crypto-assets.”
Defined under CRA 1.1.6 as “managing or agreeing to manage accepted crypto-assets belonging to a client and the arrangement for
4 Portfolio management their management are such that the licensee managing or agreeing to manage those accepted crypto-assets has a discretion to
invest in one or more accepted crypto-assets.
Defined under CRA 1.1.6 as “safeguarding, storing, holding, maintaining custody of or arranging on behalf of clients for accepted
5 Crypto-Asset custodian
crypto-assets.”
Defined under CRA 1.1.6 as “giving, offering or agreeing to give, to persons in their capacity as investors or potential investors or as
agent for an investors or potential investor, a personal recommendation in respect of one or more transactions relating to one or
more accepted crypto-assets. A "personal recommendation" means a recommendation presented as suitable for the client to whom
6 Investment advisory
it is addressed, or which is based on a consideration of the circumstances of that person, and must constitute a recommendation to
buy, sell, exchange, exercise or not to exercise any right conferred by a particular accepted crypto-asset, or hold a particular
accepted crypto-asset.
Defined under CRA 1.1.6 as “crypto-asset exchange, licensed by the CBB and operating in or from the Kingdom of Bahrain, on which
7 Crypto-Asset exchange trading, conversion or exchange of: (i) accepted crypto-assets for fiat currency or vice versa; and/or (ii) accepted crypto-assets for
another accepted crypto-asset, may be transacted in accordance with the Rules of the crypto-asset exchange.
Activities such as creating or administering Crypto-Assets, publishing or using software for the production or mining of Crypto-Assets and running a loyalty programme are not considered a regulated activity. 13
Digital Assets CBB Digital Assets Framework Conclusions
Categories of License
Applicants may seek to be licensed by CBB under any of the following four categories of licenses:
Category 3 and 4 licensees are permitted to hold or control client assets and client money. Category 3 licensees are also permitted to deal on their own account. 14
Digital Assets CBB Digital Assets Framework Conclusions
Criteria of Approval
CBB will consider several factors while approving Accepted Crypto-Assets, including the following:
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Digital Assets CBB Digital Assets Framework Conclusions
Under CRA 1.5.1 of CRA Rules, applicants seeking a license from CBB must pay a non-refundable license application fee of BD 100 at the time of submitting their formal application
to CBB. Further, under CRA 1.6.3 of CRA Rules, the variable annual license fees payable by licensees is 0.25% of their relevant operating expenses, subject to a minimum and a
maximum as per the table below:
License Category Minimum Fees [BD] Maximum Fees [BD] • Reception and transmission of order
Category 1
• Investment advisory
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Digital Assets CBB Digital Assets Framework Conclusions
Licensing Process
# Stage Description
The applicant must contact CBB at an early stage to discuss their plans, for guidance on CBB’s license categories and
1 Due diligence and discussions with CBB team(s) associated requirements.
Following discussions with CBB, and upon CBB having reached a reasonable comfort level that the applicant’s proposed
business processes, technologies and capabilities are at a sufficiently advanced stage, the applicant must submit the
2 Initiate application following forms along with relevant supporting documents: form1 (application for a license), form2 (application for
authorization of shareholders) and form3 (application for approved person status). In addition to the previous, also a
detailed business plan and financial projections should be included,
In order for a license to be granted, applicants must demonstrate their ability to comply with the minimum criteria for
licensing conditions specified under crypto-assets (CRA) rules. CBB has set out licensing conditions in relation to the
3 Compliance with licensing conditions
following aspects: legal status, management, substantial shareholders, board and employees, financial resources,
systems and controls, external auditors, other requirements.
CBB permits applicants to first submit an unsigned Form 1 in draft, together with certain mandatory supporting
documents. Based on the information submitted at this stage, CBB may provide an initial ‘in principle’ confirmation
4 In-principle confirmation (IPC)
(“IPC") that the applicant appears likely to meet CBB’s licensing requirements, subject to the remaining information
and documents being assessed as satisfactory.
Subject to being satisfied that the applicant has met all conditions applicable to at the IPC, CBB will grant the applicant
5 Granting of final approval
with final approval for the relevant regulated activity.
Prior to the commencement of operations, a new licensee must, after obtaining CBB's prior written approval, appoint
6 Post final approval an independent third-party to undertake a readiness assessment and submit a readiness assessment report.
Within 6 months of license being issued, the new licensee must provide CBB with: the registered office address, a copy
7 Steps post approval fo the business continuity plan, notarized memorandum and articles of association and copy of the auditor’s
acceptance to act as auditor for the licensee.
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Digital Assets CBB Digital Assets Framework Conclusions
Legal Aspects
Category 3 Category 3
• B.S.C.
• A branch resident in Bahrain of a company
• Category 4 incorporated under the laws of its territory of Category 4 Category 4
incorporation
18
3. Conclusions
19 Critical Considerations
20 General Advice
Giorgio Torre
Digital Assets CBB Digital Assets Framework Conclusions
Critical Considerations
The following are the critical considerations that Bahraini companies and investors should take into account with regards to the delivery of business 3-5-7 years strategies
1 Applications to CBB
CBB has just issued the new digital-assets regulation, it will be expected some kind of delay for the first applicants and licensees to obtain the required
permissions. In the meantime, companies willing to register in Bahrain, should take this into account in order to avoid finan cial and strategic impact.
The CBB Sandbox (as mentioned in the rulebook) aims to test the application before launching it to the market. During this ti me, lessons learnt will be captured
and experience will be gathered. Companies should be ready to pivot in any time, during this process.
3 ESG Considerations
Although Proof-of-Work cryptocurrencies (PoW) - such as 'Bitcoin' - are notorious for their huge energy consumption, the Digital Tokens framework is not
issuing a ban on crypto currencies that use the PoW algorithm. Companies operating in Bahrain and pproved by the CBB might be required in the future to
adhere to the ESG compliance standards, based on the specific activity.
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Digital Assets CBB Digital Assets Framework Conclusions
General Advise
By following these recommendations, companies operating in the DLT ecosystem can help ensure that they are well-positioned to navigate the changing regulatory landscape and
take advantage of the opportunities presented by emerging technologies
A Stay up to date with regulatory developments: As the regulatory landscape around DLT and cryptocurrencies continues to evolve, it is important for companies
to stay informed about the latest updates and changes in regulations.
B Focus on compliance: Until the new regulations come into effect, companies should focus on complying with existing regulations and best practices. This
includes KYC/AML procedures, data protection regulations, and cybersecurity standards.
C Implement robust security measures: Security is a critical concern for DLT and cryptocurrency companies, and they should take proactive steps to implement
robust security measures to protect their systems and user data.
D Establish clear governance and accountability structures: Companies should establish clear governance structures and accountability mechanisms to ensure
that all stakeholders understand their roles and responsibilities and that decision-making processes are transparent and accountable.
E Conduct thorough risk assessments: Companies should conduct thorough risk assessments to identify and mitigate potential risks associated with DLT and
cryptocurrency activities, such as financial crime, fraud, and cybersecurity threats.
F Engage in constructive dialogue with regulators: Companies should engage in constructive dialogue with regulators to help shape the regulatory landscape and
ensure that their concerns and needs are heard and taken into account.
G Participate in regulatory sandboxes and pilot regimes: Companies should consider participating in regulatory sandboxes and pilot regimes to test new DLT and
cryptocurrency products and services under controlled conditions and to gain valuable feedback from regulators.
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Giorgio Torre
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