CBB regulates playtime in Sandbox for Fintech firms

The Central Bank of Bahrain introduced a regulatory Sandbox for the Fintech Firms in July 2017 for testing their innovative and customer beneficial technologies in a safe virtual place. The State of Bahrain is the second member state of the GCC to introduce these regimes.

A regulatory sandbox is a place where the startup and established Fintech firms could develop their financial technology (“FinTech”) sector in a safe, measured and practical manner. The Sandbox helps in developing, testing and tweaking the commercial technology of the Fintech firms. This regulatory compliance of Bahrain enables the companies to test and refine their technique without the pressure of the usual regulatory and financial requirements which would otherwise apply to their activities.

The notable features of this sandbox are:

• The regulatory sandbox is open to existing CBB licensees as well as to entities or firms that do not hold a license issued by the CBB (both Bahraini and foreign). Such non-licensed companies or entities may include financial sector companies as well as technology and telecom companies; professional services firms which work with or service financial institutions; and any other type of applicant working within the financial services industry and considered acceptable by the CBB.
• The regulatory sandbox is open both to existing FinTech solutions which have already been tested within a lab environment, as well as to ideas and solutions which are yet to be fully developedand
• The time allotted for an applicant to remain within the regulatory sandbox is a maximum of nine months (with the possibility of an entirely discretional extension of three months).
• The CBB may limit the testing of the product or service by the applicant regarding the number of volunteer customers and the amounts involved.

The eligibility criteria:

• Innovativeness: the technology should be genuinely innovative or expressively diverse to existing elucidations within the Bahrain market,
• Customer benefits: it should offer tangible benefits directly or indirectly to the customer,
• Technical testing: this is only for existing technology, the firm offering with existing technology should have obtained technical testing with the results to be provided to the CBB or produce an external validation from a reputable third party,
• Ready for regulatory testing:Applicants are obligated to show evidence of a thriving regulatory testing plan which includes highlighting of the key risks the solution poses; details of how these will be alleviated; and details of sufficient safeguards to protect customers.
• Post-testing deployment in Bahrain. The applicant should exhibit their aim and ability to deploy the projected solution in Bahrain by way of submission of a Sandbox exit strategy (to include specific details of proposed scale-up and future deployment).

The application procedure:

The applicants have to submit a written application using the standard template issued by the CBB for the sandbox regulatory compliances in Bahrain, and they should provide the following details:

• A description of the applicant’s organization as well as its corporate structure, key business lines and centers, and its financial standing and technical expertise;
• The proposed innovative financial solution, and how it satisfies the eligibility criteria
• The information as to the type (and number) of volunteer customers to be included in the applicant’s sandbox testing; how they will be sourced, and proposals to protect the volunteer customers and their privacy;
• Key performance indicators and targets which will be used to determine the success of the testing
• The cybersecurity and other relevant measures to be applied by the applicant to maintain security of the solution service or product; and
• The applicant’s exit plan, plans for development and deployment strategy, together with a timeline of steps to be taken to meet the additional legal and regulatory compliances in Bahrain after exiting the regulatory sandbox.

The CBB reserves the right to relax the requirements according to the applicant’s situation. The applicants are required to adhere to the relevant CBB regulations with regards to Know Your Customer (KYC), Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT). Also, the funds received by the applicants from the volunteer customers, required to be entrusted to the handling of CBB licensed retail banks.At the end of the designated period, the applicant can apply for appropriate CBB license depending on the precise activities of the applicant.

The introduction of the new framework and the creation of a dedicated FinTech Unit within the CBB are consistent with Bahrain’s sustained focus on promoting the kingdom as the emerging FinTech and financial services hub of the Middle East region. At the same time, the defenses built into the regulatory compliance in Bahrain will ensure the required level of consumer protection and regulatory oversight which have long established Bahrain as one of the leading financial sector hubs in the GCC.

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