Bahrain has made history by becoming the first Gulf nation to introduce a dedicated regulatory framework for stablecoins, marking a significant advance over its regional counterparts as governments in the Middle East consider how to regulate digital finance. This new set of rules, implemented by the Central Bank of Bahrain, aims to provide clarity in the burgeoning market of cryptocurrencies.

The framework outlines licensing requirements and operational guidelines for companies wishing to issue fiat-backed stablecoins, which are cryptocurrencies linked to traditional currencies like the US dollar or Bahraini dinar. To comply, firms must maintain a minimum capital of approximately $660 000, establish clear governance structures, and implement robust cybersecurity measures. Additionally, they are required to submit whitepapers that disclose their business models.

Stablecoins have gained popularity for facilitating rapid and cost-effective cross-border payments, particularly in remittances, which constitute a crucial income source in many Gulf nations. Circle, the organization behind USD Coin—the second-largest stablecoin globally—recently announced it is in preliminary discussions with money-transfer companies in the UAE to incorporate its stablecoin into one of the world’s busiest remittance corridors.

Bahrain’s regulations notably exclude riskier models like algorithmic stablecoins, which depend on software-driven mechanisms to maintain price stability. These models have come under intense scrutiny following the collapse of TerraUSD in 2022, which resulted in billions of dollars lost when its algorithm failed.

Under Bahrain’s new framework, holders of stablecoins are guaranteed the right to redeem their tokens for fiat currency at any time, and standard products are prohibited from offering interest payments. By establishing this dedicated rulebook, Bahrain sets clear standards for the issuance, management, and redemption of tokens pegged to various currencies, thereby providing companies and investors with enhanced legal certainty by recognizing stablecoins as distinct financial instruments.

While the UAE has regulations for stablecoins under its broader Payment Token Services Regulation, it has only approved a dirham-backed token, AE Coin, and lacks a specific framework for stablecoin issuers. Other Gulf nations, including Saudi Arabia, are exploring central bank digital currencies and wider cryptocurrency regulations but have yet to implement stablecoin-specific rules.

Stablecoins are engineered to maintain a stable value, typically pegged 1:1 to a conventional currency like the US dollar. However, unlike traditional bank deposits, they are not insured or guaranteed, posing risks if reserves are mismanaged or user confidence diminishes, potentially leading to losses.