The National Assembly of Panama approved in third debate the proposed Law which “regulates the commercialization and use of crypto assets, the issuance of digital value, the tokenization of precious metals and other assets, payment systems, and dictates other provisions”.
The proposed Law establishes that its main objective is to make the Republic of Panama compatible with the digital economy, specifically with innovative technologies such as Blockchain, Crypto Assets and Smart Contracts. Additionally, the proposed Law specifically seeks to:
- Expand the digitization of the Republic of Panama by promoting the use of distributed ledger technologies and Blockchain in the digitization of the identity of individuals and legal entities and as a means of making the public function more transparent.
- Give legal, regulatory, and fiscal certainty to the use and possession of Crypto Assets, the issuance of digital securities and the tokenization of precious metals and other assets in the Republic of Panama.
- Create a regulatory framework that promotes banking interoperability in such a way that promotes greater financial inclusion.
- Attract new foreign investment to the country related to these new technologies for the strengthening of the national economic system.
Since these technologies are still new and their concepts are not yet completely clear for the public, we consider it’s important to refer to some of the most relevant terms defined in the proposed Law, namely:
- Payment System Administrator: any person, company, entity, or financial institution that operates a payment system, establishes its internal regulations or, where appropriate, carries out, in accordance with the applicable regulations to that payment system, the actions to coordinate the performance of the participants.
- Blockchain: a type of distributed ledger technology that chains blocks of transactions by means of a decentralized cryptographic consensus mechanism, including, without limitation, proof-of-work, proof-of-stake, and other consensus distributed protocols.
- Smart Contracts: self-executing transactional protocols deployed on blockchain networks that facilitate, secure, enforce, and execute pre-registered agreements between two or more parties.
- Crypto Asset: fungible or non-fungible digital entry in a distributed ledger, which may or may not be a blockchain, whose ownership can be proven using cryptography and whose transfer can be done through digital signatures using cryptography.
- Crypto Asset with Underlying Value: crypto assets that represent assets economically invested in the Republic of Panama.
- Payment System: agreements or procedures, centralized or by federated consortium through any type of legal entity or contractual arrangement, whose purpose is the clearing of transfer orders or the settlement of accepted transfer orders and which are designated as such by the of the Board of Directors of the National Bank of Panama.
- Distributed Ledger Technology: technology consisting of the storage and registration of information through databases in a decentralized, distributed, and interconnected manner, managed by more than one entity.
- Redeemable Digital Value: monetary value stored by digital, electronic, or magnetic means that represents a credit on the issuer and that meets the following requirements:
- Is issued by the issuer after obtaining possession of funds, physical goods, or fungible Crypto Assets for the purpose of carrying out payment operations or facilitating the sale of Crypto Assets.
- Is accepted by a natural or legal entity other than the issuer of the Redeemable Digital Value.
- It is not included in the exclusions contemplated in the proposed Law
The proposed Law also contemplates the following provisions that we consider relevant:
- It includes the possibility of the use of Crypto Assets by individuals, branches registered in the Republic of Panama and legal entities organized in the Republic of Panama, as a payment method for any civil or commercial operation not prohibited by law. The proposed Law also contemplates the possibility of paying taxes, fees (tasas) and other tax obligations using Crypto Assets once this is properly regulated by the General Directorate of Revenue (Dirección General de Ingresos).
- Issuers of Redeemable Digital Value are designated as financial reporting entities, subject to the supervision of the Superintendency of Banks of Panama. These entities will have to, among other things: (i) obtain a Redeemable Digital Value entity license issued by the Ministry of Commerce and Industries and (ii) comply with due diligence provisions and with all other risk prevention and control mechanisms of money laundering and other provisions contained in Law 23 of 2015.
- The proposed Law proposes new regulation on Payment Systems, delegating exclusive faculties to the Board of Directors of the National Bank of Panama to regulate other Payment Systems that operate in or from the Republic of Panama, as well as establishing the relevant regulations applicable to the Payment System Administrators.
- It equates the sale of Crypto Assets with Underlying Value with the sale of movable and immovable assets, bonds, shares, and other securities issued by legal entities, including such sale in the provisions used to calculate gross income.
- Amends article 701 of the Tax Code, which establishes the guidelines for calculating income tax and establishes that: “… profits obtained from the sale of bonds, shares, participation fees and other securities issued by legal entities are taxable, as well as those obtained from the sale of other personal property, including Crypto Assets with Underlying Value.”
- It includes the transfer of Crypto Assets as transfers that do not trigger the Tax on the Transfer of Movable Tangible Assets and the Provision of Services (“ITBMS”).
- It establishes that the income generated through the sale of Crypto Assets with Underlying Value, which do not constitute ordinary course of business will be considered taxable, provided that said Crypto Asset represent underlying assets economically invested in the Republic of Panama. A capital gains treatment would be applied, calculating the amount of the applicable tax to be paid at a rate of 4% on the profits.
It is important to note that the proposed Law is still pending final approval by the Executive Branch. The President of the Republic of Panama, Laurentino Cortizo, announced that based on their analysis, he is considering a partial veto of the proposed Law to make sure that the provisions of the Law are consistent with Panama’s financial system. The President also stressed the need to strengthen the provisions of the proposed Law that regulate money laundering activities, in such a way that those provisions comply with global standards required by international organizations such as the Financial Action Task Force (FATF). If the proposed Law is in fact partially vetoed, it would then return to the National Assembly for evaluation and to make the necessary modifications in accordance with the comments made by the Executive Branch.