The State of Crypto in Panama [June 2024]
Teresa Carballo & Edgar Young, Partners
Pacífica Legal
Pacífica Legal is a firm focused on technology projects. Often, our clients come to us with regulatory questions regarding virtual assets in Panama, seeking legal opinions on specific points. We want to share our knowledge on the subject and provide an overview of the State of Crypto in Panama in 2024, which we plan to update as new developments arise. We aim to help Panama become one of the world's leading blockchain hubs, achievable only with solid information and use cases. As a second phase, we intend to bring these founders to Panama, creating better jobs and knowledge for tech enthusiasts, and leveraging the benefits and principles of blockchain technology.
Legal and Regulatory Landscape of Virtual Assets in Panama
Current Legal Framework and Classification
Without determining specific properties, the ones that need to be evaluated in a case-by-case scenario, virtual assets may fall under a broad interpretation of "movable property" as per the Panamanian Civil Code, allowing them to be owned, bought, sold, and inherited. This classification acknowledges virtual assets as legitimate property interests, capable of being integrated into the broader economic system of Panama.
Despite this classification, the lack of specific regulations leaves many aspects of virtual asset usage, such as consumer protection and market stability, in a legal grey area.
Insights from Regulatory Authorities
The Superintendency of Securities Market's approach, as noted in their 2018 statement, highlights that while virtual assets are recognized for their transactional roles in the economy, they do not fall under traditional financial or securities oversight frameworks.
The absence of a specific regulatory body for virtual assets means that their supervision falls through the gaps of existing financial regulations, emphasizing the need for tailored regulatory frameworks to address these emerging technologies.
Legislative Developments and Implications:
The now-unconstitutional Bill No. 697 of 2021 would have established definitions and frameworks for managing virtual assets. Although it was not enacted, the discussions and drafts surrounding this bill provide critical insights into potential future regulatory paths that Panama might consider.
This legislative attempt indicates a growing recognition of the need for formal governance structures around virtual assets, signaling possible future developments in Panamanian law.
Constitutional Law and Its Implications for Virtual Assets in Panama
Panama’s constitutional framework provides a foundational context for understanding how virtual assets might be governed within the country. Article 18 of the Panamanian Constitution articulates a fundamental principle concerning the legality of actions by private individuals and public officials, setting the stage for a broad interpretation of permissible activities unless explicitly restricted by law.
Constitutional Principles:
Principle of Legality: This principle is crucial in governing how authorities and individuals operate within Panama. For private individuals and also for Panamanian Legal Entities, there is a wide latitude to engage in activities not specifically prohibited by law, which inherently includes transactions and operations involving virtual assets. For public authorities, however, actions must be explicitly authorized by law, ensuring a restrained and defined scope of governmental power.
Responsibility and Accountability: The Constitution makes a clear distinction between the responsibilities of private individuals and public officers. Private persons are accountable to the authorities only for violations of the constitution or laws, whereas public officers are also accountable for exceeding their authority or failing in their duties. This distinction is vital in the context of regulatory enforcement and compliance in the burgeoning sector of virtual assets.
Principle of Territoriality: Article 3 extends constitutional principles to the entire territory of Panama, which includes the land, territorial sea, submarine shelf, subsoil, and airspace. This comprehensive territorial jurisdiction implies that any regulation or legal framework concerning virtual assets would apply uniformly across all these domains, affecting how virtual assets are managed, traded, and stored within the national boundaries.
Implications for Virtual Assets
Regulatory Scope and Enforcement: Given the constitutional backing for activities not expressly prohibited, Panama provides a flexible regulatory environment for virtual assets. Even though there is no specific regulation, Panama’s approach is very flexible, allowing it to perfectly and legally operate crypto-related activities in and from the country.
Legal Framework Development: The constitutional principles provide a basis for the development of future legislation specifically targeted at virtual assets. Lawmakers are guided by these principles to ensure that any new laws are clearly defined and provide explicit guidelines for both individuals and authorities involved with virtual assets.
Territorial Integrity and Legal Jurisdiction: The principle of territoriality ensures that any laws passed concerning virtual assets have national applicability, potentially simplifying the legal landscape but also imposing uniform regulations that might affect international transactions involving virtual assets.
Our Analysis of Securities Regulations in Panama Related to Virtual Assets
Panama’s regulatory framework for securities, encapsulated within the Unified Text of the Securities Market of Panama, provides a comprehensive legal basis for the governance of financial instruments, albeit with distinct provisions relating to virtual assets. This detailed analysis examines the definitions, regulatory scope, and practical implications of these regulations, particularly in the context of virtual assets such as cryptocurrencies.
Definition and Scope of Securities in Panama
The Panamanian legislation defines "security" broadly under Article 49 (66) of the Unified Text of the Securities Market of Panama, encompassing bonds, shares, debentures, and other negotiable instruments. It explicitly clarifies what constitutes a security, enabling the Superintendence of Securities Market (SMV) to regulate these instruments comprehensively. Notably, certain financial instruments like non-negotiable bank obligations and insurance policies are excluded from this definition, highlighting a tailored approach to securities oversight.
Definition of Financial Assets and Offers
Financial assets are defined in Article 49 (2) as encompassing securities, cash, and other movable properties held in custody accounts, provided they are recognized as such by both the intermediary and the asset holder unless explicitly excluded by the Superintendence. Furthermore, an "offer" under Article 49 (41) is broadly defined to include proposals to sell or transfer securities, not covering preliminary negotiations, which delineates the boundaries of formal market transactions and informal preparatory discussions.
Public Offers and Regulatory Compliance
Article 128 stipulates that public offers or sales of securities within Panama need to be registered with the SMV unless specifically exempted. This provision ensures that securities offered to individuals domiciled in Panama are subject to local regulations regardless of the location from where the offer is made. The distinction between domestic and international offers ensures clarity and jurisdictional precision in securities trading.
Regulatory Stance on Virtual Assets
The stance of the SMV on virtual assets is pivotal in understanding the regulatory landscape. Opinion 7 of November 15, 2018, explicitly states that virtual assets like cryptocurrencies are not recognized as securities or currencies under current Panamanian regulations. This lack of recognition stems from the absence of inherent value and traditional financial characteristics in these assets. The SMV clarifies that activities related to virtual assets do not necessitate communication or notification to the SMV, indicating a significant regulatory gap in this rapidly evolving asset class.
Operational Freedom and Regulatory Exemptions
This regulatory setup posits that without explicit laws governing cryptocurrencies, operations involving these assets do not require licensing or direct oversight by the SMV. This position reflects a broader regulatory philosophy of non-intervention in areas not explicitly governed by existing laws, allowing for a certain level of operational freedom within the market.
Breakdown of the view of the Superintendency of Banks of Panama (SBP) on Virtual Assets
The regulatory landscape from the perspective of the Superintendency of Banks of Panama (SBP), presents a cautious yet under-defined approach, through Law Decree 9 of 1998 and subsequent notices.
Regulatory Framework Governing Banking Entities
Law Decree 9 of 1998 establishes the jurisdiction of the SBP over banking entities, including banks, banking groups, and non-banking financial affiliates operating within Panama. The decree mandates that any entity engaging in banking activities within the nation must obtain a proper banking license, underscoring a regulatory environment aimed at ensuring compliance and oversight within the banking sector.
SBP's Stance on Virtual Assets
Notice 5, 2018 issued by the SBP, marks a pivotal moment in the discourse around cryptocurrencies in Panama. This notice acknowledges the increasing visibility and use of cryptocurrencies like Bitcoin but points out the lack of specific regulatory frameworks governing their use within the banking sector. The SBP advises public caution and a heightened awareness of the risks associated with digital currencies, given their unregulated status.
Regulatory Competence and Cryptocurrencies
The SBP explicitly clarifies that the activities associated with the exchange, investment, and commercialization of cryptocurrencies do not fall under its regulatory competence. This distinction is crucial as it highlights the regulatory vacuum in which these digital assets currently operate. The SBP’s admission of its limited regulatory reach over cryptocurrencies signals a need for legislative attention to address these emerging financial instruments.
Consumer Protection and Risk Advisory
While the SBP does not regulate cryptocurrencies, it emphasizes the importance of consumer protection by urging potential users to educate themselves about the risks involved. The absence of specific regulations for cryptocurrencies means that consumers and investors engage with these digital assets at their own risk, without the typical safeguards that regulated financial products offer.
Due Diligence and Compliance
Despite the lack of direct oversight, the SBP expects regulated financial entities to maintain strict due diligence processes to prevent the misuse of their platforms for cryptocurrency transactions. This approach aligns with broader financial compliance measures, such as those outlined in Law 23 of 2015 and Agreement 10 of 2015, which focus on anti-money laundering (AML) practices and the financing of terrorism.
Implications for Banking Entities and Financial Stability
The SBP’s position necessitates that banking entities remain vigilant in their operations related to cryptocurrencies, ensuring they do not inadvertently breach existing financial regulations. The call for due diligence and the prohibition against unauthorized cryptocurrency activities by regulated entities underscore the SBP's commitment to financial stability and the integrity of Panama's banking system.
Future Regulatory Prospects and Academic Discussion
The evolving nature of digital currencies and their increasing integration into global finance suggests that regulatory frameworks will need to adapt. Academic discussions and policy analyses are essential in guiding these developments, ensuring that new regulations provide clarity and security for investors while fostering innovation and growth in the financial sector.
Interpretation of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Regulations in Panama
Panama's commitment to combating money laundering, terrorist financing, and the proliferation of weapons of mass destruction is articulated through a robust legal framework, primarily anchored by Law 23 of 2015, and supplemented by various decrees and resolutions. This detailed analysis explores the implementation of AML/CFT measures in Panama, highlighting the comprehensive approach and the range of entities involved.
Legal Foundation and Regulatory Instruments
Law 23 of 2015 serves as the cornerstone of Panama’s AML/CFT regulations, setting forth a framework to identify, assess, and mitigate risks associated with money laundering and related financial crimes. This law is further regulated by Executive Decree 35 of 2022, which provides additional guidelines and procedures for compliance. Additionally, Administrative Resolutions such as 05-2019 and JD-REG-001-18 define specific directives for obligated subjects, ensuring a clear path for the implementation of risk assessment and control measures.
Scope of Application and Obligated Subjects
The law categorizes obligated subjects into two broad groups: financial and non-financial. Financial obligated subjects include banks, trust companies, financial companies, and other entities that are traditionally part of the financial system and are directly supervised by regulatory bodies like the Superintendency of Banks of Panama and the Superintendency of the Securities Market.
Non-financial obligated subjects, defined under Article 40 of Law 124 of 2020, encompass a wide array of entities from real estate agents to lawyers and public accountants, indicating the extensive reach of Panama’s AML/CFT regulations beyond conventional financial entities to include any sector where financial transactions might occur that could potentially be used for money laundering or terrorist financing.
Due Diligence and Risk Assessment
Entities subject to AML/CFT regulations are required to implement due diligence procedures, which include verifying customer identities and assessing the risks associated with their transactions. This process is critical in detecting and preventing potential illicit activities. The law mandates that these entities keep their risk assessments up to date and have mechanisms in place to report suspicious activities to the authorities.
Enhanced Scrutiny on Politically Exposed Persons (PEPs)
The regulations impose stricter scrutiny on transactions involving politically exposed persons, requiring enhanced due diligence to ensure that these high-risk profiles do not exploit the financial system for illicit purposes. This focus on PEPs underscores Panama’s commitment to international standards for financial integrity.
International Compliance and Cooperation
Panama's AML/CFT laws align with global standards set by bodies such as the Financial Action Task Force (FATF). The legislation facilitates international cooperation and compliance, particularly in the sharing of financial intelligence and the enforcement of measures against entities listed in high-risk jurisdictions, such as those on the FATF blacklist or under sanctions by the Office of Foreign Assets Control (OFAC).
Sector-Specific Implications
The broad definition of obligated subjects means that sectors typically not associated with financial crimes, such as the construction or automotive industries, are also under regulatory scrutiny. This inclusive approach ensures that money laundering and terrorist financing risks are mitigated across all potential avenues.
Commercial License
Law 5 of 2007 in Panama serves to streamline the process for opening and operating companies within the national jurisdiction. It mandates that:
Ease of Business Operations: Any individual or legal entity is permitted to conduct commercial or industrial activities within the national territory, provided they adhere to the stipulations of the law and constitutional limitations. This open regulatory stance is designed to foster a business-friendly environment by minimizing bureaucratic resistance once legal prerequisites are met.
Extraterritorial Application: Panamanian legal entities engaging in business activities outside the national territory are not required to obtain a commercial license from Panama, nor are they compelled to adhere to local commercial regulations that apply to businesses operating within Panama. This provision underscores the jurisdictional boundaries of Panama’s commercial regulations and highlights the nation’s respect for the sovereignty of business operations conducted abroad.
Pre-sale of Tokens through Private Agreements
In the realm of digital assets, particularly tokens, Panama’s contractual law plays a crucial role:
Contractual Freedom: Panama upholds the principle of freedom of contract, where parties have the liberty to establish the terms of their agreements as long as they are not contrary to law, morals, or public order. This principle is vital in the context of virtual assets, where pre-sale agreements of tokens can be structured flexibly to suit the needs of the parties involved.
Essential Contractual Elements: For a contract to be considered valid under Panamanian law, it must have the consent of the parties involved, a determinate object, and a lawful cause. These elements ensure that contracts, including those for the pre-sale of tokens, are founded on mutual agreement, clear terms, and legitimate purposes.
Regulatory Considerations: While specific regulations for contracts involving virtual assets like tokens do not exist, such agreements are subject to the general contract law principles of Panama. This means that while the market for tokens operates in a relatively unregulated space, the fundamental legal protections and obligations of contract law still apply.
Other Considerations
Bill No. 697 of 2021, aimed at regulating the market and use of virtual assets, encountered significant legal hurdles:
Constitutional Challenge: The bill was declared unconstitutional by the Supreme Court of Justice, citing non-compliance with the procedural norms established for law-making under Article 170 of the Constitution. This decision underscores the rigorous standards required for legislative processes in Panama, especially concerning emerging technologies like virtual assets.
Legal and Market Implications: As highlighted by Justice Olmedo Arrocha’s dissenting opinion, the lack of regulation for cryptocurrencies and tokenization activities means these operations continue without specific governmental guarantees. This scenario places a greater emphasis on market forces, trust, and general legal principles to govern the transactions involving virtual assets.