Ranking and Index: doing business in Panama
One of the difficulties that I see on the way forward, is that Panama is not the easiest country in which to set up a business (locally) and run it.
Panama scores a low #54 in “economic freedom” according to the Heritage.org, having a score of 67.0 – because of drops in property rights and government integrity (corruption). On the other hand, the Fraser Institute and the Economic Freedom Network place Panama for 2017 at #30 in Economic Freedom. Forbes lists Panama as #64 in “Best Countries for Business“. Unfortunately, economic growth has depended on debt-financed infrastructure projects, while the economy has depended heavily on transportation and logistics services.
One of the biggest problems with all the infrastructure development and spending is the burden this creates on tax payers. General government gross debt accounted for 39% of GDP in 2017, with a fiscal deficit of 3.1% (up substantially from 2% in 2016). That said, amazingly enough the IMF estimates Panama will have the highest per capita GDP in Latin America – USD 25.712 – in 2018.
That said, Panama continues to have the fastest growing economy in the region: our well-developed services sector accounts for over 75% of GDP. Before the crash of 2008, Panama has the highest growth rate in Latin America (close to 11%) – with real estate prices and speculation leading the rush. Since 2013, the GDP has slowed from previous levels of 6-8%, and following on from the #PanamaPapers scandal the banking and corporate services sectors have diminished considerably. The services which continue to contribute to GDP include logistics, banking, the Colon Free Zone, insurance, container ports, tourism and offshore services to a lesser extent.
Unfortunately, Panama dropped (2016-2017) on the global entrepreneurship index from 32.2 to 26.1, and in the innovation index ranks also #63. In human development, Panama also ranks similarly at #61. Likewise, in the knowledge economy index, we come in at #64.
Having looked at these indexes, it is interesting to see how well Panama is moving with respect to FinTech, blockchain and the implementation of these technologies. As Panama seeks to leave behind the shroud of “shady deals” and “Panama Papers”, the Ministry of Economy & Finance has announced an initiative to regulate FinTech, blockchain, sandboxes, crypto-currencies, and crowd-funding enterprises.
Development of the Fintech industry in Panama
Unbeknownst to most people, Panama is on the list of countries that are friendliest to Bitcoin and crypto worldwide!
Panafintech is the Panamanian Association of Fintech, who so far have organised five blockchain and fintech events. Back in 2017 they organised an event for 300 people from banking and finance, to discuss blockchain – its scope and application. It was at this event back in 2017 that Cryptobuyer announced that it was moving to the City of Knowledge and that it would be developing Blockchain Academy Latam.
Blockchain Academy offers training not only to developers and entrepreneurs, but also for financial institutions (such as banks), organizations, schools and the government. It also offers a bootcamp in which it is possible to learn about cryptocurrencies, industry, mining, Blockchain, opening a digital wallet and other applications of the technology.
Cryptobuyer is unique in Panama, offering the “Blockchain Academy Panama“, in which it offers training and certification in programming with blockchain, and has its offices in Ciudad del Saber. Additionally, it has installed Bitcoin ATMS in parts of Panama, such as in Banistmo (since June 2017) and has installed Cryptobuyer Pay in various local businesses (so that they can accept payments in Bitcoin and other currencies).
Cryptobuyer also set up Blockchain Embassy Panama, which opened in 2017. In addition to offering crypto clothing and merchandise, craft beers, hardware wallets and working space, the embassy also gives cryptocurrency workshops and presentations.
The first large-scale conference on fintech & blockchain was held May 5 & 6th, at Ciudad del Saber, and called “PanamChain“, with Andreas Antonopoulos as the Keynote Speaker (author – Mastering Bitcoin (O’Reilly Media), speaker, educator) . This event was organised by Cryptobuyer and Panafintech.
Coming up on May 24th, Panama will host its second “Digital Business Day“, offered by CAPAtec – the Panamanian Chamber of IT, Innovation & Telecommunications. This is a “Microsoft Experience Day” – about AI, transforming customer experiences, using ChatBots, and “intelligent billing”.
Disruption & change of the market
Fintech additionally has a role to play in Panama’s “offshore industry”. At its simplest, financial technology – or fintech – applies technological innovations to financial processes, products and services. It could easily play a large role in the lucrative business of identity verification, eKYC and fraud detection. This could also directly impact in the banking industry, if Panamanian banks could work out how to incorporate this into their account opening process.
Experts in blockchain have shown that banks could easily change their account opening process to a simple 5-step process relying on this system. Some go so far as to claim blockchain technology could transform international financial transactions in much the way the Internet transformed communications. Of course, on some levels fintech competes with the traditional financial methods of delivering financial services.
Blockchain = distributed ledger technology – provides decentralized networks that simply record transactions. So, for example, IBM provides “Blockchain-as-a-service” for banks. It is interesting to see how the blockchain industry could have helped Panama avoid the #PanamaPapers, as expressed by Otonomos BCC:
Our hope is that a decentralised database, which by its very nature is secure, tamperproof by third-parties and immutable even by its very authors, can be looked at by enlightened regulators around the world. This technological architecture could ultimately become a global, cross-jurisdictional database.
At Otonomos, which represents private company shares on blockchain and makes them programmable, we have engineered a decentralised solution that performs Know-Your-Customer checks at every stage of the ownership chain of company shares, and watermarks the shares with the UBO’s identity.
In addition, Otonomos has architectured our solution with the privacy of end-users in mind. We make public only such information regulators in a specific jurisdiction require to be publicly accessible, whilst masking non-publicly disclosed information.
Finally, we future-proofed our solution by letting third-party verification agents — typically organisations such as banks who by legal mandate from their Government can perform KYC checks -“stamp” people’s KYC at the blockchain level, resulting in a layered verification process in which every check fortifies a user’s KYC.
Nonetheless, it seems that tech giants are much further ahead in disrupting banks, as these lag behind in cloud computing, AI and big data. Fintechs define the direction of innovation in financial services, but they face a challenge in their ability to scale (something that companies like Amazon or Facebook have already dealt with). So, for example, Amazon Web Services provides cloud computing for Capital One and Nasdaq. That’s because of the scope of the transactions that occur on a single day, which small start up fintech companies are not ready to handle.
If what we see internationally occurs in Panama, this means that large banks are acquiring fintech companies and digital banks, as strategic acquisitions – they are simply leveraging the competition to re-establish their leadership in the market. So, for example, in Panama we have a small crypto-currency that was recently established: Natan Edu – created by a group of young entrepreneurs, as a payment system in education, to allow payments of online courses. This was created by Osmar Major and Marcos Pineda (22 and 24 years old respectively). Will this be swallowed up by bigger players in the market? Additionally, just this week, DigitalX (the first crypto-currency fund established in Australia) indicated that it is looking at Panama to establish the Latin American financial hub.
Response from the banking sector
Panama’s banking sector, however, has been very cautious in response to fintech, indicating that until it is fully regulated, they simply see the possibilities of further scandals for money laundering. On this note, Panama’s banking Superintendence issued a notice to banks that the activity of exchange, investment, purchasing, and commercialization of “Bitcoin” or any other crypto-currency is unregulated in Panama.
As a result, some traders were threatened with having their bank accounts closed at local banks for receiving funds from their international crypto accounts! This seems to be completely contrary to the way it is being dealt with, for example, in the US where Goldman Sachs and Morgan Stanley both announced that they were going to get involved in crypto-currencies.
Nonetheless, we find that Australia (leading with DigitalX), the UK and other jurisdictions have all introduced regulations in order to create the market conditions for development of fintech, blockchain and financial services. For example, back in 2015-2016 the UK introduced their regulatory framework, working closely with the operators, so that fintech firms could set up. This involved the Innovation hub (similar to what Panama wishes to do in the City of Knowledge), in which the businesses can understand the financial regulations and how these might apply to their business model.
As with the Innovation Hub in the UK, the City of Knowledge will simply provide guidelines, from which the startup would need to apply for the regulatory approval from the respective agency (possibly the Banking Superintendence or the Securities Commission). Also copied from the UK is the idea of the “sand box” – where fintech startups can test their financial products and their business model in the market, and then work out the details of regulation as the market develops.
So, as Panama looks to regulate “Specialized Financial Entities”, as it is calling fintech companies, setting up crowd-funding enterprises, incubators and sand boxes, I hope that it doesn’t simply protect the interests of the existing players (like banks), but rather innovates to draw into the country investors, know-how, and entrepreneurs that are looking to build something special from Panama.