The law offers amnesty to thousands of members of the Revolutionary Armed Forces of Colombia (FARC) who are accused of minor crimes.
It comes after an original pact with the FARC as rejected by Colombians in a popular vote because it was seen as too lenient.
Colombia specialist Joel Ross, from Verisk Maplecroft, which analyses political and economic risks, says this amnesty is not all that much tougher on the FARC than the previous amnesty deal rejected by the Colombian electorate in October.
"Those who commit serious crimes won't go to prison, but they'll have their liberty restricted. After that, they'll be able to participate in politics and even be elected to Congress. The only key changes to the law concern drug traffickers ... those with only a loose affiliation with the Farc and no political activity will not be able to profit from the law."
While Santos described the law as “historic”, former president Alvaro Uribe - from the opposition Democratic Centre party - warned it would allow criminals to be pardoned.
The Colombian Congress approved the bill on Wednesday with a large majority. It's part of a wider peace plan agreed between Bogota and the FARC in November.
This time round, however, the peace deal isn't being put to a referendum.
Ross says this is because it's too politically sensitive - with both President Santos and arch-rival Uribé positioning themselves for a tough elections battle in 2018.
"We are now entering an extremely important period over the next year or so as Santos and his coalition partners implement this peace deal. The success of the deal will determine how successful these parties will be electorally in 2018," he says.
"As we get closer to elections, we'll start to see many parties who are supporting the peace deal right now distance themselves from Santos and unpopular aspects of the deal - and we'll start to see a bit more tension within the government. All of this may result in more difficulties regarding the implementation of the agreement itself."
As part of Santos's revived peace plan, the FARC was to demobilise more than 16,000 people before the end of the year.
However Colombian media reports say that deadline has been extended to January 10 because the government has not set up the camps needed for the FARC to surrender their weapons.