Well, you have to remember that Panel runs in the web browser and that web browsers don't support playback of all media formats (just a handful, actually), e.g. Safari on macOS and iOS doesn't support FLAC. So it kinda has to convert everything to another format that's supported by the web browser, depending on what media formats the web browser supports. If I had to guess, it might be converting FLAC to WAV which is more-or-less supported by all web browsers (except Internet Explorer), but I'm not sure. Take a look at the browser compatibility list relating to media formats here:
https://developer.mozilla.org/en-US/docs/Web/HTML/Supported_media_formatsOther than that, don't think it's possible to avoid conversion unless the web browser you're using supports the format you're playing back. Or at least, it should be that way (e.g. it could read which web browser is being used, the version of the web browser AND the OS the web browser is running on via the user agent string, and adjust accordingly. Both Chrome and Firefox has native FLAC support now since a couple versions ago but AFAIK Chrome and Firefox on iOS may not support FLAC since every web browser that runs on iOS has to use Safari's WebKit engine instead of the engines Chrome and Firefox uses on other OSes).