Three Japanese megabanks are involved in a cross-border payments initiative that aims to use stablecoins and SWIFT’s application programming interface (API) framework to enable fast, cost-effective, and 24/7 international transfers.

The initiative, called Project Pax, is a joint effort between Japanese companies Progmat and Datachain. It aims to create a cross-border stablecoin transfer platform that addresses key challenges in international payments, such as high costs, slow processing speeds, limited accessibility, and lack of transparency.

Pilot testing for Project Pax is set to commence this fall, and the three Japanese banks, namely Mitsubishi UFJ Bank, Sumitomo Mitsui Banking Corporation, and Mizuho Bank, will participate, Progmat said in a statement. Additionally, more than 10 other lenders in Japan and overseas will join the trial, Nikkei reported earlier this month.

While the banks envision the setup as being mainly for corporate transactions, such as trade settlements, there is potential for the system to be expanded to consumer usage in the future, the media outlet reported.

Addressing challenges in corporate cross-border payments

Currently, international payments go through the SWIFT system, a standardized and secure messaging network that enables financial institutions to send and receive transaction information, and which ensures that payments are directed correctly. This system can sometimes result in delays, ranging from an hour to a month if the transaction is low on key information.

Project Pax aims to streamline this process by using stablecoins, which are cryptocurrencies running on blockchain platforms that are designed to maintain a stable value by being pegged to reserve assets like fiat currencies.

The platform will enable stablecoin transfers on blockchain systems and incorporate globally standardized features. These features will include the transfers of stablecoins across multiple blockchains and the conversion and transfer of existing stablecoins.

The platform will also integrate SWIFT’s API framework, allowing banks to initiate and settle transactions on blockchain networks. This will help address regulatory concerns such as anti-money laundering (AML) and countering the financing of terrorism (CFT) requirements, while also solving operational challenges.

For cross-chain transactions between different blockchains, the platform will use the Inter-Blockchain Communication (IBC) protocol developed by the Interchain Foundation, along with Datachain’s middleware solution, Light Client Proxy (LCP), and a stablecoin contract co-developed by Progmat and Datachain. Liquidity for these transfers will be provided by TOKI, a cross-chain infrastructure provider based in Dubai and a partner in the project.

Progmat said that the platform will enable corporate clients to execute international transfers more quickly and cost-efficiently, all the while maintaining a seamless experience similar to traditional international transfers. For financial institutions, Project Pax will offer the advantage of utilizing existing infrastructure, meaning banks won’t need to overhaul their systems to adopt it. This will allow them to provide new transfer solutions to corporate customers with minimal additional investment.

Progmat and Datachain strive for the technology to become a global standard for international payment networks powered by stablecoins. They aim to expand collaboration with additional countries and financial institutions, with the goal of commercializing the platform by 2025.

A bank-led stablecoin initiative

Progmat is a Japanese company launched by Mitsubishi UFJ Trust and Banking. The company focuses on developing a platform for the issuance and management of tokenized securities, stablecoins, and utility tokens.

Specifically, Progmat is spearheading the creation and operational implementation of the Progmat Coin platform, which aims to support various blockchains, including public blockchains.

This infrastructure is designed to facilitate the issuance of stablecoins in compliance with regulatory standards, as well as accounting and tax rules. Additionally, various stablecoins issued using the Progmat Coin platform can be denominated in major fiat currencies such as JPY, USD, and EUR, allowing for flexible use domestically and internationally.

In addition to its work with the Progmat Coin platform, Progmat says it also leads the Digital Asset Co-Creation Consortium, which has over 200 member firms, including Japan Exchange Group and major Japanese banks like SMBC and Mizuho.

The announcement of Project Pax comes on the heels of the launch of a new stablecoin law in Japan. The legislation, which took effect in June 2023, defines two main categories of stablecoins: “collateralized” stablecoins and “uncollateralized” stablecoins. The former falls under the regulatory framework while the latter does not.

Collateralized stablecoins are linked to a fiat currency’s value and are promised to be redeemable at that value. They are treated as electronic payment instruments under Japan’s Payment Services Act and can only be issued by specific entities, including banks, fund transfer service providers, and trust banks, each facing different regulatory requirements to ensure security and redemption.

Intermediary activities involving collateralized stablecoins, such as buying, selling, and transferring, require registration with Japan’s Financial Services Agency and compliance with various regulations including AML/CFT measures and user protection rights.

Featured image credit: edited from freepik