Japan's largest banks - MUFG, SMBC and Mizuho - are participating in a pilot using stablecoins and the Swift network for cross-border payments that could offer an effective alternative to traditional L/Cs in trade finance transactions.

By integrating regulated stablecoins pegged to major fiat currencies such as Japanese yen, US dollar or euro, Project Pax aims to offer an adaptable, secure, and efficient framework for handling both domestic and international transactions.

Replacing correspondent role

The project leverages blockchain technology to replace the traditional role of correspondent banks, while maintaining compatibility with Swift.

In the traditional financial system, correspondent banks act as intermediaries between two banks in different countries, facilitating international payments. This system is often slow, expensive, and lacks transparency.

Project Pax however aims to allow users to initiate payments through standard banking channels, ensuring a seamless blend of innovative blockchain solutions with conventional payment systems.

Unlikely to replace L/Cs soon

While stablecoins, particularly fiat-backed ones, could offer faster and more efficient alternatives to traditional L/Cs in international trade finance, they are unlikely to fully replace L/Cs in the near future.

The regulatory environment, trust, and the established nature of L/Cs make them difficult to displace in the short term.

However, stablecoins and blockchain technology could complement L/Cs or eventually provide a parallel option, especially as digital finance evolves and becomes more accepted in global trade.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.