Traditional financial institutions are also stepping into Layer 2. Deutsche Bank is launching an Ethereum-based Layer 2 solution named Project Dama 2. Its test version was released in November, with the official launch expected next year after regulatory approval.

Author: Weilin, PANews

Traditional financial institutions are also venturing into Layer 2. Boon-Hiong Chan, Deutsche Bank’s Head of Industry Application Innovation for the Asia-Pacific region, recently disclosed that Deutsche Bank is launching an Ethereum-based Layer 2 solution named Project Dama 2. Its test version was released in November, and the official launch is expected next year after obtaining regulatory approval.

This move not only signifies further exploration by traditional financial institutions in the blockchain space but could also initiate a new trend: secure and compliant blockchain solutions being integrated into the core of traditional finance, driving adoption even further.

Built on ZKsync Stack, it is currently testing multiple use cases.

Deutsche Bank’s Project Dama 2 is part of Singapore’s Monetary Authority of Singapore (MAS) “Project Guardian.” This initiative fosters collaboration between policymakers and the financial industry to enhance liquidity and efficiency in financial markets through asset tokenization.

Project Guardian involves 27 industry participants, including Ant Group, ANZ, BNY Mellon, Citibank, DBS Bank, Fidelity, Franklin Templeton, HSBC, JPMorgan, Moody’s, UBS, Standard Chartered, S&P Global, and more. It also includes associations and organizations such as SWIFT, along with central banks and policy institutions like the World Bank.

Memento Blockchain and Interop Labs are Deutsche Bank’s technical partners, assisting in developing the minimum viable product for Project Dama 2. Specifically, Memento Blockchain has built a fully functional testnet for the public-permissioned blockchain, Memento ZKchain. This testnet is constructed on ZKsync Stack, supported by Matter Labs, and achieves cross-chain interoperability through the Axelar network, with Interop Labs providing support.

Key features of Memento ZKchain include:

· Digital Identity with Soulbound Tokens (SBTs): A secure, tamper-proof identity system for access control, facilitating KYC, AML, sanctions screening, and investor suitability tests.

Paymaster Functionality: Simplifies gas fee management via traditional payment methods while providing a clear audit trail for gas fee payments.

· Custom Blockchain Explorer: Designed to manage on-chain transaction confidentiality while maintaining full regulatory audit capabilities.

· Creation and Issuance of Tokenized Funds: Enabled through the Domani Protocol dApp, supporting the creation and distribution of tokenized traditional investment funds, hybrid funds combining digital and traditional assets, or fully native digital funds.

Interop Labs has established comprehensive cross-chain connectivity between the Memento ZKchain testnet, Avalanche Fuji, and Stellar via the Axelar network. This integration supports over 69 blockchain networks, enhancing accessibility, security, scalability, and customization for financial applications.

Additionally, Interop Labs has established comprehensive cross-chain connectivity between the Memento ZKchain testnet, Avalanche Fuji, and Stellar via the Axelar network. This functionality supports integration with over 69 blockchain networks, enhancing accessibility, security, scalability, and customization for financial applications.

Currently, the Project Dama 2 team is testing various use cases, including issuing and distributing tokenized funds across single or multiple blockchains, interoperability between digital assets and digital cash, and near-real-time settlement to improve asset security and operational efficiency.

Exploring Compliance Challenges for Financial Institutions Using Public Blockchains

Deutsche Bank’s upcoming Layer 2 solution aims to address the compliance challenges financial institutions face when using public blockchains, such as the anonymity of transaction validators, the risk of transaction fees flowing to sanctioned entities, and the threat of hard forks that could significantly alter the ledger.

The project leader believes that public blockchains like Ethereum pose significant risks for regulated lending institutions. These risks include the uncertainty of “who is validating these transactions,” whether transaction fees could potentially be paid to sanctioned entities, and the threat of unexpected hard forks causing major changes to the ledger.

Layer 2 components may allow banks to experiment with public blockchains more freely. This would enable banks to customize a “more personalized list of validators,” who would process digital asset transactions to earn rewards. Other benefits include the potential to grant regulators—exclusively—“super administrator privileges,” meaning they could review the flow of funds when necessary. “By using a dual-chain architecture, many of these regulatory concerns should be able to be addressed,” he said.

Advocates, including Deutsche Bank, believe that blockchain offers an opportunity to tackle profit compression in the financial services industry. However, there are still questions about the extent to which banks should delve into the crypto ecosystem.

Crypto industry expert AdrianoFeria.eth believes that the regulatory compliance levels these institutions require cannot be achieved on any Layer 1 blockchain. For institutions needing strict supervision and interoperability, the only pragmatic option is to run their own private, permissioned Layer 1 chain or leverage Ethereum’s Layer 2 ecosystem.

Deutsche Bank Continues to Expand in the Crypto Space

Deutsche Bank has been active in the crypto space throughout 2024. As early as June, the bank provided BitPanda with an API-based account solution, enabling the platform to access Germany’s International Bank Account Number (IBAN), an internationally recognized code that helps banks securely handle international transfers. BitPanda plans to use this service to enhance the efficiency and security of its fund transfers.

Additionally, Deutsche Bank has offered multi-currency accounts and foreign exchange services to crypto market maker Keyrock, helping optimize and expand its market making and over-the-counter (OTC) services in the EMEA, APAC, and LATAM regions. On November 27, Deutsche Bank joined the Series B funding round of Singapore-based blockchain fintech company Partior as a strategic investor, supporting Partior in expanding its cross-border settlement capabilities and developing features like instant forex swaps and multi-bank payments.

On December 10, Deutsche Bank announced a partnership with Crypto.com to offer corporate banking services in Singapore, Australia, and Hong Kong. Both parties plan to expand their cooperation further in the future.

Currently, despite initial caution from some traditional banks regarding blockchain technology, due to concerns over instability and regulatory uncertainty, the growing maturity of the cryptocurrency ecosystem now presents banks with an opportunity to rethink traditional financial services.

For instance, in November this year, UBS announced the creation and pilot of a blockchain-based payment solution—UBS Digital Cash. In the same month, J.P. Morgan announced a major upgrade to its blockchain platform, renaming it from Onyx to Kinexys. According to J.P. Morgan, the bank’s blockchain business has executed over $1.5 trillion in transactions since its inception in 2020, including intraday repos and cross-border payments, with a daily transaction volume exceeding $2 billion. Its clients include global corporations such as Siemens, BlackRock, and Ant Group.

Overall, as crypto industry expert Adriano Feria.eth pointed out, Deutsche Bank’s entry into Ethereum Layer 2 may not be a standalone experiment but part of a broader trend that could eventually bring more secure and compliant blockchain solutions into the heart of traditional finance. Other members of Singapore’s Project Guardian may follow suit, encouraging more traditional financial institutions to embrace Web3 technologies and blockchain solutions.

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