Traditional banks enter Layer 2, Deutsche Bank builds on ZKsync and has tested multiple use cases.

Author: Weilin, PANews

Traditional financial institutions are also beginning to engage in Layer 2. Recently, Boon-Hiong Chan, head of industry application innovation for Deutsche Bank in the Asia-Pacific region, revealed that Deutsche Bank is launching an Ethereum-based Layer 2 solution, codenamed Project Dama 2, with its beta version launched in November, expected to officially launch after obtaining regulatory approval next year.

This initiative not only marks a further exploration of blockchain by traditional financial institutions but may also herald a new trend where secure and compliant blockchain solutions are integrated into the core of traditional finance, leading to increased adoption.

Built on the ZKsync Stack, testing multiple use cases.

Deutsche Bank's Project Dama 2 is also part of the Monetary Authority of Singapore's (MAS) 'Guardian Program' Project Guardian. This is a collaborative initiative between policymakers and the financial industry aimed at enhancing liquidity and efficiency in financial markets through asset tokenization.

Project Guardian involves 27 industry institutions, including Ant Group, ANZ Bank, BNY Mellon, Citibank, DBS Bank, Fidelity, Franklin Templeton, HSBC, J.P. Morgan, Moody's, UBS Group, Standard Chartered, S&P Global, among others. It also includes a range of associations and collaborative organizations such as SWIFT and various central banks and policy-making bodies like the World Bank.

Memento Blockchain and Interop Labs are technical partners of Deutsche Bank, assisting Project Dama 2 in developing its minimum viable product. Specifically, Memento Blockchain has developed a fully functional testnet for the publicly licensed chain Memento ZKchain. This testnet is built on the ZKsync Stack, supported by Matter Labs, and achieves cross-chain interoperability through the Axelar network, supported by Interop Labs.

The main features of Memento ZKchain include:

· Digital identity based on Soulbound Tokens: A secure and tamper-proof identity system used for permission management and facilitating KYC, AML, sanctions checks, and investor suitability testing.

· Paymaster function: Aims to simplify gas fee management through traditional payment channels, providing a clear audit trail for gas fee payments.

· Customized blockchain browser: Designed to manage the confidentiality of on-chain transactions while maintaining complete regulatory oversight capability.

· Creation and issuance of tokenized funds: Achieved through the Domani Protocol decentralized application (dApp), supporting the creation and distribution of tokenized traditional investment funds, hybrid funds combining digital and traditional assets, or fully native digital funds.

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

Currently, the Project Dama 2 team is testing multiple use cases, including the issuance and distribution of tokenized funds on one or multiple blockchains, interoperability of digital assets and digital cash circulation, and near-real-time settlement achieved to enhance asset security and operational efficiency.

Exploring compliance challenges faced by financial institutions using public blockchains.

Deutsche Bank's upcoming Layer 2 aims to address the compliance challenges financial institutions face when using public blockchains, such as the anonymity of transaction validators, the flow of fees to sanctioned entities, and the risks of hard forks.

The project leader believes that public chains like Ethereum pose significant risks for regulated lending institutions. These include the inability to determine 'who is verifying these transactions,' whether transaction fees could be paid to sanctioned entities, and the threat of significant ledger changes due to unforeseen hard forks.

The Layer 2 component may allow banks to freely experiment with public chains. This would enable banks to customize a 'more personalized validator list,' with these validators processing digital asset transactions to earn rewards. Other benefits include the potential to grant regulators—limited to regulatory authorities—'super admin rights,' meaning they can review fund flows when necessary. 'By using a dual-chain architecture, many of these regulatory concerns should be resolved,' he said.

Advocates, including Deutsche Bank, believe that blockchain provides an opportunity to address the profit compression faced by the financial services industry. However, there are still some questions about the extent to which banks should deeply engage in the crypto ecosystem.

Crypto insider Adriano Feria.eth believes it is crucial that the level of regulatory compliance required by these institutions cannot be achieved on any Layer 1 blockchain. For institutions requiring strict oversight and interoperability, the only pragmatic option is to run their own private, permissioned Layer 1 chain or leverage Ethereum's L2 ecosystem.

Deutsche Bank is continuously positioning itself in the crypto space.

Deutsche Bank's activities in the crypto space are frequent in 2024. As early as June, Deutsche Bank provided API-based account solutions for BitPanda, enabling it to access German International Bank Account Numbers (IBAN), a globally recognized code that helps banks safely process international transfers. BitPanda plans to utilize this service to enhance the efficiency and security of fund transfers.

In addition, Deutsche Bank has provided multi-currency accounts and foreign exchange services to crypto market maker Keyrock to help optimize and expand its market-making and OTC services in the EMEA, APAC, and LATAM regions. On November 27, Deutsche Bank joined the Series B financing of Singapore blockchain fintech company Partior as a strategic investor to support Partior in expanding cross-border settlement capabilities and developing features such as instant foreign exchange swaps and multi-bank payments.

On December 10, Deutsche Bank also announced a partnership with Crypto.com to provide corporate banking services in Singapore, Australia, and Hong Kong. The two parties plan to further expand the scope of cooperation in the future.

Currently, although some traditional banks initially held a cautious attitude towards blockchain technology, fearing its instability and regulatory uncertainty, the increasingly mature cryptocurrency ecosystem now provides banks with an opportunity to reimagine traditional financial services.

For example, in November of 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, renamed from Onyx to Kinexys. According to J.P. Morgan, its blockchain business has executed over $1.5 trillion in transactions since its inception in 2020, including repurchase agreements and cross-border payments, handling an average of over $2 billion daily. Its users include global companies such as Siemens, BlackRock, and Ant International.

Overall, as pointed out by crypto insider Adriano Feria.eth, Deutsche Bank's entry into Ethereum L2 may not be a standalone experiment but part of a broader trend that could bring more secure and compliant blockchain solutions into the core of traditional finance in the future. Other members in Singapore's Project Guardian may also follow suit, encouraging more traditional financial institutions to embrace Web3 technologies and blockchain solutions.