December 18, 2024
Deutsche Bank, a global banking and financial services company, is taking on the compliance challenges of public blockchains with the launch of Layer 2 (L2). The company is focused on digital transformation, sustainability and innovation.
This represents a bold step towards integrating blockchain technology into traditional financial services (TradFi) as Deutsche Bank AG addresses one of the biggest hurdles facing regulated institutions.
Deutsche Bank Faces Compliance Challenges of Public Blockchains
Compliance risks of public blockchains are one of the biggest hurdles facing regulated institutions. With its latest solution, Dama 2, Deutsche Bank is introducing a new framework that aims to alleviate regulatory concerns. It also seeks to leverage blockchain’s efficiency and cost benefits.
Dama 2, unveiled in November, is an asset servicing pilot project developed as part of the Monetary Authority of Singapore’s (MAS) Guardian Project. The initiative involves 24 major financial institutions experimenting with blockchain technology to encrypt assets.
Deutsche Bank’s contribution also includes a “layer two” protocol, which enhances public blockchains like Ethereum. Specifically, it makes transactions more cost-effective and efficient.
“Using two chains should be able to address a number of these regulatory concerns,” Bloomberg reported, citing Boon-Hyung Chan, head of industry applied innovation for Asia-Pacific at Deutsche Bank. “This approach allows us to create a more coordinated and compliant framework while leveraging the benefits of public blockchains.”
At the same time, public blockchains like Ethereum, despite their promise, present a unique set of risks for financial institutions. These risks include the possibility of unknowingly interacting with criminals, sanctioned entities, or unverified auditors. There is also the risk of unforeseen events like hard forks that could disrupt the digital ledger.
Deutsche Bank’s Layer 2 also aims to address these issues by creating a dedicated list of validators that meet strict compliance standards. The L2 solution also includes advanced features such as ZKsync technology, which enhances transaction efficiency and security.
One of the key innovations is the introduction of “supervisor rights” for regulators. This feature gives regulatory authorities exclusive access to inspect fund movements when necessary, adding an extra layer of trust and transparency.
Addressing Compliance Concerns and Why Public Blockchains Matter
The potential of public blockchains lies in their ability to revolutionize asset encryption and address margin pressures across financial services. However, for banks, entry into the crypto ecosystem has been fraught with challenges.
Questions persist about how traditional finance can integrate with decentralized systems. Chan stressed the importance of reducing risk without losing opportunities.
“Public blockchains offer unparalleled scalability and interoperability, but compliance must remain a priority,” he said.
By connecting to Ethereum, one of the most widely used commercial blockchains, Deutsche Bank’s solution aims to create a bridge between traditional finance and decentralized technology. In addition to being more efficient, layer-2 protocols also provide a way to maintain detailed transaction records independently of the underlying layer-1 blockchain.
At the same time, the development of the Dama 2 project reflects the importance of collaboration in advancing blockchain technology. Deutsche Bank has partnered with crypto companies Memento Blockchain Pte. and Interop Labs to realize this vision. The success of the project could serve as a model for other financial institutions facing similar challenges.
Pending regulatory approval, Deutsche Bank plans to launch a minimum viable product (MVP) for DAMA 2 next year. The platform could pave the way for wider adoption of public blockchains in financial services. Such an outcome would set new standards for compliance and innovation.
