Traditional Banks Enter Layer 2, Deutsche Bank Builds on ZKsync, Multiple Use Cases Tested

Author: Weilin, PANews

Traditional financial institutions are also diving into Layer 2. Boon-Hiong Chan, Head of Industry Application Innovation for Deutsche Bank in the Asia-Pacific region, recently revealed that Deutsche Bank is launching an Ethereum-based Layer 2 solution, named Project Dama 2, with a beta version released in November, expected to officially launch after regulatory approval next year.

This initiative not only marks further exploration of blockchain by traditional financial institutions but may also open a new trend, where secure and compliant blockchain solutions are introduced 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 Singapore's Monetary Authority of Singapore (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 has participation from 27 industry institutions, including Ant Group, ANZ Bank, BNY Mellon, Citibank, DBS Bank, Fidelity, Franklin Templeton, HSBC, JPMorgan, Moody's, UBS Group, Standard Chartered Bank, S&P Global, and others. It also includes a range of associations and collaborative organizations such as SWIFT, as well as central banks and policy-making institutions like the World Bank.

Memento Blockchain and Interop Labs are Deutsche Bank's technology partners, helping Project Dama 2 develop its minimum viable product. Specifically, Memento Blockchain has developed a fully functional test network for the public permissioned chain Memento ZKchain. This test network is built on the ZKsync Stack, supported by Matter Labs, and achieves cross-chain interoperability via the Axelar network, backed by Interop Labs.

The main features of Memento ZKchain include:

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

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

· Customized blockchain explorer: Specifically designed to manage the confidentiality of on-chain transactions while retaining full regulatory scrutiny capabilities.

· 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 completely native digital funds.

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

Currently, the project team for Project Dama 2 is testing multiple use cases, including issuing and distributing tokenized funds on one or multiple blockchains, interoperability of digital assets with digital cash, and achieving near real-time settlements 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 faced by financial institutions when using public blockchains, such as the anonymity of transaction validators, transaction fees potentially going to sanctioned entities, and the risk of hard forks.

Project leaders believe that public chains like Ethereum pose significant risks for regulated lending institutions. These include uncertainty about 'who is actually verifying these transactions,' the potential for transaction fees to be paid to sanctioned entities, and the threat of significant changes to the ledger due to unforeseen hard forks.

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

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

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

Deutsche Bank is continuously laying out its plans in the crypto field.

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

Additionally, Deutsche Bank is providing multi-currency accounts and foreign exchange services to crypto market maker Keyrock to help optimize and expand its market making and OTC trading services in the EMEA, APAC, and LATAM regions. On November 27, Deutsche Bank joined the B round financing of Singapore blockchain fintech company Partior as a strategic investor to support Partior in expanding its 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, despite some traditional banks' initial cautious attitudes towards blockchain technology, worried about its instability and regulatory uncertainties, the maturing cryptocurrency ecosystem now offers banks an opportunity to reimagine traditional financial services.

For example, in November this year, UBS announced the creation and pilot of a blockchain-based payment solution - UBS Digital Cash. In the same month, JPMorgan announced a significant upgrade to its blockchain platform, renamed from Onyx to Kinexys. According to JPMorgan, its blockchain business has executed over $15 trillion in transactions since its establishment in 2020, including daytime repos and cross-border payments, with an average daily transaction amount exceeding $2 billion. Its users include global enterprises 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 of Singapore's Project Guardian may follow this initiative, promoting more traditional financial institutions to embrace Web3 technology and blockchain solutions.