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

Author: Weilin, PANews

Traditional financial institutions have also started to work on Layer 2. Boon-Hiong Chan, head of industry application innovation in Asia Pacific at Deutsche Bank, recently revealed that Deutsche Bank is launching a Layer 2 solution based on Ethereum, called Project Dama 2. Its beta version was launched in November and is expected to be officially launched next year after obtaining regulatory approval.

This move not only marks a further exploration of the blockchain field by traditional financial institutions, but may also start a new trend in which secure and compliant blockchain solutions are introduced into the core of traditional finance, further increasing the adoption rate.

Built on ZKsync Stack, testing multiple use cases

Deutsche Bank’s Project Dama 2 is also part of Project Guardian, a collaborative initiative between policymakers and the financial industry that aims to improve liquidity and efficiency in financial markets through asset tokenization.

Project Guardian has 27 industry organizations participating, including Ant Group, ANZ Bank, Bank of New York Mellon, Citibank, DBS Bank, Fidelity, Franklin Templeton, HSBC, JPMorgan Chase, Moody's, UBS, Standard Chartered Bank, S&P Global, etc. In addition, it also includes a series of associations and cooperation organizations, such as SWIFT, as well as policy-making institutions such as central banks and the World Bank.

Memento Blockchain and Interop Labs are technology partners of Deutsche Bank, helping Project Dama 2 develop its minimum viable product. Specifically, Memento Blockchain has developed a fully functional testnet of the public permissioned chain Memento ZKchain. The testnet is built on the ZKsync Stack, supported by Matter Labs, and achieves cross-chain interoperability through the Axelar network, powered by Interop Labs.

The main features of Memento ZKchain include:

Soulbound Token-based digital identity: a secure and immutable identity system for permission management and facilitating KYC, AML, sanctions checks and investor suitability testing.

Paymaster feature: aims to simplify gas fee management through traditional payment channels and provide a clear audit trail for gas fee payments.

Custom blockchain explorer: Designed specifically to manage on-chain transaction confidentiality while retaining full regulatory scrutiny.

Tokenized Fund Creation and Distribution: This is achieved through the Domani Protocol decentralized application (dApp), which supports the creation and distribution of tokenized traditional investment funds, hybrid funds that combine digital and traditional assets, or fully native digital funds.

In addition, Interop Labs has achieved full cross-chain connectivity between the Memento ZKchain testnet and Avalanche Fuji and Stellar through the Axelar network. This feature supports integration with more than 69 blockchain networks, improving the accessibility, security 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 a single or multiple blockchains, the interoperability of digital assets and digital cash circulation, and near-real-time settlement for improved asset security and operational efficiency.

Exploring the compliance challenges of using public blockchains for financial institutions

Deutsche Bank’s upcoming Layer 2 is designed to address the compliance challenges that financial institutions face when using public blockchains, such as the unknown identity of transaction validators, fees flowing to sanctioned entities, and the risk of hard forks.

Its project leader believes that public chains such as Ethereum are full of risks for regulated lenders. These include the inability to determine "who is actually validating these transactions", whether transaction fees may be paid to sanctioned entities, and the threat of major changes to the ledger due to unforeseen hard forks.

The Layer 2 component may give banks the freedom to experiment with public chains. This would allow banks to tailor a "more personalized list of validators" who process digital asset transactions to earn rewards. Other benefits include the potential to give regulators - and only regulators - "super administrator privileges," meaning they can review the flow of funds when necessary. "Many of these regulatory concerns should be addressed by using a dual-chain architecture," he said.

Advocates, including Deutsche Bank, see blockchain as an opportunity to combat squeezed margins in the financial services industry. However, some questions remain about how deeply banks should get involved in the crypto ecosystem.

AdrianoFeria.eth, an industry insider, believes that it is crucial that the level of regulatory compliance required by these institutions is impossible to achieve on any Layer 1 blockchain. For institutions that require strict supervision and interoperability, the only pragmatic options are to run their own private, permissioned Layer 1 chain or to leverage Ethereum's L2 ecosystem.

Deutsche Bank continues to invest in cryptocurrencies

Deutsche Bank has been active in the crypto space in 2024. As early as June, Deutsche Bank provided BitPanda with an API-based account solution, 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 use this service to improve the efficiency and security of fund transfers.

In addition, Deutsche Bank also provides multi-currency accounts and foreign exchange services to crypto market maker Keyrock to help it optimize and expand its market making and over-the-counter (OTC) services in EMEA, APAC and LATAM. On November 27, Deutsche Bank joined the B round of financing of Singapore blockchain fintech company Partior as a strategic investor, supporting Partior to expand its cross-border settlement capabilities and develop functions 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.

Although some traditional banks were initially cautious about blockchain technology, fearing its instability and regulatory uncertainty, the maturing cryptocurrency ecosystem now provides banks with an opportunity to reimagine traditional financial services.

For example, in November this year, UBS announced the creation and piloting of a blockchain-based payment solution, UBS Digital Cash. In the same month, J.P. Morgan announced a major upgrade to its blockchain platform, which was renamed Kinexys from Onyx. According to JPMorgan, JPMorgan's blockchain business has executed more than $1.5 trillion in transactions since its establishment in 2020, including intraday repurchases and cross-border payments, with an average daily processing amount of more than $2 billion. Its users include global companies such as Siemens, BlackRock and Ant International.

In general, as Adriano Feria.eth, an industry insider, pointed out, Deutsche Bank's entry into Ethereum L2 may not be a separate experiment, but part of a broader trend that may introduce more secure and compliant blockchain solutions into the core of traditional finance in the future. Other members of Singapore's Project Guardian may also follow this move to push more traditional financial institutions to embrace Web3 technology and blockchain solutions.