Author: Weilin, PANews
Traditional financial institutions have also started to enter the Layer2 space. Boon-Hiong Chan, Head of Industry Application Innovation for the Asia-Pacific region at Deutsche Bank, recently revealed to the public that Deutsche Bank is launching an Ethereum-based Layer 2 solution, codenamed Project Dama 2, with a test version already launched in November and expected to be officially launched next year after regulatory approval.
This move not only marks the further exploration of traditional financial institutions in the blockchain field, but may also open up a new trend, where secure and compliant blockchain solutions are introduced into the core of traditional finance, further increasing their adoption rate.
Built on the ZKsync Stack, multiple use cases are being tested
Project Dama 2 of Deutsche Bank is also part of the Monetary Authority of Singapore (MAS) "Project Guardian" initiative. This is a collaboration initiative between policymakers and the financial industry, aimed at enhancing the liquidity and efficiency of financial markets through asset tokenization.
Project Guardian has 27 industry participants, including Ant Group, ANZ, BNY Mellon, Citibank, DBS Bank, Fidelity, Franklin Templeton, HSBC, JPMorgan, Moody's, UBS, Standard Chartered, and S&P Global, as well as a series of associations and collaborative organizations such as SWIFT, and policymaking institutions such as central banks and the World Bank.
Memento Blockchain and Interop Labs are Deutsche Bank's technology partners, helping to develop the Minimum Viable Product for Project Dama 2. Specifically, Memento Blockchain has developed a fully functional testnet for its permissioned public chain Memento ZKchain. This testnet is built on the ZKsync Stack, supported by Matter Labs, and achieves cross-chain interoperability through the Axelar network, with support from Interop Labs.
The main features of Memento ZKchain include:
· Digital identity based on Soulbound Tokens: A secure and tamper-proof identity system for access control and to facilitate KYC, AML, sanctions screening, and investor suitability testing.
· Paymaster functionality: Aimed at simplifying gas fee management through traditional payment channels, providing a clear audit trail for gas fee payments.
· Customized blockchain explorer: Designed to manage on-chain transaction confidentiality while retaining full regulatory oversight 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 fully native digital funds.
Furthermore, through the Axelar network, Interop Labs has established full cross-chain connectivity between the Memento ZKchain testnet and Avalanche Fuji and Stellar. This functionality supports integration with over 69 blockchain networks, enhancing the accessibility, security, scalability, and customizability of financial applications.
Currently, the Project Dama 2 team is testing multiple use cases, including issuing and distributing tokenized funds on single or multiple blockchains, interoperability between digital assets and digital cash flows, and near-real-time settlement to enhance asset security and operational efficiency.
Exploring solutions to the compliance challenges of financial institutions using public blockchains
The upcoming Layer2 solution from Deutsche Bank aims to address the compliance challenges that financial institutions face when using public blockchains, such as unclear identities of transaction validators, the possibility of transaction fees being paid to sanctioned entities, and the threat of major ledger changes due to unforeseen hard forks.
The project lead believes that public chains like Ethereum pose risks to regulated lending institutions. These include the inability to determine "who exactly is verifying these transactions", the possibility that transaction fees could be paid to sanctioned entities, and the threat of major changes to the ledger due to unpredictable hard forks.
Layer 2 components may allow banks to freely experiment with public chains. This would enable banks to customize a "more personalized validator list" to handle digital asset transactions and earn rewards. Other benefits include the potential to grant "super-admin privileges" to regulators - and only regulators - allowing them to review fund flows when necessary. "By using a dual-chain architecture, many of these regulatory concerns should be addressable," he said.
Advocates, including Deutsche Bank, believe that blockchain presents opportunities to address the profit squeeze in the financial services industry. However, there are still questions about the extent to which banks should delve into the crypto ecosystem.
Crypto insider AdrianoFeria.eth believes 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 practical choice is to run their own private, permissioned Layer 1 chain, or leverage the Ethereum L2 ecosystem.
Deutsche Bank is continuously expanding its presence in the crypto space
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, allowing it to access German international bank account numbers (IBANs), an internationally recognized code that helps banks securely handle international transfers. BitPanda plans to use this service to improve the efficiency and security of fund transfers.
Additionally, Deutsche Bank has provided multi-currency accounts and foreign exchange services to the crypto market maker Keyrock, helping it 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 blockchain fintech company Partior as a strategic investor, supporting Partior's expansion of cross-border settlement capabilities and the development of instant FX swaps and multi-bank payment functionalities.
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 their collaboration in the future.
Currently, although some traditional banks were initially cautious about blockchain technology, concerned about its instability and regulatory uncertainty, the increasing maturity of the cryptocurrency ecosystem now provides banks with an opportunity to reimagine traditional financial services.
For example, in November, UBS announced the creation and piloting of a blockchain-based payment solution - UBS Digital Cash. Also in the same month, JPMorgan announced a major upgrade to its blockchain platform, which has been renamed from Onyx to Kinexys. According to JPMorgan, its blockchain business, established in 2020, has executed over $1.5 trillion in transactions, including intraday repo and cross-border payments, with a daily average volume of over $2 billion. Its users include global enterprises such as Siemens, BlackRock, and Ant International.
In summary, as crypto insider Adriano Feria.eth pointed out, Deutsche Bank's foray into Ethereum L2 may not be a standalone experiment, but rather part of a broader trend, where more secure and compliant blockchain solutions are likely to be introduced into the core of traditional finance in the future. Other members of Singapore's Project Guardian may also follow suit, driving more traditional financial institutions to embrace Web3 technologies and blockchain solutions.
