Traditional institutions enter the game: Deutsche Bank launches Layer 2-based solution

Author: Weilin, PANews

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

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

Built on ZKsync Stack, multiple use cases are being tested

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

Project Guardian has 27 industry organizations participating, including Ant Group, ANZ, BNY Mellon, Citi, DBS Bank Singapore, Fidelity, Franklin Templeton, HSBC, JPMorgan Chase, Moody's, UBS, Standard Chartered, S&P Global, etc. In addition, it also includes a series of associations and cooperative 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, supported by Interop Labs.

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 functionality: designed to simplify gas fee management through traditional payment channels and provide a clear audit trail for gas fee payments.

· Customized blockchain browser: designed to manage on-chain transaction confidentiality while retaining full regulatory review capabilities.

· Tokenized fund creation and issuance: implemented 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 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 of financial applications.

Currently, the Project Dama 2 project 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 to improve asset security and operational efficiency.

Explore compliance challenges for financial institutions using public blockchains

Deutsche Bank's upcoming Layer2 is designed to address compliance challenges faced by financial institutions when using public blockchains, such as the unknown identity of transaction validators, the flow of fees 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 verifying 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.

And 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" that 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, believe that blockchain offers an opportunity to address margin compression in the financial services industry. However, there are still some questions about how deeply banks should get involved in the crypto ecosystem.

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

Deutsche Bank is continuing to deploy in the crypto field

Deutsche Bank has been active in the crypto field in 2024. As early as June, Deutsche Bank provided BitPanda with an API-based account solution that enabled it to access the German International Bank Account Number (IBAN), an internationally recognized code that helps banks safely 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 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 Partior, a Singaporean blockchain fintech company, 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 sides plan to further expand the scope of cooperation in the future.

At present, although some traditional banks were initially cautious about blockchain technology, worried about its instability and regulatory uncertainty, the more mature cryptocurrency ecosystem now provides banks with 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, 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 inception 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 in the crypto industry, 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 suit, pushing more traditional financial institutions to embrace Web3 technology and blockchain solutions.