Traditional banks enter Layer 2, Deutsche Bank builds on ZKsync and has tested multiple use cases
Traditional financial institutions are also starting to engage in Layer 2. Deutsche Bank is launching an Ethereum-based Layer 2 solution called Project Dama 2, with its beta version already released in November, and it is expected to be officially launched next year after obtaining regulatory approval.Author: Weilin, PANews
Traditional financial institutions are also starting to engage in Layer 2. Boon-Hiong Chan, the 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. Its beta version was released in November and is expected to be officially launched next year after obtaining regulatory approval.
This move not only marks a further exploration of blockchain by traditional financial institutions but may also open a new trend, where secure and compliant blockchain solutions are integrated into the core of traditional finance, leading to increased adoption.
Built on ZKsync Stack, Testing Multiple Use Cases
Deutsche Bank's Project Dama 2 is also part of the Monetary Authority of Singapore (MAS) "Guardian Project," a collaborative initiative between policymakers and the financial industry aimed at enhancing liquidity and efficiency in financial markets through asset tokenization.
Project Guardian has 27 industry participants, including Ant Group, ANZ Bank, BNY Mellon, Citibank, DBS Bank, Fidelity, Franklin Templeton, HSBC, JPMorgan, Moody's, UBS Group, Standard Chartered, S&P Global, and more. 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 the technical partners of Deutsche Bank, assisting in the development of its minimum viable product for Project Dama 2. Specifically, Memento Blockchain has developed a fully functional testnet for the public permissioned chain Memento ZKchain. This testnet is built on the ZKsync Stack, supported by Matter Labs, and achieves cross-chain interoperability through the Axelar network, backed by Interop Labs.
Key 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 testing.
Paymaster Functionality: Designed to simplify gas fee management through traditional payment channels, providing a clear audit trail for gas fee payments.
Custom Blockchain Explorer: Specifically designed to manage the confidentiality of on-chain transactions while retaining full regulatory review 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.
Additionally, Interop Labs has achieved comprehensive cross-chain connectivity between the Memento ZKchain testnet and Avalanche Fuji and Stellar through the Axelar network. This functionality supports integration with over 69 blockchain networks, enhancing the accessibility, security scalability, and customization capabilities of financial applications.
Currently, the Project Dama 2 team is testing multiple use cases, including issuing and distributing tokenized funds on a single or multiple blockchains, interoperability of digital assets and digital cash circulation, and near-real-time settlement to enhance asset security and operational efficiency.
Exploring Compliance Challenges for 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, the flow of transaction fees to sanctioned entities, and the risks of hard forks.
The project leader believes that public chains like Ethereum pose significant risks for regulated lending institutions. These include the inability to determine "who is validating these transactions," whether transaction fees might 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—exclusively to regulators—"super admin rights," meaning they could review fund flows when necessary. "By using a dual-chain architecture, many of these regulatory concerns should be able to be addressed," he said.
Advocates, including Deutsche Bank, believe that blockchain offers opportunities to address profit compression in the financial services industry. However, there are still questions about the extent to which banks should deeply engage in 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 pragmatic option is to run their own private, permissioned Layer 1 chain or leverage Ethereum's L2 ecosystem.
Deutsche Bank's Ongoing Engagement in the Crypto Space
Deutsche Bank has been active in the crypto space throughout 2024. As early as June, Deutsche Bank provided API-based account solutions for BitPanda, enabling it to access German International Bank Account Numbers (IBAN), which are internationally recognized codes that help banks securely process international transfers. BitPanda plans to use this service to enhance the efficiency and security of fund transfers.
Additionally, Deutsche Bank has provided multi-currency accounts and foreign exchange services to crypto market maker Keyrock to help 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 B round of financing for Singapore blockchain fintech company Partior as a strategic investor, supporting Partior in expanding 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 their cooperation in the future.
Currently, despite some traditional banks initially being cautious about blockchain technology due to concerns over its instability and regulatory uncertainty, the maturation of the cryptocurrency ecosystem now provides banks with an opportunity to reimagine traditional financial services.
For instance, in November of 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, which was renamed from Onyx to Kinexys. According to JPMorgan, its blockchain business has executed over $1.5 trillion in transactions since its establishment in 2020, including intraday repos and cross-border payments, with an average daily processing amount exceeding $2 billion. Its users include global enterprises such as Siemens, BlackRock, and Ant International.
Overall, 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 that could bring more secure and compliant blockchain solutions into the core of traditional finance. Other members of Singapore's Project Guardian may also follow suit, encouraging more traditional financial institutions to embrace Web3 technologies and blockchain solutions.
