Deutsche Bank, the largest bank in Germany by total assets, is exploring the launch of an Ethereum layer-2 to address compliance issues for financial institutions.
This is according to a report from Bloomberg today. Notably, the layer-2 network will especially be useful for mainstream financial institutions looking to get into blockchain but are hindered by compliance concerns.
The Purpose of Project Dama 2
Named Project Dama 2, the initiative seeks to improve transaction efficiency while ensuring stricter regulatory compliance for financial institutions.
Public blockchains, such as Ethereum, hold great promise for asset tokenization and improving operational efficiency. However, they could present compliance challenges for regulated organizations, including risks of interacting with unauthorized or sanctioned entities.
To address these issues, Deutsche Bank’s Layer-2 solution will connect with Ethereum and leverage ZKsync technology to enable more efficient and affordable transactions.
Boon-Hiong Chan, who leads applied innovation for Deutsche Bank in the Asia-Pacific region, stated that the Layer-2 framework enables banks to design a tailored list of validators for processing digital asset transactions.
Notably, this method improves compliance by ensuring only approved entities are involved in validation. Furthermore, the platform is designed to provide regulators with exclusive oversight abilities, allowing them to track fund movements when required.
For context, Project Dama 2 is a component of the Monetary Authority of Singapore’s (MAS) Project Guardian, a program that brings together 24 leading financial institutions to explore blockchain-based asset tokenization.
Centralization Risks?
Deutsche Bank’s participation confirms its dedication to using blockchain for enhancing operations while adhering to stringent regulatory standards. The bank plans to release a minimum viable product of the platform next year, subject to regulatory approval.
However, the project’s design, which includes curated validators and exclusive oversight rights for regulators, raises concerns among blockchain enthusiasts who value decentralization as a core principle.
With the decision to hand over regulators “super admin rights” and limit transaction validation to approved entities, the initiative could undermine the open and permissionless nature of blockchain.
Deutsche Bank Warming up to Crypto and Blockchain
Meanwhile, this development is not Deutsche Bank’s first foray into blockchain and digital assets. In June 2024, the bank partnered with Austrian crypto broker Bitpanda to facilitate cryptocurrency transactions for its clients.
This collaboration enabled Deutsche Bank customers in Germany to buy and sell cryptocurrencies through internal transfers, simplifying the investment process in digital assets.
Furthermore, Deutsche Bank has been exploring crypto custody services. In May 2024, reports confirmed that the bank plans to offer digital asset custody solutions, aiming to provide secure storage for cryptocurrencies and other digital assets.
Before this, last June, Deutsche Bank applied with Germany’s regulator Bafin to procure a digital asset custody license. Most recently, Deutsche Bank inked a partnership with leading exchange Crypto.com to help the platform bolster its banking support in the Asia Pacific (APAC) region.
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