Deutsche Bank wants to build a 'so-called' Layer 2 on the Ethereum network: report

Deutsche Bank is reportedly building a Layer 2 under an asset servicing pilot project called Dama 2 as part of the lender's goal to overcome regulatory hurdles for institutions that want to use public blockchains.

According to a Bloomberg <a target="_blank" href="https://www.bloomberg.com/news/articles/2024-12-18/deutsche-bank-tries-to-tackle-compliance-hurdles-for-public-blockchains?srnd=phx-crypto” target=”_blank” rel=”nofollow”>report Posted on December 18, German banking giant Deutsche Bank AG is in the process of building the “so-called” Layer 2 for a public network. The lender hopes the project will resolve regulatory challenges faced by financial companies trying to incorporate public blockchains into their operations.

Last month, Deutsche Bank launched a test version of Project Dama 2, which includes a Layer 2 built on top of the ethereum (eth) network, the second-largest cryptocurrency network by market capitalization after bitcoin (btc).

Boon-Hiong Chan, Asia-Pacific industry applied innovation leader at Deutsche Bank, said public blockchains like ethereum pose a risk to financial institutions entering the blockchain, as companies host concerns of interacting with criminals or sanctioned entities within the ecosystem.

This is because, according to Chan, institutions do not know “who exactly validates the transactions” and whether transaction fees could fall into the pockets of the sanctioned entities. There is also the looming threat of facing a “hard fork” in the ecosystem that could radically change the digital ledger.

“Using two chains, a number of these regulatory concerns should be able to be met,” Chan told Bloomberg, adding that the bank is still waiting for regulatory approval but hopes to launch the product at the minimum viable by next year.

Chan believes that built-in Layer 2 can pave the way for banks to explore new opportunities within public blockchains, allowing them to select a “more personalized list of validators” who will process digital asset transactions to earn rewards.

Additionally, he stated that regulators could be granted “super administrator rights” that allow them to monitor the movement of funds within the blockchain to detect illicit transactions.

“You no longer rely on Layer 1 for detailed transaction logs,” Chan said.

Project Dama 2 is part of an even larger initiative formed by the Monetary Authority of Singapore called Project Guardian. Project Guardian brings together 24 leading financial companies that are exploring ways to use blockchain to tokenize assets. However, the project has raised questions about how far banks are willing to venture when it comes to the cryptosphere.

The Dama 2 in particular was born from collaborations with crypto companies Memento Blockchain and Interop Labs. The platform was built using ZKsync technology.

Back in May 2024, Deutsche Bank announced that it was in the process of testing an ethereum-based anonymous platform. The bank said the platform would offer services focused on tokenized funds.

Deutsche Bank joined Project Guardian on May 14, aiming to test the viability of asset tokenization alongside other major banking firms such as JPMorgan Chase & Co., DBS Group, and Ant International, among others.