(Bloomberg) -- Deutsche Bank AG is working on a fix for the regulatory challenges financial institutions face when trying to use public blockchains, such as the risk of inadvertently transacting with criminals or sanctioned entities.
The bank in November unveiled a test version of Project Dama 2, an asset-servicing pilot. The platform includes a so-called Layer 2 — a tool that draws on public blockchains while offering cheaper and more efficient transactions.
Deutsche Bank’s Layer 2 plugs into Ethereum, the busiest commercial highway in crypto, Boon-Hiong Chan, the lender’s Asia-Pacific industry applied innovation lead, said in an interview.
Public blockchains such as Ethereum are fraught with risk for regulated lenders, according to Chan. Among those are not knowing “who exactly is validating the transactions,” whether transaction fees could be paid to sanctioned entities and the threat of an unforeseen hard fork that radically alters a digital ledger.
“Using two chains, a number of these regulatory concerns should be able to be satisfied,” Chan said.
Project Guardian
Dama 2 is part of the Monetary Authority of Singapore’s Project Guardian, an initiative under which 24 major financial institutions are testing ways to use blockchain technology to tokenize assets. Advocates including Deutsche Bank see in blockchain an opportunity to respond to margin compression across financial services. There are questions, though, about how far into the crypto ecosystem banks should venture.
The Dama 2 platform is a collaboration with crypto firms Memento Blockchain Pte. and Interop Labs, and has been built using ZKsync technology. The bank hopes to launch it as a minimum viable product next year, pending approval from regulators.
The Layer 2 component could free banks to experiment with public blockchains, according to Chan. It will allow them to curate a “more bespoke list of validators,” which process digital-asset transactions to earn rewards. Other benefits include the potential to give regulators — and only regulators — “super admin rights,” meaning they can scrutinize fund movements where necessary.
“You are not dependent on the Layer 1 for detailed transaction records anymore,” Chan said.
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