Deutsche Bank Launches Layer 2 Solution Based on Ethereum, Called Project Dama 2

Traditional financial institutions have also started to work on Layer 2. Boon-Hiong Chan, head of industry application innovation in Asia Pacific at Deutsche Bank

Deutsche Bank, a traditional financial institution, is preparing to launch Project Dama 2, a Layer 2 solution based on Ethereum. This move is part of a larger trend in which secure and compliant blockchain solutions are being introduced into the core of traditional finance.

Deutsche Bank’s Layer 2 solution is designed to address the challenges that financial institutions face when using public blockchains. These challenges include the unknown identity of transaction validators, fees flowing to sanctioned entities, and the risk of hard forks.

The 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 validating 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.

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” who 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 added.

Proponents, including Deutsche Bank, view blockchain as an opportunity to combat squeezed margins in the financial services industry. However, there are questions about how deeply banks should get involved in the crypto ecosystem.

Adriano Feria.eth, an industry insider, believes that the level of regulatory compliance required by these institutions is impossible to achieve on any Layer 1 blockchain. For institutions that require strict supervision and interoperability, the only pragmatic options are to run their own private, permissioned Layer 1 chain or to leverage Ethereum’s L2 ecosystem.

Deutsche Bank has been actively exploring cryptocurrencies in 2024. In June, Deutsche Bank provided BitPanda with an API-based account solution, enabling it to access the German International Bank Account Number (IBAN), an internationally recognized code that helps banks securely process international transfers. BitPanda plans to use this service to improve the efficiency and security of fund transfers.

Deutsche Bank also provides multi-currency accounts and foreign exchange services to crypto market maker Keyrock to help it optimize and expand its 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 Singapore blockchain fintech company Partior as a strategic investor, supporting Partior to expand its cross-border settlement capabilities and develop functions 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 the scope of cooperation in the future.

While some traditional banks were initially hesitant to engage with blockchain technology due to concerns about its immaturity and the regulatory landscape, the maturing cryptocurrency ecosystem now presents an opportunity for banks to reimagine traditional financial services.

For example, in November, UBS announced the creation and piloting of a blockchain-based payment solution, called UBS Digital Cash. In the same month, JP Morgan announced a major upgrade to its blockchain platform, which was renamed Kinexys from Onyx.

According to JP Morgan, JP Morgan's blockchain business has executed more than $1.5 trillion in transactions since its establishment 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.

Overall, as Adriano Feria.eth, an industry insider, suggests, Deutsche Bank's entry into Ethereum L2 may be part of a not-so-subtle experiment, which is more secure and compliant blockchain solutions being introduced into the heart of traditional finance.

Other members of Singapore's Project Guardian may follow suit, leading to a broader adoption of Web3 technology and blockchain solutions by traditional financial institutions.