Deutsche Bank Turns to Layer 2 for Compliant Tokenization of Assets

Deutsche Bank, Europe's ninth-largest bank by assets, is testing a Layer 2 blockchain to overcome the obstacles financial institutions face in using public blockchains to tokenize real-world assets.

Project Dama 2 uses a Layer 2 based on ZKsync technology, Bloomberg News reported. It will be built on top of the Ethereum blockchain to provide faster and cheaper transactions, and especially tokenization use cases.

Dama 2 is being run under the auspices of the Monetary Authority of Singapore, which is working with 24 large financial institutions to test ways of tokenizing payments and real-world assets such as stocks and bonds.

Banks have to worry about a number of pitfalls in embracing public blockchains, starting with the potential to inadvertently fund terrorists, money launderers, and sanctioned entities and ranging to concerns over what happens in the event of a 51% attack.

That first big pitfall comes from not knowing who validates transactions, Boon-Hiong Chan, Deutsche Bank’s Asia-Pacific industry applied innovation lead, told Bloomberg.

Layer 2 Fixes This

A bespoke Layer 2 could alleviate many of those potential regulatory concerns, Chan said, allowing banks to control “who exactly is validating the transactions" with a “more bespoke list of validators."

That could deal with many of the issues around funding criminals. And a privately controlled Layer 2 would deal with the problems of unforeseen hard forks potentially altering the digital ledger.

“You are not dependent on the Layer 1 for detailed transaction records anymore,” Chan said.

A third benefit is the potential to give regulatory authorities “super-admin” privileges, letting them scrutinize transactions at will.

If given regulatory permission, Deutsche Bank will launch Dama 2 as a minimally viable product. That means it would have fewer features than a final project and be targeted at early adopters.

Dama 2's ZKsync technology was built by Memento Blockchain and Matter Labs, with blockchain interoperability provided by the Axelar network and Interop Labs.

Deutsche Bank did not respond to a request for comment by press time.

Deutsche Bank Embraces Crypto

The news of the Dama 2 project comes just a week after Deutsche Bank announced a new partnership with the Crypto.com centralized exchange.

Under the agreement, the German banking giant will provide corporate banking services for Crypto.com in Singapore, Australia and Hong Kong.

Banking services aside, the arrangement gives Crypto.com the cachet of a strong, globally recognized banking partner that “further highlights our commitment to security and compliance,” said Karl Mohan, General Manager APAC and MEA and Global Head of Banking Partnerships for Crypto.com.

For Deutsche Bank, the partnership is an example of what it calls its “commitment to innovation” and to serve “global new economy clients.”