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 clear regulatory hurdles for institutions who want to use public blockchains.

According to a Bloomberg report published on Dec. 18, German banking giant Deutsche Bank AG is in the process of building a “so-called” Layer 2 for a public network. The lender hopes the project will clear regulatory challenges faced by financial firms trying to incorporate public blockchains into their operations.

Last month Deutsche Bank released a test version of Project Dama 2, which includes a Layer 2 that is built on the Ethereum (ETH) network, the second-largest cryptocurrency network by market capitalization after Bitcoin (BTC).

Deutsche Bank’s Asia-Pacific industry applied innovation lead, Boon-Hiong Chan said that public blockchains like Ethereum pose a risk for financial institutions entering the blockchain, as firms harbor worries of interacting with criminals or sanctioned entities within the ecosystem.

This is because, according to Chan, institutions do not know “who exactly is validating the transactions” and whether transaction fees could fall into the pockets of 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 satisfied,” said Chan to Bloomberg, adding the bank is still waiting on regulatory approval but it hopes to launch the product as a minimum viable by next year.

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

In addition, he stated that regulators could be given “super admin rights” that lets them monitor the movement of funds within the blockchain to spot illicit transactions.

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

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 firms that are exploring ways to utilize the blockchain to tokenize assets. Though, the project has raised questions on just how deep banks are willing to venture when it comes to the crypto sphere.

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

As early as May 2024, Deutsche Bank announced it was in the process of testing an unnamed Ethereum-based platform. The bank said the platform would offer services centered around tokenized funds.

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