Deutsche Bank AG is working to address the regulatory hurdles financial institutions encounter when engaging with public blockchains like Ethereum. These challenges include concerns about transacting with unknown or sanctioned entities, transparency of validators, and the risks of hard forks that can fundamentally alter blockchain operations.

The German banking giant unveiled a test version of Project Dama 2 in November, a pilot initiative aimed at providing asset-servicing solutions. This innovative platform leverages a Layer 2 system connected to Ethereum, the most widely used blockchain for commercial applications. 

Speaking to Bloomberg, Boon-Hiong Chan, Deutsche Bank’s Asia-Pacific industry applied innovation lead, emphasized the potential of Layer 2 technology to mitigate regulatory risks associated with public blockchains.

“Using two chains, a number of these regulatory concerns should be able to be satisfied,” Chan said.

Public blockchains like Ethereum have long been seen as a double-edged sword for regulated entities. While they offer opportunities for efficiency and innovation, they also pose compliance risks. For example, transaction fees on public networks could inadvertently benefit sanctioned entities, and the identity of validators—those responsible for processing transactions—remains opaque.

Project Dama 2’s Layer 2 solution addresses these concerns by allowing financial institutions to work with a curated list of validators and granting regulators unique oversight capabilities. According to Chan, this system enables banks to operate with greater confidence on public blockchains, while ensuring compliance with regulatory standards.

The initiative is part of Singapore’s Project Guardian, led by the Monetary Authority of Singapore (MAS), which brings together 24 major financial institutions to explore blockchain technology for tokenizing assets. 

Deutsche Bank is positioning Project Dama 2 as a response to mounting cost pressures in financial services and the growing interest in blockchain-based asset tokenization. The bank plans to launch the platform as a minimum viable product next year, pending regulatory approval.

“By providing regulators with ‘super admin rights,’ we can allow necessary scrutiny of fund movements without depending entirely on the Layer 1 chain for detailed transaction records,” Chan told Bloomberg.