Banks need to upgrade their blockchain infrastructure

Comment by: Igor Mandrigin, Co-Founder and Chief Technology and Product Officer of Gateway.fm

For years, private distributed ledger systems, such as Hyperledger, have provided a secure way for banks to investigate blockchain technology without accessing public networks. These frameworks offer privacy, authorized access and a sense of institutional control – qualities that undoubtedly appeal to traditional financial players at a time when the crypto market is still seen as the Wild West.

The environment has changed fundamentally since then, as tokenized assets, stablecoin settlements and institutional crypto exposure have quickly become normal. The closed, leveraged models that once dictated banks' risk appetite now hold them back. In this critical geopolitical and macroeconomic era, financial institutions must move away from legacy frameworks and adopt a public permissioned Layer 2 infrastructure built on Zero Knowledge (ZK).

The reason is straightforward. These new systems maintain the privacy and compliance standards that regulators demand, but also offer the interoperability and scalability that modern finance demands.

Some readers, especially those in regulatory or corporate IT roles, may balk at this argument, perhaps arguing that public chains are too flexible, too transparent, or “unmanageable” that don't meet corporate standards. Others argue that traditional distributed ledger technology (DLT) is already effective and migration creates unnecessary operational and compliance risks. This outdated view underestimates how fast global finance is moving onsen and how expensive it is for institutions to remain isolated in closed systems.

Transition from control to communication

Ten years ago, blockchain adoption was primarily about control. Enterprises want distributed systems, but they can only manage them in gardens. That made sense when public blockchains were slow, expensive and lacked privacy. In that environment, Hyperledger and its peers offer predictable, verified participants and centralized governance and can satisfy auditors without exposing transaction data to the world.

Today's financial landscape is radically different. Tokenized financial markets are growing to billions of dollars in daily transaction volume, and stablecoins are rapidly being integrated into global settlement systems. Layer 2 solutions are bringing low-cost, high-speed, privacy-enhanced functionality to public chains. ZK technology now makes it possible to verify compliance or credit without revealing sensitive information.

The once accepted trade-off between privacy and transparency has broken down.

Isolation is now responsible.

The risk is not that private blockchains fail technically. The risk is to fail systematically. After all, old DLT stacks were never built for cross-chain connectivity, global liquidity, or real-time asset management. They act as digital islands, disconnected from the growing onchain ecosystem of tokenized assets, secured loans and instant settlements that are coming together.

Related: JPMorgan sees benefits of blockchains in deposit tokens over stablecoins for commercial banking

That isolation comes at a cost. Decentralized finance (DeFi) protocols, treasuries, and institutional stablecoin markets are increasing liquidity in public infrastructure. A private network, no matter how compliant, cannot tap into that fluidity. He can only see it when he moves to another place.

As banks wait to connect to each other's open infrastructure, it will be difficult to catch up. Institutions built on closed systems risk becoming legacy clearinghouses in an era of automated settlement.

The case for public, authorized L2s

Thankfully, the perfect middle ground already exists. Public, permissioned Layer 2 networks – enhanced by zero-knowledge cryptography – allow financial institutions to maintain privacy and control while operating in an integrated open ecosystem.

This helps with optional disclosure where banks can demonstrate regulatory compliance by using ZK-proofs such as Anti-Money Laundering (AML) and Know Your Customer (KYC) checks without disclosing transaction information to the public. Layer 2s, built on top of Ethereum or similar base layers, can interface directly with stablecoin issuers, financial markets, and real-world asset protocols.

This does not require banks to sacrifice their safety posture. It allows them to easily build in the same ecosystem as anyone else, scalable, scalable and stable infrastructure in real time.

Swift has started testing the onchain version using Linea, Ethereum's online layer 2 network. What this means for banks is that if the backbone of global interbank communications is moving towards blockchain integration, traditional institutions cannot afford to ignore it.

Lessons from the market

We are already seeing the disparity between institutions with open infrastructure and those without. Payment networks like Visa and Stripe are experimenting with stablecoin settlements on public blockchains. Meanwhile, U.S. Treasuries and institutional Diffie protocols attract capital from hedge funds and asset managers seeking to yield on-chain rather than in sanctioned silos.

This token financial integration is becoming the new capital market standard, and banks based on DLT models may lose their intermediary role in this next-generation settlement infrastructure. Conversely, the transition to public L2s may be the new gateways to programmable, customizable financial services.

If large financial institutions start building on the open ZK-powered layer 2s, the impact will be significant. Liquidity is aggregated across networks, improving efficiency and reducing friction between traditional and crypto-native markets. Tokenized assets can flow seamlessly between institutions, enabling onchain treasuries, credit markets and consumer payments.

For crypto markets, this shift brings legitimacy and scale from traditional finance. For banks, it opens up new payment structures and business models, including protection, compliance-as-a-service and program deposits, by reducing settlement costs and associated risks.

The reverse is also evident: Banks that resist the evolution process operate on isolated rails, unable to interact with global liquidity. They will be the audience for an increasingly open and programmable financial ecosystem.

Going from private to public infrastructure will not be easy. It requires new security models, updated compliance frameworks, and a willingness to collaborate with regulators and technology experts. It's even more dangerous to stick with systems that can't scale or collaborate.

Modernity and compliance should not be a zero-sum game. Institutions don't need to give up privacy or compliance to thrive in this new direction. What they need to abandon is the assumption that “private” equals “secure.”

In the new age of financial money, isolation is a real threat.

Comment by: Igor Mandrigin, Co-Founder and Chief Technology and Product Officer of Gateway.fm.

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