Perspective by: Igor Mandrigin, co-founder and chief technology and product officer of Gateway.fm
For years, private distributed ledger systems, such as Hyperledger, have allowed banks to explore blockchain technology safely without engaging with public networks. These frameworks offered privacy, permission-based access, and a sense of institutional control—features that appealed to traditional finance when the crypto market resembled the Wild West.
The landscape has fundamentally shifted; tokenized assets, stablecoin settlements, and institutional crypto engagement are now standard. The closed, permissioned models that once catered to cautious banks now hinder them. At this pivotal geopolitical and macroeconomic moment, financial institutions must transition from legacy frameworks to public, permissioned layer 2 infrastructures utilizing zero-knowledge (ZK) proofs.
The logic is clear: these modern systems uphold the privacy and regulatory compliance required while providing the interoperability and scalability needed in contemporary finance.
Some readers, particularly those in regulatory or enterprise IT roles, may disagree, arguing that public chains are too volatile, transparent, or “ungovernable” to satisfy enterprise requirements. Others might contend that existing distributed ledger technology (DLT) is already effective and that switching would incur unnecessary operational and compliance risks. This outdated view overlooks how rapidly global finance is advancing onchain and the high cost for institutions remaining in isolated systems.
The Transition from Control to Connectivity
A decade ago, blockchain adoption centered around control. Enterprises sought distributed systems, but only within secure environments could they manage operations. This was reasonable when public blockchains were slow, costly, and lacked privacy. In that context, Hyperledger and similar alternatives provided predictability, vetted participants, and centralized governance, satisfying auditors without publicizing transaction data.
Today’s financial environment has drastically transformed. Tokenized money markets now handle billions in daily transaction volumes, while stablecoins integrate swiftly into global settlement systems. Layer 2 solutions are adding cost-effective, speedy, privacy-enhanced capabilities to public chains. ZK technology allows for compliance verification or creditworthiness proof without disclosing sensitive information.
The trade-off between privacy and openness that once justified private blockchains has vanished.
Isolation is Now a Liability
The risk is not that private blockchains will fail technically; rather, they may fail strategically. Legacy DLT frameworks were not designed for cross-chain communication, global liquidity, or real-time asset settlement. They operate as isolated digital islands, disconnected from the expanding onchain ecosystem where tokenized assets, collateralized lending, and instant settlement converge.
Related:JPMorgan identifies advantages of deposit tokens over stablecoins for commercial bank blockchains
This isolation carries a price. Liquidity continues to consolidate on public infrastructures, where decentralized finance (DeFi) protocols, tokenized treasuries, and institutional stablecoin markets interact seamlessly. A private network, regardless of its compliance, cannot access this liquidity; it can only observe it moving elsewhere.
The longer banks delay connecting to open, interoperable infrastructures, the more difficult it becomes to bridge the gap. Institutions that rely on closed systems jeopardize their relevance, akin to legacy clearinghouses in an automated settlement age.
The Advantage of Public, Permissioned L2s
Fortunately, an ideal middle ground exists. Public, permissioned layer 2 networks—enhanced by zero-knowledge cryptography—allow financial institutions to maintain privacy and control while engaging in a composable, open ecosystem.
This supports selective disclosure, enabling banks to prove regulatory compliance, such as Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations, using ZK-proofs, without revealing transaction details publicly. Layer 2s based on Ethereum or similar foundational layers can connect directly with stablecoin issuers, tokenized money markets, and real-world asset protocols.
This approach does not require banks to compromise their security frameworks. It simply facilitates their ability to operate within the same ecosystem as other participants, employing infrastructure that scales, communicates, and settles in real time.
SWIFT has begun testing an onchain version of its global messaging framework using Linea, an Ethereum layer 2 network. This indicates to banks that if global interbank communication is moving toward blockchain integration, traditional institutions must take notice.
Insights from the Market
We are witnessing a growing divide between institutions that adopt open infrastructures and those that resist. Payment platforms like Visa and Stripe are exploring stablecoin settlements on public chains. Meanwhile, tokenized US treasuries and institutional DeFi protocols are attracting investments from hedge funds and asset managers seeking onchain yield rather than in permissioned silos.
This merging of tokenized finance is establishing the new norm for capital markets, and banks relying on outdated DLT frameworks risk losing their intermediary roles in this new settlement infrastructure landscape. Conversely, those that shift to public L2s can become gateways for programmable, composable financial services.
If major financial institutions start building on open, ZK-powered layer 2s, the repercussions would be significant. Liquidity would consolidate across networks, enhancing efficiency and reducing friction between traditional and crypto-native markets. Tokenized assets could move seamlessly among institutions, fostering the adoption of onchain treasuries, credit markets, and consumer transactions.
For crypto markets, this transition would generate legitimacy and trading volume from traditional finance. For banks, it would unlock new fee structures and business models, including custody, compliance-as-a-service, and programmable deposits, while lowering settlement costs and counterparty risks.
The alternative scenario is equally clear: Banks that resist evolution will find themselves confined to isolated systems, unable to engage with global liquidity. They will become mere spectators in a financial ecosystem that is rapidly becoming open and programmable.
Shifting from private to public infrastructure will not be straightforward. It will necessitate new security frameworks, updated compliance processes, and a readiness to collaborate with regulators and technologists. Holding onto systems that cannot scale or interconnect is far more perilous.
Modernization and compliance need not be a zero-sum game. Institutions do not need to forsake privacy or compliance to advance in this new direction. What they must abandon is the misconception that “private” equates to “safer.”
In this new age of tokenized finance, isolation poses the real threat.
Perspective by: Igor Mandrigin, co-founder and chief technology and product officer of Gateway.fm.
This opinion piece expresses the contributor’s expert view and may not reflect the views of Cointelegraph.com. The article has undergone editorial review to ensure clarity and relevance, with Cointelegraph maintaining a commitment to transparent reporting and upholding journalism standards. Readers are encouraged to conduct their own research before acting on any information related to the company.
This opinion piece expresses the contributor’s expert view and may not reflect Cointelegraph.com’s perspectives. The article has been editorially reviewed for clarity and relevance, with Cointelegraph remaining dedicated to transparent reporting and high journalism standards. Readers should conduct their own research before making any decisions related to the company.
