Banks Must Upgrade Their Blockchain Infrastructure

Opinion by: Igor Mandrigin, co-founder and chief technology and product officer of Gateway.fm

For years, private distributed ledger systems, like Hyperledger, have provided banks with a secure means to explore blockchain technology without venturing into public networks. These frameworks delivered privacy, permissioned access and a sense of institutional control — qualities that undoubtedly appealed to traditional finance players when the crypto market was still viewed as the Wild West.

The environment has changed fundamentally since then, as tokenized assets, stablecoin settlements and institutional crypto exposure have quickly become the standard. The closed, permissioned models that once spoke to the risk-averse tendencies of banks now hold them back. At this critical geopolitical and macroeconomic juncture, financial institutions need to move beyond legacy frameworks and adopt public, permissioned layer 2 infrastructure built with zero-knowledge (ZK) proofs. 

The rationale is straightforward. These newer systems maintain the privacy and compliance standards regulators demand, but they also offer the interoperability and scalability that modern finance requires.

Some readers, especially those in regulatory or enterprise IT roles, might bristle at this contention, possibly arguing that public chains are too volatile, too transparent or too “ungovernable” to meet enterprise standards. Others may argue that traditional distributed ledger technology (DLT) is already effective and that migrating would create unnecessary operational and compliance risks. This dated view underestimates how rapidly global finance is moving onchain and how expensive it will be for institutions to remain isolated in closed systems.

The shift from control to connectivity

A decade ago, blockchain adoption was primarily about control. Enterprises wanted distributed systems, but only within walled gardens could they manage internally. That made sense when public blockchains were slow, expensive and lacked privacy. In that environment, Hyperledger and its peers offered predictability, vetted participants and centralized governance and were able to satisfy auditors without revealing transaction data to the world.

Today’s financial landscape is radically different. Tokenized money markets are scaling up to billions in daily transaction volume, while stablecoins are being integrated into global settlement systems at a rapid rate. Layer 2 solutions are bringing low-cost, high-speed, privacy-enhanced functionality to public chains. ZK technology now makes it possible to prove compliance or creditworthiness without revealing sensitive data.

The trade-off between privacy and openness that once justified private blockchains has dissolved.

Isolation is now a liability

The danger isn’t that private blockchains will fail technically. The danger is that they’ll fail strategically. Ultimately, legacy DLT stacks were never built for cross-chain communication, global liquidity, or real-time asset settlement. They operate as digital islands, disconnected from the growing onchain ecosystem where tokenized assets, collateralized lending and instant settlement are converging.

Related: JPMorgan sees advantages in deposit tokens over stablecoins for commercial bank blockchains

That isolation comes at a cost. Liquidity is increasingly aggregating on public infrastructure, where decentralized finance (DeFi) protocols, tokenized treasuries and institutional stablecoin markets interact seamlessly. A private network, no matter how compliant, can’t tap into that liquidity. It can only watch it move elsewhere.

The longer banks wait to connect to open, interoperable infrastructure, the harder it becomes to catch up. Institutions that build on closed systems risk becoming like legacy clearinghouses in an era of automated settlement.

The case for public, permissioned L2s

Thankfully, the right middle ground already exists. Public, permissioned layer 2 networks — enhanced with zero-knowledge cryptography — enable financial institutions to retain privacy and control while operating within a composable, open ecosystem.

This can help with selective disclosure, where banks can demonstrate regulatory compliance, like Anti-Money Laundering (AML) and Know Your Customer (KYC) checks, using ZK-proofs, without revealing transaction data to the public. Layer 2s built on Ethereum or similar base layers can directly connect with stablecoin issuers, tokenized money markets and real-world asset protocols.

This doesn’t require banks to sacrifice their security posture. It simply allows them to build within the same ecosystem as everyone else, using infrastructure that scales, communicates and settles in real time.

SWIFT has begun testing an onchain version of its global messaging infrastructure using Linea, an Ethereum layer 2 network. This signals to banks that, if the backbone of global interbank communication is moving toward blockchain integration, traditional institutions can’t ignore it.

Lessons from the market

We’re already seeing the gap widen between institutions that embrace open infrastructure and those that don’t. Payment networks like Visa and Stripe are experimenting with stablecoin settlements on public chains. Meanwhile, tokenized US treasuries and institutional DeFi protocols are attracting capital from hedge funds and asset managers who want yield onchain, not in permissioned silos.

This convergence of tokenized finance is becoming the new standard for capital markets, and banks that rely on outdated DLT models risk losing their role as intermediaries in this next generation of settlement infrastructure. Conversely, those that transition to public L2s can become the new gateways for programmable, composable financial services.

If large financial institutions begin building on open, ZK-powered layer 2s, the impact would be profound. Liquidity would consolidate across networks, improving efficiency and reducing friction between traditional and crypto-native markets. Tokenized assets could flow seamlessly between institutions, driving adoption of onchain treasuries, credit markets and consumer payments.

For crypto markets, this shift would bring legitimacy and 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 reducing settlement costs and counterparty risks.

The opposite scenario is also clear: Banks that refuse to evolve will find themselves operating on isolated rails, unable to interact with global liquidity. They’ll become spectators to a financial ecosystem that’s increasingly open and programmable.

Moving from private to public infrastructure will not be easy. It will require new security models, updated compliance frameworks and a willingness to collaborate with regulators and technologists. Clinging to systems that can’t scale or interoperate is far riskier.

Modernization and compliance do not have to be a zero sum game. lnstitutions don’t need to abandon privacy or compliance to make progress in this new direction. What they need to leave is the assumption that “private” equals “safer.” 

In the new era of tokenized finance, isolation is the real threat.

Opinion by: Igor Mandrigin, co-founder and chief technology and product officer of Gateway.fm.

This opinion article presents the contributor’s expert view and it may not reflect the views of Cointelegraph.com. This content has undergone editorial review to ensure clarity and relevance, Cointelegraph remains committed to transparent reporting and upholding the highest standards of journalism. Readers are encouraged to conduct their own research before taking any actions related to the company.