Closed blockchain systems are no longer enough
For years, banks have used private blockchain systems like Hyperledger to test this technology safely, without directly entering public crypto networks. Such an approach gave them what traditional financial institutions most sought after: privacy, access control, and the feeling that the system remained under their control. At a time when the crypto market was still seen as an unregulated and risky area, it made a lot of sense to banks.
But the market has changed significantly since then. Tokenized assets, stablecoin payments and institutional exposure to crypto are no longer marginal topics, but are becoming a normal part of the financial system. Closed blockchain models, which used to offer security to banks, are now increasingly limiting them. If they want to follow the direction in which the global financial market is going, banks will have to get out of the old framework and start using public but regulated blockchain infrastructure.
This does not mean that banks have to give up privacy, control and compliance with the rules. Newer systems, especially layer 2 solutions that use zero knowledge proof, can maintain these standards, but with much better connectivity with the rest of the market and greater scalability. In other words, banks no longer have to choose between control and open infrastructure.
Of course, some regulators and people from the banking IT sector will still argue that public blockchain networks are too unstable, too transparent or too difficult to manage. Others will say that existing private DLT systems are already working well enough and that moving to a new infrastructure would only create additional operational and regulatory risks. The problem is that such a view is increasingly lagging behind reality. Finance is rapidly moving on-chain, and institutions that remain locked in their own systems could end up paying a high price for isolation.
Source: cointelegraph
From Control to Connection
A decade ago, the use of blockchain in banks and large companies was mostly about control. Institutions wanted the benefits of distributed systems, but only within a closed environment that they could monitor themselves. This made sense at the time because public blockchains were slow, expensive, and didn’t offer enough privacy for serious financial processes.
In such an environment, systems like Hyperledger were a logical choice. They offered banks predictability, verified participants, centralized governance and the ability to satisfy auditors without publicly disclosing transaction data.
Today, the situation is completely different. Tokenized money markets are already processing large daily volumes, and stablecoins are increasingly connecting to global payment and settlement systems. Layer 2 solutions bring lower costs, faster transactions, and better privacy protection to public blockchains.
In addition, zero knowledge technology now makes it possible to prove compliance, identity or creditworthiness, without revealing sensitive data. This is a big change for banks, as they no longer have to choose between privacy and open infrastructure.
The compromise that once justified private blockchains is less and less existent today. It is no longer enough for banks to have a closed system that works for itself. The question of how much this system can connect with the rest of the financial market is becoming increasingly important.
Source: cointelegraph
Isolation becomes a problem
The problem with private blockchains is not necessarily that they will technically stop working. The bigger problem is that they can become strategically obsolete. Older DLT systems are not built for communication between different blockchains, global liquidity, or real-time asset settlement.
They often function as separate digital systems, connected only to a limited number of participants. This is a growing problem as tokenized assets, lending protocols, and instant settlements are increasingly developed in the open onchain ecosystem.
That insulation comes at a price. Liquidity is increasingly moving to public infrastructure, where DeFi protocols, tokenized government papers, and institutional stablecoin markets can interact with each other much more easily. A private network can be compliant and secure, but if it does not have access to this liquidity, its usefulness becomes limited.
The longer banks wait to connect to an open and interoperable infrastructure, the harder it will be for them to catch up. Institutions that remain locked in their own systems risk becoming slow and obsolete in a financial world that is increasingly moving towards automatic settlement.
Source: cointelegraph
Public Layer 2 as the Golden Mean
The golden mean already exists. Banks do not have to choose between fully closed private systems and fully open public networks. Public but permissioned layer 2 systems can give them a combination of privacy, control, and connectivity to a larger onchain ecosystem.
Systems that use zero-knowledge cryptography are especially important. It allows banks to selectively disclose data. For example, a bank can prove that it has conducted AML and KYC checks, without publicly revealing all the information about the user or the transaction itself.
Layer 2 networks built on Ethereum or similar underlying blockchains can more easily connect to stablecoin issuers, tokenized money markets, and real-asset protocols. This opens up access for banks to infrastructure that is already connected to the market, instead of building everything within their own closed system.
This does not mean that banks have to sacrifice security. The point is that they can maintain the necessary controls but build within the same ecosystem where tokenized assets, instant settlements, and new financial infrastructure are already being developed.
That is why the moves of big players such as SWIFT, which is testing an onchain version of its global communication infrastructure through Linea, the Ethereum layer 2 network, are also important. If the infrastructure for global interbank communication also starts to move closer to blockchain, banks can no longer see it as a side experiment.
Source: cointelegraph
What the market is already showing
The difference between institutions that accept open infrastructure and those that remain in closed systems is already becoming visible. Payment networks like Visa and Stripe are testing stablecoin settlements on public blockchains. At the same time, tokenized U.S. Treasury bills and institutional DeFi protocols attract capital from hedge funds and asset managers who want onchain yield rather than within closed, limited-access systems.
Tokenized finance is increasingly becoming the new standard for capital markets. Banks that continue to rely on outdated DLT models risk losing their role as intermediaries in the new transaction settlement infrastructure. On the other hand, banks that move to public layer 2 networks can become the main entry point for programmable financial services.
If large financial institutions start building on open layer 2 networks that use zero knowledge technology, the effect could be huge. Liquidity could be better connected between different networks, which would reduce friction between traditional finance and the crypto market. Tokenized assets could move more easily between institutions, and this would accelerate the development of onchain government bills, credit markets, and payments.
For the crypto market, this shift would bring more legitimacy and more volume from traditional finance. For banks, it would open up new revenue streams, such as digital asset custody, regulatory compliance services, and programmable deposits. At the same time, it could reduce clearing costs and counterparty risk.
The opposite scenario is just as clear. Banks that do not adapt will be left on an isolated infrastructure, without real access to global liquidity. Instead of being an important part of the new financial system, they could become observers in an ecosystem that is increasingly open, connected and programmable.
Of course, the transition from private to public infrastructure will not be easy. Banks will need to develop new security models, adapt regulatory compliance frameworks and work with regulators and technology experts. But sticking to systems that are difficult to scale and poorly connect to the rest of the market becomes an even greater risk.
Modernization and compliance don’t have to be contradictory things. Institutions don’t have to give up privacy or regulatory standards to take a step forward. What they need to abandon is the idea that private is automatically safer.