Opinion: 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 having to tap into public networks. This framework ensured privacy, permissive access, and a sense of institutional control – features that undoubtedly appealed to classic financial players when the cryptocurrency market was still viewed as the Wild West.

Since then, the environment has changed fundamentally, as tokenized assets, stablecoin settlements, and institutional exposure to cryptocurrencies quickly became the standard. Closed, permitted models that once appealed to banks’ tendency to be risk-averse now hold them back. At this critical geopolitical and macroeconomic moment, financial institutions must move beyond the existing framework and adopt public, licensed Layer 2 infrastructure built on zero-knowledge (ZK) proofs.

The rationale is straightforward. These newer systems deliver the privacy and compliance standards required by regulators, but also offer the interoperability and scalability that state-of-the-art finance demands.

Some readers, particularly those in regulatory or enterprise IT roles, may bristle at this thesis, perhaps arguing that public chains are too volatile, too limpid, or too “unmanageable” to meet corporate standards. Others may argue that classic distributed ledger technology (DLT) is already effective and that migration would create unnecessary operational and compliance risks. This old-fashioned view underestimates how quickly global finance is moving on-chain and how costly it will be for institutions to remain isolated in closed systems.

Moving from control to connection

Ten years ago, blockchain adoption was all about control. Enterprises wanted distributed systems, but they could only manage them internally within walled gardens. This made sense when public blockchains were leisurely, exorbitant and lacked privacy. In this environment, Hyperledger and its peers offered predictability, verified participants, and centralized management, and were able to satisfy auditors without revealing transaction data to the world.

Today’s financial landscape is radically different. Tokenized money markets are reaching billions in daily transaction volumes, while stablecoins are rapidly being integrated into global settlement systems. Layer 2 solutions provide public networks with low-cost, brisk, and more privacy-enhancing functionality. 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 is gone.

Isolation is now a must

The danger is not that private blockchains will technically fail. The danger is that they will fail strategically. Ultimately, legacy DLT stacks were never built with cross-chain communication, global liquidity, or real-time asset settlement in mind. They act as digital islands, disconnected from the growing onchain ecosystem where tokenized assets, collateralized loans and instant settlements converge.

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

This isolation comes at a price. Liquidity is increasingly accumulating in public infrastructure, where decentralized finance (DeFi) protocols, tokenized vaults, and institutional stablecoin markets interact seamlessly. A private network, regardless of its degree of compliance, cannot tap into this liquidity. He can only watch as he moves elsewhere.

The longer banks wait to connect to open, interoperable infrastructure, the harder it is to catch up. Institutions using closed systems risk becoming like classic clearinghouses in an era of automated settlement.

The case of public, permissible L2

Fortunately, an appropriate golden mean already exists. Public, licensed Layer 2 networks – enhanced with zero-knowledge cryptography – enable financial institutions to maintain privacy and control while operating in a composable, open ecosystem.

This can aid with selective disclosure, where banks can demonstrate compliance with regulations, such as anti-money laundering (AML) and Know Your Customer (KYC) checks, using ZK evidence, without disclosing transaction details to the public. Layer 2s built on Ethereum or similar underlying layers can directly connect to stablecoin issuers, tokenized money markets, and real-world asset protocols.

This does not require banks to compromise their level of security. It simply allows them to build within the same ecosystem as everyone else, using infrastructure that scales, communicates and billes in real time.

SWIFT has begun testing an onchain version of its global messaging infrastructure using Linea, Ethereum’s Layer 2 network. This is a signal to banks that if the backbone of global interbank communication moves towards blockchain integration, classic institutions cannot ignore it.

Lessons from the market

We are already seeing a widening gap between institutions that operate open infrastructure and those that do not. Payment networks like Visa and Stripe are experimenting with stablecoin settlements on public networks. Meanwhile, tokenized U.S. Treasuries and institutional DeFi protocols are attracting capital from hedge funds and asset managers who want profits in the supply chain rather than in approved silos.

This convergence of tokenized finance is becoming the fresh standard in capital markets, and banks relying on old-fashioned DLT models risk losing their role as intermediaries in the next generation of settlement infrastructure. On the other hand, those that migrate to public L2s could become fresh gateways to programmable and composable financial services.

If vast financial institutions start building on open, ZK-powered Layers 2, the impact will be huge. Liquidity would consolidate across networks, improving efficiency and reducing friction between classic and crypto markets. Tokenized assets could flow seamlessly between institutions, driving the adoption of onchain treasuries, credit markets and consumer payments.

For cryptocurrency markets, this change would bring legitimacy and volume to classic finance. For banks, this would unlock fresh fee structures and business models, including deposits, compliance-as-a-service and programmable deposits, while reducing settlement costs and counterparty risk.

The reverse scenario is also clear: banks that do not want to expand will find themselves operating on isolated rails, unable to interact with global liquidity. They will become observers of a financial ecosystem that is increasingly open and programmable.

The transition from private to public infrastructure will not be straightforward. This will require fresh security models, updated compliance frameworks, and a willingness to work with regulators and technologies. Sticking with systems that don’t scale or interoperate is much riskier.

Modernization and compliance don’t have to be a zero-sum game. Institutions don’t have to sacrifice privacy or compliance to advance in this fresh direction. What they need to get over is the assumption that “private” means “safer.”

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

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

This opinion article represents the author’s expert opinion and may not reflect the views of Cointelegraph.com. This content has been editorially reviewed for clarity and relevance. Cointelegraph remains committed to limpid reporting and the highest journalistic standards. We encourage readers to conduct their own research before taking any action with the company.