Layer-2 networks

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A layer-2 network processes transactions off the main chain and periodically posts a compressed record to it. Rollups on Ethereum, such as Arbitrum, Optimism and Base, and the Lightning Network on Bitcoin, are the main types. The purpose is speed and cost. The legal consequence is that the asset the client sees in her wallet is often a representation of a token locked in a bridge contract on the main chain. If the layer-2 operator fails or the bridge is exploited, the main-chain token may be gone while the layer-2 balance still displays.

For custody and segregation analysis the question is always where the underlying asset sits and who controls the contract that holds it. A Singapore DPT licensee that credits customers with tokens on a layer-2 must satisfy itself that the operator's sequencer and upgrade keys do not place customer assets within another person's control for the purposes of the custody segregation requirements in the Payment Services Regulations.¹

Notes

Payment Services Regulations 2019 (Singapore), reg. 16A ff. as inserted by the Payment Services (Amendment) Regulations 2024 on the safeguarding of customers' digital payment tokens, in force 4 October 2024. See Part K, Chapter II. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of October 2026.

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I am Of Counsel with KGP Legal LLC in Singapore, where I work with a global client base of successful entrepreneurs and their families, independent asset managers, commodity trading houses and other commercial clients. I am a German and Swiss attorney-at-law, also admitted as a solicitor in England & Wales and in Hong Kong. I divide my time between Zug in Switzerland, Singapore and Hong Kong. Since 2017 I have advised international clients on more than 700 crypto and digital asset projects. I also have extensive experience in cross-border litigation and arbitration in Singapore, Hong Kong and other markets in South-East Asia and Greater China.

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