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Welcome to another edition of the DeFi Frontier, a weekly newsletter about DeFi innovation for the real world! After last week’s drama and intrigue, this week provided a welcome return to calm, steady growth and building.

News Wire

Scaling

• Feb 23 — Coinbase launches Ethereum L2 blockchain Base. The L2 network, now in testnet, is built using Optimism’s OP stack. Coinbase has no plans to launch a network token for Base; instead the L2 network’s gas fees will be Ethereum-denominated. (link)
• Feb 21 — Centrifuge surpasses $150mn in TVL. Centrifuge, a real-world asset financing protocol, surpassed $150 for the first time. This reflects the exciting growth potential of RWA protocols in DeFi. (link)
• Feb 14 — Survey: 80% of institutional investors anticipate a return to DeFi. A survey conducted by Avantgarde of 50 institutional investors indicated that 8 of 10 institutions are more likely to use DeFi platforms than they were a year ago. (link)

Commerce

• Feb 23 — Spotify tests NFT-gating capability for playlists. Spotify has partnered with Web3 community Overlord and Bored Ape band KINGSHIP for a pilot initiative, wherein users must connect a wallet holding a designated NFT in order to access a playlist. (link)
• Feb 21 — Mastercard and Immersve partner to allow card payments funded by on-chain transactions. Immersve provides an issuer-as-a-service platform on the Mastercard network, allowing for the instant issuance of virtual Mastercard cards that are funded via Web3 wallet transactions. (link)
• Feb 16 — LatAm workers increasingly receive international compensation via crypto. Cross-border payroll provider Deel reported that the share of remote LatAm workers receiving compensation via crypto increased from 61% to 64% between January and December 2022. (link)

Regulation

• Feb 22 — Hong Kong backs Web3 innovation with $6.4mn budget. Hong Kong’s financial secretary outlined a plan to develop the city’s Web3 ecosystem, including international seminars, business cooperation initiatives, and workshops. (link)
• Feb 14 — Circle downplays rumors of an SEC investigation into USDC. Responding to a Fox Business reporter’s (later retracted) claim that USDC would face SEC scrutiny, Circle Chief Strategy Officer Dante Disparte tweeted that Circle had not received a Wells notice. Wells notices inform recipients of a possible SEC enforcement action and give them the opportunity to contest any allegations. (link)

Analysis

With respect to crypto, most traditional financial institutions have taken a similar, somewhat contradictory stance: they are bullish on blockchain but skeptical of cryptocurrency. J.P. Morgan, for example, is a leader in TradFi blockchain innovation with its Onyx unit, at the same time that the company’s CEO Jamie Dimon calls crypto tokens “decentralized Ponzis.”

Visa and Mastercard are two notable exceptions to this rule, with both of the world’s largest credit card networks emerging as enthusiastic partners for crypto. Some highlights of the networks’ crypto initiatives:

• Both Visa and Mastercard enable the issuance of crypto-backed cards, and both networks have partnerships with major crypto exchanges;
• Both networks have tested direct USDC settlement for card transactions (see Visa’s pilot and Mastercard’s pilot)
• Visa’s crypto team has published several fascinating technical papers, including a December paper on auto payments for self-custodial wallets. (link)

Why are Visa and Mastercard, massive financial incumbents founded decades ago, leaning into crypto? The answer is simple: Both companies depend on being essential to the payments process, and so they see integrations — and interdependencies — with emerging payments technologies as a matter of life and death. Currently, the Visa and Mastercard networks provide a vital service in the global economy, enabling customers and merchants in nearly every country in the world to transact safely. And yet the payment networks are not without their detractors; merchants in particular have long criticized Visa and Mastercard’s swipe fees, which merchants must pay to accept cards, as unfair. Many merchants would eagerly adopt new payment methods with lower fees, should they become available. In the United States, a coalition of merchants even tried to launch their own mobile payment system using bank transfers (spoiler: it didn’t work).

Whenever Visa and Mastercard see a potential rival emerging, they often attempt to get ahead of whatever trend the would-be rival is harnessing, before they can be replaced. In the case of crypto, many merchants would happily accept something like Solana Pay, with instantaneous, final settlement for practically no fees. But new payment methods face a catch-22 for increasing usage:

• For a payment method to achieve widespread usage by consumers, it needs to be accepted in the stores that they spend money; but
• For a payment method to achieve widespread acceptance by merchants, it needs to be asked for/preferred by lots of consumers.

Consequently, even though crypto acceptance has expanded, the deployment of crypto acceptance infrastructure (e.g., crypto QR codes) has been slow. And, by encouraging the development of crypto-backed cards, Visa and Mastercard may stifle the rollout of that technology altogether. After all, if a Visa or Mastercard card can draw on a crypto balance, then the cardholder can already spend their crypto at millions of merchants throughout the world, without needing to wait for merchant-side crypto uptake. Furthermore, using a Visa or Mastercard card is a familiar payment experience for both customers and merchants, while paying with a crypto QR code is not. All else equal, customers stick with what they know.

Ultimately, Visa and Mastercard’s integrations with crypto are strongly positive for the ecosystem, helping to enable exciting, real-world crypto use cases. Merchants may be disappointed that crypto seems unlikely to become a Visa-killer in the near term. But in the long term, Visa and Mastercard may well be fostering the development of blockchain-powered payment solutions that will become their competition. Time will tell!

DISCLAIMER: The views and opinions expressed herein are those of the speakers and do not necessarily reflect the views or positions of any entities they represent. The information provided does not constitute investment advice, financial advice, trading advice, or any other sort of advice, and you should not treat any of this content as such. Do conduct your due diligence and consult your financial advisor before making any investment decisions.