Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
From her perch as a commissioner at the CFTC, Summer Mersinger has established herself as a defender of the crypto industry. She may shirk that title, but it's clear from her recent dissents against CFTC enforcement actions that she sees value in nurturing the sector.
Earlier this month, when the agency jointly filed lawsuits against three DeFi protocols, Mersinger objected, decrying the CFTC's "regulation by enforcement" approach and likening the agency's actions to the old adage from psychologist Abraham Maslow—if all you have is a hammer, you view everything as a nail.
I interviewed Mersinger onstage yesterday at Stellar's Meridian conference in Madrid, where the regulation of DeFi was a persistent topic of discussion. Crypto advocates, of course, subscribe to the ethos of decentralization—if a project is truly controlled by no one, then how can someone be found liable when it runs afoul of the law?
If anyone were to support this novel theory, it would be Mersinger, who not only dissented from the recent DeFi lawsuits from the CFTC, but also the Ooki DAO enforcement action from last September, which found that token holders of a decentralized autonomous organization could be held liable merely for participating in governance.
When I asked her whether a project could truly be decentralized to the point where no one could be held liable, Mersinger demurred. "Financial services is a highly regulated industry," she told me. "So the idea that you can set up a protocol and be outside of those regulations—I don't think anyone's going to be okay with that."
When I described her warning as a wake-up call to DeFi boosters who believe that services like Tornado Cash will be able to operate without governmental action, Mersinger agreed. "If you're setting up something that's going to handle people's money, there's responsibility there," she said.
There is a silver lining here—Mersinger does not believe the answer is enforcement actions. Perhaps it was the jetlag, but she spoke critically of both Chair Rostin Behnam of the CFTC and Chair Gary Gensler of the SEC (in the respectful way that regulators do). She said she's been asking Behnam for the past two years to have rulemaking over how the agency plans to hold decentralized protocols and DAOs liable for violations, but he has declined to do so due to the CFTC's myriad other priorities.
As for Gensler, Mersinger said there was hope that the two agencies would have better collaboration because Gensler had previously been chair of the CFTC. "There was maybe an expectation that the relationship would really be strong," she said. "I don't think that's how it's turned out."
Frosty relations between the two agencies have had serious repercussions. The persistent debate over whether Ether is a security or a commodity is one example, especially because the CFTC has ETH derivatives trading on its regulated markets. "If that's a security, that's a problem," she said. "I worry too that we're going backward."
The other is a proposal from fellow CFTC commissioner Caroline Pham to launch a regulatory sandbox for digital assets. While Mersinger said she was supportive of the idea, she warned that it would be ineffective without SEC participation. "To do that, what would be better coordination with the SEC, and we don't have that right now," she said.
Crypto often feels like an echo chamber, but it seems the industry has found an interested party in Mersinger. For the DeFi crowd, keeping her sympathetic may require a reality check.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
