Meet the former DeFi lawyer spearheading fintech development at the CFTC

Formerly lead counsel for DeFi project 0x Labs and a board member of crypto lobbying group the Blockchain Association, Jason Somensatto is about as crypto-native as anyone at the Commodity Futures Trading Commission.

The crypto industry’s reaction to Somensatto joining the CFTC in January was, consequently, intrigued at the very least. His subsequent ascension to leading LabCFTC was even greeted with enthusiasm.

But from his perspective? “It’s been a really great transition. One of the reasons I joined the CFTC was in part because I saw a lot of interesting and exciting developments within the industry but also questions for regulators to be addressing,” Somensatto told The Block in a recent interview.

LabCFTC is a relatively new branch of the CFTC. Former Chairman Chris Giancarlo christened it in 2017, while his successor Heath Tarbert made it an independent office reporting to the chair at the end of 2019.

Despite the relative youth of the lab, Somensatto staunchly believes that innovation is core to the tradition of the U.S. commodities market, saying of its history since the 1936 Commodity Exchange Act that “it is more a story of change and adaptation than it is a story of ‘hey, this is the way that we’ve always done things.’”

“I wouldn’t be where I am if I didn’t find all of this fascinating,” he remarked.

What is LabCFTC?

As its name suggests, LabCFTC focuses on new technologies as they apply to this era of oversight of the commodities market. Somensatto’s appointment earlier this year clearly puts crypto and DeFi at the center of the office’s work. Alongside predecessor Melissa Netram’s move to a major tech lobbying firm, it also reflected the increasingly porous barriers between the crypto industry and federal regulators.

Though LabCFTC can’t formally provide legal advice, it acts as a node by linking industry players with the CFTC and broader regulatory landscape, including the Securities and Exchange Commission’s equivalent office, FinHub. There’s also a lot of education involved, like primers on AI and digital assets — though Somensatto said no new primers are in the works at the moment.

In both the educational and linking roles, Somensatto’s industry connections are a critical asset, he said:

“My primary goal within LabCFTC is to make sure that people are understanding what’s occurring, both how these protocols work both from a technical perspective, but also how the market works and development happens.”

In terms of education, Somensatto sees big steps forward at the CFTC. New conversations no longer need to begin with a “Bitcoin 101” as “staff are generally already familiar with the core concepts and these new commodities.”

On the industry side, however, a big part of his role is just fundamentals: “There’s just baseline information that I think people in a lot of cases need to understand, which doesn’t even require legal advice so much as pointing to certain applicable sections of the CEA.”

Questions of CeFi exchanges

Somensatto’s prior gig at a DeFi exchange is especially interesting given recent fascination with the role of various forms of crypto exchange at the highest levels of U.S. agencies.

SEC chairman Gary Gensler is asking Congress for new laws to regulate crypto exchanges. At the end of June, Congress heard arguments that spot markets for crypto assets — even those widely acknowledged to be commodities like Bitcoin and Ether — should fall under the CFTC’s regulatory purview in the way that only commodity derivatives currently do.

Meanwhile, in Canada, securities regulators have recently adopted the logic that even if an asset is a commodity, the relationship between custodial exchanges and users forms a sort of investment contract that subjects exchanges to requirements reserved for derivatives.

Amid such a maelstrom over exchanges, Somensatto was relatively unfazed.

“With the spot markets, we have enforcement authority for fraud and manipulation. That remains an area where we’re trying to be active,” he told The Block. “But I can comfortably say that the spot market for this asset market is fairly unique.”

Comparing crypto to spot markets for energy or agricultural commodities, he noted that those areas are dominated by “sophisticated investors,” whereas retail excitement for crypto gives rise to an entirely different species of risk.

One of the critical issues with these centralized exchanges is the freedom that crypto technology gives them to operate both globally and nowhere. Not for the first time, Binance, the world’s largest crypto exchange, is currently in the spotlight owing to its controversial straddling of regulatory jurisdictions. Among this renewed regulatory attention, there are reports that the CFTC is investigating the exchange. The agency is already in the middle of a case against BitMEX and its key operators for the same conduct.

“The offshore exchanges present, I think, a unique issue to be considered. To what extent are they accessing the US market and implicating our jurisdiction?” said Somensatto.

...what about DeFi?

Also central to the idea of jurisdiction is DeFi, which ostensibly renders finance open-source and denies regulators an intermediary to hold accountable.

When it comes to DeFi, regulators have spent a great deal of the last year trying to throw together a cohesive approach. CFTC Commissioner Dan Berkovitz recently referred to the DeFi ecosystem a “Hobbesian marketplace,” with many derivatives exchanges likely requiring intervention as a violation of the Commodities Exchange Act. It was the first public statement of its scale on the subject.

It’s also a viewpoint that Somensatto does not dispute. He does maintain that most of these assets constitute commodities, highlighting that “DeFi is largely built around how we interact with these assets.”

The question stands, though, when DeFi leaves the spot markets for futures, options or other derivatives.

In Somensatto’s words: “When we look at the trading products that are out there, are they offering derivatives that fit within our core boundaries?”