Merchants are constantly punished for all sorts of things, why not punish them (e.g. with a higher rate or more cumbersome chargeback) when they don't have network connections? Then you could have two slightly different protocols and the secure one would actually be somewhat secure.

Designing a protocol for the offline case sounds like a game of Whack-a-Mole and also like something we've all been advised against. However, ISTM that the attacks against a better offline protocol that included e.g. zero-knowledge proofs would be much more difficult than racing to say "yes".