I have a question about how custodial ZEC should be treated in coinholder voting.
If I hold ZEC on a centralized exchange, I obviously do not control the keys and therefore cannot vote with those coins myself. However, the exchange does control the keys.
Does anything prevent a CEX from using ZEC held on behalf of its customers to participate in a coinholder vote according to the exchange’s own preference?
The same question seems to apply to institutional custodial holdings. For example, an ETF or trust may hold a large amount of ZEC on behalf of shareholders, while the actual keys are controlled by the trust or its custodian. If those coins were eligible for a future coinholder vote, who would effectively have the voting power: the shareholders, the trust/sponsor, or the custodian?
I understand that this may not be an issue for the current vote if exchange and institutional holdings remain in transparent addresses while voting is restricted to eligible shielded funds. But that seems more like an operational limitation than a fundamental solution.
If custodians eventually hold large amounts of eligible shielded ZEC, is there any protocol-level or governance-level mechanism that prevents them from voting with customers’ or shareholders’ coins without their explicit consent?
I’m mainly wondering whether this issue has been discussed before, and how people think custodial holdings should be treated in future coinholder governance.
I asked the same question right around the launch of the Greyscale ETF. Now, legally speaking, the crypto must be kept in transparent ZEC form, but theoretically nothing prevents them from borrowing shielded ZEC 1:1 with transparent ZEC.
Once shielded, it is impossible to know if they voted on something. There is no protocol level mechanism to prevent this AFAIK.
The contract you sign does not entitle you to any benefits that may derive from holding the ZEC, including voting rights. Instead, a concept called fiduciary duty comes into play: the trustees are explicitly commanded to do anything feasible and legal that maximises the value of the trust. That includes voting in the favour of whatever will benefit the trust the most, regardless of how much it harms everyone else.
Same thing Blockstream did with Bitcoin, and courts have consistently upheld this duty to shareholders and duty to the trust.
Lots of legal things but it depends on how the etf is structured and whether it is explicitly designed and communicated to shareholders that they do the things they plan to do. I remember this when the first ETH ETFs came out in the US. Most are designed to give you spot exposure and structurally design to give you that. They have the ability to convert and offer staking yield (a better fiduciary outcome) but they would need to make changes and communicate it properly. You can probably read the details of the Grayscale ZCash ETF filing to determine what they do explicitly in the T&Cs tbh…
Another thing to consider is the risks of actual people taking out their coins in their designed security cold storage system to do anything with them. This probability proves way more risk (ie total loss) and you’d probably find that the risk outweighs any benefit of having to manage transactions with those funds. Given some of the crazy supply chain hacks and the Bybit one a year so or ago. I would dare to say anyone managing tens of millions of other people’s funds probably will just let it sit, unless the product is actively designed to do whatever they say they’re going to do (ie stake, vote, etc…)
The block rock article below describes it pretty well and the other article walks through the mechanisms.
It’s in their S3 and Coinbase custodies and holds the keys… they ain’t voting… having a qualified custodian and prime broker managing those parts from Coinbase probably makes it even a more solid case that those coins unless traded will just sit their as dead weight.
??? An ETF is a fractional share of the fund, not ZEC. There is absolutely no guarantee it is ZEC. It is an IOU that says that you own a share of the pool that you can’t even redeem. Most ETF IOUs have an “authorised participant” clause which says only Authorised Participants can even redeem the shares for any ZEC, and let me repeat it again:
An IOU of potential redemption does not bound anyone to hold your fungible assets as-is, as long as the asset is provably fungible (ZEC is), and you got the equivalent of what you would have if the action did not happen.
This is well established in English common law: its what allows the government to convict you even if they can’t prove the money you have is EXACTLY THE SAME as the money you stole, and it’s also what powers civil forfeiture (the money you pay back doesn’t have to be the same money you stole)
Now let me read what the custodian prospectuses say.
I’ll spare the AI response with another AI one but just read the T&Cs this is a SEC approved product that has guarentees for the holder of the asset… this isn’t a 3Arrows or FTX product…
Also the question at hand is could they vote with the funds coins… since they don’t hold the keys I’d say probability of that happening is extremely low and would need to be communicated in an amendment. The above I don’t know what you’re trying to say that’s relevant to that point
However, I just finished reading a like four SEC documents.
From what I’ve gathered:
The custodian under the PBA cannot hypothecate or rehypothecate the shares, so yes, technically they are forbidden from doing it on a non-fungible basis.
However, there’s one more clause that people need to be aware of…
Additionally, DCG and its subsidiaries may engage in activities with respect to digital asset ecosystems, including the Zcash Network, such as mining, staking, running mining or validator nodes, investing in ecosystem participants, voting on governance proposals or, before or after a hard fork, taking a position regarding which fork among a group of incompatible forks of the Zcash Network should be considered the “true” Zcash Network.
DCG and its subsidiaries’ activities with respect to a digital asset ecosystem and positions on changes that should be adopted in various digital asset networks, including the Zcash Network, could be adverse to positions that would benefit the Trust or its shareholders. DCG and its subsidiaries could prioritize their own interests in these and other investments over those of the Trust, in ways that may adversely impact the value of the Shares. DCG and its subsidiaries may also make token-related decisions to benefit their own holdings, including buying or selling ZEC tokens, which could cause price volatility, adversely affecting the value of the Shares.
DCG, or Digital Currency Group, is the parent company of Greyscale and ultimately owns a majority of the ETF shares, thus a controlliing stake. They can, also, explicitly, do, and I quote, “[participate in] voting on governance proposals”
The ETF prospectus acknowledges this, even if it may adversely affect a trust.
And here’s where it gets better. You are allowed to hypothecate ETF shares you own to borrow against to get equivalent 1:1 ZEC, even if the custodian can’t!
Yeah, given no one besides Gemini supports shielded txs (from CEX/Custodial role), its legally, based on the prospectus and T&Cs possible but given the qualified custodian not being able to handle a shielded transaction (in current form) its pretty unfeasible at this time. That’s my take at how it looks though