Regulatory Risk to the Zcash Ecosystem and the ZEC currency

ELi5: Explain this to me Like I’m 5 years old
The Zcash ecosystem has a global footprint, yet the vast majority of human capital and funds for ongoing work are highly concentrated in 3 different USA chartered entities. All three of these entities receive free ZEC as each Zcash blockchain block is constructed. Those ZEC are subsequently brokered to external parties for dollars which pay for ongoing expenses.

Based on current precedent, there is a non-zero possibility that the American SEC will take to court - one, two, or all three entities for engaging in unregistered securities sales. That prosecution could be levied regardless of whether or not ZEC is asserted to be a security. That outcome would have significant negative impacts on the global Zcash ecosystem and the American Zcash ecosystem.

For the sake of readability, Electric Coin Company (bwo Bootstrap), Zcash Foundation, and Zcash Community Grants will be referred to as “block reward entities” - PoW miners will be referred to as such

Why the concern? Why cry wolf?
The human capital and long term funding assets for the global Zcash ecosystem is almost completely contained within the realm of the Electric Coin Company, the Zcash Foundation, and the Zcash Community Grants. Each of those three entities are formally chartered in the United States. Under the current USA Securities And Exchange Commission (with Gary Gensler leading), there has been as notable increase to material prosecutions and other crack-downs against crypto industry players.

The global Zcash ecosystem inherently carries elevated risk by allowing the existing block reward entities to do business as usual (I assert this point, until USA SEC provides regulatory clarity to lift said risk, or some actions are taken within the Zcash community to mitigate). This thread outlines observations and ideas to remediate risk.

Mining for ZEC vs receiving them as a perpetual, indiscriminate block creation reward (airdrop)
There is a distinct difference between how and why proof of work miners receive ZEC. The miner at any point in time X who receives ZEC as reward has completed work for the network. In affect this is contractualized compensation for resources +labor having been provided.

The ZEC received by the block rewards entities are indiscriminately provided with no bearing to past, present, or future labor or resource allocation. It is only in faith that the Zcash protocol provides to the block reward entities. This faith is reaffirmed by the community by default, until some speculative point in the future when the block reward is deprogrammed from the Zcash protocol spec.

This distinction relates to how routine actions of block reward entities in brokering their ZEC for dollars, which fund ongoing efforts for Zcash, establishes all four elements of the Howey Test.

ECC actions, ZF actions, ZCG actions
There are generally three ways to understand “common enterprise.” The first, known as the horizontal approach, focuses on the idea that all the investors are putting their money toward the same enterprise. The second, called a vertical approach, is understood to be an investment where the success of the investors is linked to the success of the party that is being invested in. The last, known as the broad vertical approach, defines a common enterprise as an investment that hinges on a promoter or a third party’s expertise.

Impacts to the global Zcash ecosystem and ZEC holders
These are straight-forward

  1. Negative impact to Zcash brand, and to ZEC valuation
  2. Loss of USA based human capital and other resources
  3. Immediate disruption to current and roadmap efforts
  4. Permanent loss of competency reputation to the block reward entities/ staff
  5. Loss of ZEC otherwise intended for development, community, growth, et al


  1. Forced/ accelerated further globalization and decentralization of Zcash
  2. Finality to ongoing risk gray-area
  3. Finality to the on-going and ever controversial block reward implementation
  4. Finality to the insiders vs outsiders perceived Zcash ecosystem

Existing ZEC funds held by ECC, ZF, ZCG
These are potentially very hot potatoes. We do not want to see them seized or frozen because of a regulatory intervention in America.

Reference: The Howey Test

Unregistered Securities sales
Are the following evaluations possible:

  1. ZEC is not a security
  2. The block reward entities are engaged in illegal, unregistered securities sales

I believe that it is possible for both truths. ZEC is not a security, but the block reward entities are distinctly selling unregistered securities to the context of how-why-when they broker ZEC.

Should ECC, ZF, and ZCG register in the USA to become registered security sellers
This would be an ideal outcome; and it would not be unprecedented - Chia is/has formally working through the USA-SEC compliance state flow. Each of the block rewards entities have the funds and lawyers necessary to go through the process to become registered securities brokers. Although this is potentially a lot of effort now, it grants the peace of mind for the future.

Emergency path to Dollar Liquidity, Freeze of additional ZEC distribution
Emergency freeze/ refusal to accept block rewards
Suppose all previously received ZEC are brokered into dollars all at once, and an ultimate halt to the receipt of any new block reward ZEC was placed. This theory is to act in good-faith by changing one’s behavior today to better align with the regulator’s view of allowed vs illegal action.

Risk of asset freeze/ seizure, de-chartering of ECC, ZF, or ZCG
Risk of severe Zcash development and roadmap disruption
Risk to individuals involved with brokering block reward ZEC to OTC third parties
Because this is crypto and because regulators love to make examples out of rules violators, there is risk to some of the more prominent Zcash leaders being made an example of.

Risk of taking no pro-active action (Risk of keeping on keeping on)
Risk of the start to a negative regulatory outcome landslide
If only one of the three block reward entities were taken to court-prosecuted, it would set a devasting precedent for the other two.

Risk of assuming that because we’ve not had a problem yet, we won’t have a problem in the future
The Zcash ecosystem may not always enjoy the luxury of not being on their radar. It is possible that Zcash block reward entities have enjoyed a lack of regulatory intervention simply because Z is the last letter in the alphabet.

Modify the Zcash distribution implementation to eliminate block rewards
There is an upcoming community decision to determine if the block rewards should be retained, if no regulatory mitigation actions have been taken prior to that vote, I will advocate to eliminate the block reward.

De-charter/ re-charter the ECC, ZF, ZCG into jurisdiction(s) with non-antagonistic regulatory entities
This is not ideal, but would significantly decrease the USA geographical risk. Unfortunately, this path would require a lot of resources, while returning very little tangible value to Zcash. Essentially this is the cost of a high premium insurance policy.

(This original thread text will be incrementally edited for additional content, clarity, and structure)

The Potion Pill: Proof Of Stake
What can a network upgrade to proof of stake provide as mitigation to regulatory risk?

  1. PoS Validators are compensated ZEC for resources-labor provided, none are given for free
  2. Existing ZEC held by block reward entities can be allocated to validating under PoS
  3. Newly received ZEC from validation reward can be spent with limited risk
  4. Countless fundamental and decentralization benefits noted here in the Forum and here from Zooko on UpOnly TV


  1. SEC might blanket characterize all PoS crypto networks and native tokens as securities
  2. Originally received block reward ZEC are still tarnished, after a move to PoS, particularly considering that they are custodied in Transparent addresses
  3. Application of ZEC from block rewards to validating may tarnish the validation reward ZEC
  4. The appearance by the block reward receivers as attempting to avoid their carried regulatory risk from block reward ZEC brokerage under the current PoW implementation

Also for consideration, The Zcash Posterity Fund which inspires both pros and cons to the context of regulatory risk.


Thank you for this highly informative and equally concerning missive.

De-chartering the three entities and removing Zcash operations to non antagonistic jurisdictions may be expensive, but clearly not as expensive as the worst negative outcomes possible in the event that the entities are prosecuted by US regulators…

Which jurisdictions could be relied upon though? The EU with MiCA and article 68 is too ambiguous at best / too anti-privacy at worst.

And could smaller jurisdictions be relied upon as being sturdy enough to resist future US political pressure or potentially even sanctions, were the US to ultimately pursue a fully draconian anti-crypto / anti-democracy path?


No single jurisdiction can be relied upon. Zcash needs to have self-sustained organizations in multiple non-aligned jurisdictions.

I think USA, Hong Kong and Singapore are the most useful jurisdictions for Zcash. The US has gotten a bad rep lately, but it is the only Western country imo that has a chance of not banning privacy preserving crypto because of its constitutional protections.


Yes, we’re in strong agreement. But as the Zcash ecosystem exists right now, we are completely relying on the USA and an environment where the SEC continues to take no action wrt The Howey Test and the capacity to prosecute certain ZEC sellers as unregistered securities brokers.

Ideally the distribution of ZEC by the block rewards entities would be occurring through legally registered paths, both inside and outside of the USA. Being All-in on the USA currently is a large carry of risk to the context that none of the 3 block reward entities are registered to be brokering their ZEC.

I’m not sure that I agree about HK. I would assert that Switzerland could be a better #3 jurisdiction (And Shielded Labs is already making great progress in Switzerland). Portugal, The Czech Republic, Ireland, and El Salvador also come to mind. I worry that you overestimate the USA’s palate for respecting constitutional protections granted to citizens on paper… Let’s have a revisit of the Edward Snowden leaks, as one flagship example of the USA not actually upholding the constitutional rights of its citizenry. To the context of anything economic-financial-commercial, we would be acting naively to assume that the USA wouldn’t also exercise behind the scenes constitutional violations.

It is these questions that are most concerning. Between the three block reward entities there are around 500,000 ZEC in possession and more than $15,000,000. It would be catastrophic if the USA SEC took prosecutorial action against these core Zcash ecosystem builders and caused those assets to be frozen or seized.

This discussion has me continually thinking of an age old aphorism.
An ounce of prevention is worth a pound of cure


Maybe it’s time to end the block dev rewards.


The reason I said Hong Kong is because it is not West-aligned and still relatively crypto friendly, but I’m under no illusion that they are a privacy haven. I agree about El Salvador, but I think Portugal, Czech Republic and Ireland are all too integrated into the EU to withstand pressure from the EU. Switzerland could be good, but the reason I didn’t mention them is because I don’t know how independent they are from the EU these days.

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There’s definitely some debate in the community about revamping it at the very least.
As @noamchom said earlier, the faith is reaffirmed by default, and this is a big problem (incumbents have all the incentives to keep the status quo going on).
I’d like discussions to get started on using ZCG as the gateway for all legacy devfund recipients to requests grants, that could clear some legal trouble AND also be more ethical.


Echo this twice it is time to challenge the status-quo and their risks, who have up to this point determined the path of being reactive rather than proactive. (RE: anyone from within ECC, ZF, or ZCG who is enlightened to the legal efforts on-going, please share details)

I don’t think the global Zcash ecosystem (we must exit the current USA-centric funding and building framework) is comfortable letting things keep going the way they always have been just happenstance that a severe regulatory event hasn’t harmed Zcash yet.

Edit Add @joris @str4d @aquietinvestor @GGuy @nathan-at-least @Dodger @David_Heisenberg for continued discussion from the Zcash Posterity Thread


OK, for me one of a low hanguit fruit is to effectively legally and technically separate ZCG from Zf.

Also @aquietinvestor has been talking about spinning a new team based in Switzerland, and while I haven’t discussed it with him, it would make sense in my view that Shielded Labs and ZCG become one entity representing the real community. Also, we need it because the github repository of zcashd and zebra don’t belong to the community and are effectively gatekeepers if the community decide to implement consensus changes (like revamping the devfund) that would hypothetically reduce ECC or Zf % of devfund.

Also another elephant in the room is the copyright issue. The community is effectively excluded from this, as the trademark belongs to Zf and Ecc only. Bummer.


Why don’t we offer to dev fund QEDIT?

  1. Outside the US
  2. Capable of protocol development
  3. Have shown long term vision
  4. To date have shown ability to deliver

I think your question is rhetorical but I can’t tell for sure. My questions following are rhetorical

Does Qedit have a current major grant? And are we pleased with their deliverables thus far? If they do then we’re already funding them in part. I’d be in support of granting them additional major funding out of ZCG or ZF minor grants depending on the scope of their proposed work. I don’t think it makes sense to try and add them as a direct block reward recipient after the November halving because my opinion is that the block reward should be eliminated at that point in the future. Having a non-USA institution building for Zcash is great, I’m grateful that they’ve contributed so much already.

I would caution to not be so hasty about direct funding

We’ve got significant regulatory news today, and its highly favorable to the crypto sector participants like The Zcash Foundation and Electric Coin Company. This has got me enjoying a few sighs of relief! @joshs @Dodger


Can you explain why you believe this is such good regulatory news?

I respectfully ask because one interpretation is Ripple’s win is shaky on the programatic sales and may not stand appeal. That being said, this is clearly a loss for the most extreme SEC interpretations.

And the SEC response:

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Again, the judge ruled Ripple violated Section 5 so I am confused how Ripple can claim outright victory for Ripple even in the best of interpretations.

Though I’m happy to see the market pumping at least…

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Having reviewed the details, I’ll say it again that this ruling is a sigh of relief. But as you can see in the nuances, the court found XRP is not a security in the sweeping context, while also suggesting that Ripple Labs is likely selling illegal unregistered securities (the XRP that they sell for funding).

This model where an institution(s) is funding by brokering its network tokens for $$ is the exact risk that I’ve outlined above, as relates to ZF, ECC, and possibly ZCG. Its a topic where the community seems to have a majority consensus that Dev Funding needs to be spread beyond only two American corporations… otherwise we continue to risk regulatory action against the Zcash Foundation and Electric Coin Company which would severely damage Zcash!

As you already know, these risks are why my primary position is that the Dev Fund should be ended at the November 2024 halving. The ZEC received and already owned up to that point will give ZF, ZCG, ECC adequate resources to continue operating for years into the future, even after the Dev Fund rewards are ended. The only way to certainly achieve treasury/ funding security for the long term, is that the value of ZEC is substantially higher and stays there… lets pick a random number like $200.00 per ZEC.

For Zcash to genuinely become decentralized and non-hierarchically governed, bold actions need to be undertaken. See many excellent points in Josh’s thread here