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
- Negative impact to Zcash brand, and to ZEC valuation
- Loss of USA based human capital and other resources
- Immediate disruption to current and roadmap efforts
- Permanent loss of competency reputation to the block reward entities/ staff
- Loss of ZEC otherwise intended for development, community, growth, et al
- Forced/ accelerated further globalization and decentralization of Zcash
- Finality to ongoing risk gray-area
- Finality to the on-going and ever controversial block reward implementation
- 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.
Unregistered Securities sales
Are the following evaluations possible:
- ZEC is not a security
- 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?
- PoS Validators are compensated ZEC for resources-labor provided, none are given for free
- Existing ZEC held by block reward entities can be allocated to validating under PoS
- Newly received ZEC from validation reward can be spent with limited risk
- Countless fundamental and decentralization benefits noted here in the Forum and here from Zooko on UpOnly TV
- SEC might blanket characterize all PoS crypto networks and native tokens as securities
- Originally received block reward ZEC are still tarnished, after a move to PoS, particularly considering that they are custodied in Transparent addresses
- Application of ZEC from block rewards to validating may tarnish the validation reward ZEC
- 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.
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, for the purpose of prosecuting, 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.