An Update from ECC on the Initial Assessment of Community Proposals

Introduction

We released an Initial Assessment of Community Proposals for development funding on August 26th and committed to providing another assessment for any proposal updates and additions. This post includes responses to revised proposals, new proposals and removes proposals withdrawn by their author. The remaining portion of the introduction is repeated from the original post for clarity.

We’ve seen a great deal of engagement on proposals from a diverse set of people within the community. Regardless of differing opinions on how support work should be funded, we share a common purpose, recognizing the importance of privacy for financial freedom and that there is much more to be done. It is very encouraging to see that the Zcash community is thoughtful and active.

The Zcash community is making a decision about whether to create a new development fund and use it to hire one or more organizations to work on its behalf. Some of these proposals include the prospect of hiring the Electric Coin Company (ECC). In order to support the community’s decision process, we’ve committed to publishing our assessments of each Pre ZIP proposal’s potential impact on ECC’s future operations.

Our assessment framework is simple:

Could ECC accept jobs from this fund while remaining true to our mission?

If not, ECC could not make use of this fund, regardless of the financial structure. We know that the community is not limited to proposals that ECC could participate in, but we want to make the community aware of the possible consequences for ECC of each proposal. We will do another assessment in September for any proposal updates or additions.

We will also honor the community’s decision with the use of the trademark. Regardless of whether the community establishes a development fund that ECC can work with, for as long as ECC is stewarding the trademark, we will use it to ensure that exchanges and other third parties use the word “Zcash” only for blockchains/assets that honor the community’s decision.

Objectives

Though the ultimate decision about what work is funded is up to the community, we are actively focused on the following objectives. They will require more time than is available through the existing funding model. 

Objectives:

  • Drive adoption and expand shielded use (e.g. shielded mobile wallets, shielded multisig, view keys, etc.)
  • Layer 1 scalability (potentially including consensus innovation such as proof-of-stake)
  • Regulatory engagement worldwide
  • Onboarding and supporting more services and markets (e.g. BOLT/layer 2 use cases, cross-chain interoperability, Zcash as a platform, trading platforms a.k.a. cryptocurrency exchanges, etc.)
  • Awareness, education, and community-building for both Zcash and the importance of privacy

We would welcome proposal advocates to share any additional objectives they have.


About Securities Regulation

One of Zcash’s strengths is that it is widely supported by the most highly-regulated crypto companies in the world including Gemini, Coinbase, Circle, Galaxy, Bitgo, and many more. There’s a persistent myth that privacy is only for illicit activities, but people around the world are realizing that in this age, privacy is necessary to protect individuals from cybercrime and to protect nations from cyberwar. Maintaining and deepening the support of these regulated companies and their regulators is an important part of our mission to bring economic freedom and opportunity to all people.

Investor protection regulations, such as those enforced by the Securities and Exchange Commission in the United States (“SEC”), are some of the most important regulations affecting cryptocurrencies. If the SEC were to decide that Zcash is a security, then those involved with managing the development fund and these regulated companies would be at risk of violating SEC regulations.

What is a security? Securities include “investment contracts” which, according to what the SEC refers to as the “Howey test,” have the following three properties:

1. An investment of money.

2. In a common enterprise.

3. With an expectation of profits predominantly from the efforts of others.

For more information, please read Coin Center’s analysis of recent SEC statements.

We believe that Zcash is not a security for many reasons, including that it is a decentralized network, that it is useful for private payments and private messaging, and that it was never offered as an investment (there was never an ICO). Regulated entities could not support trading Zcash unless they agreed with our assessment.

However, we do not know whether the SEC has a view on whether Zcash is an investment contract. It is important that the community doesn’t, through their development fund decision-making process, introduce doubt about whether Zcash is actually a security. As the major outcome of this decision-making process appears to be further increasing decentralization, it should increase confidence that Zcash is not subject to SEC regulation.

Last year, the SEC created the Strategic Hub for Innovation and Financial Technology (“FinHub”). FinHub has published guidance on complying with SEC regulations and has offered to meet with developers of digital assets to discuss compliance questions. Depending on the proposal selected by the community, ECC may consult with legal counsel and meet with FinHub to discuss compliance questions prior to applying for funding under the community’s terms. It’s important to note that ECC’s status as a for-profit or non-profit is not relevant to the development fund’s compliance with SEC regulations.

Proposal Assessments

Proposal 1

ZIP proposal Keep the block distribution as initially defined. 90% to miners

Advocate: mistfpga

Could ECC accept jobs from this fund while remaining true to our mission?

By design, this proposal does not provide funding for jobs.

Conclusion: ECC would wind down or pivot.

Update: The proposal was updated by the advocate to clarify and finalize language. Our initial conclusion has not changed.


Proposal 2

ZIP Proposal – A genuine opt-in protocol level, development donation option

Advocate: mistfpga

Could ECC accept jobs from this fund while remaining true to our mission?

By design, this proposal does not provide funding for jobs.

Conclusion: ECC would wind down or pivot.

Update: The proposal was updated by the advocate to clarify and finalize language. Our initial conclusion has not changed.


Proposal 3

Dev fund proposal: 20% to any combination of ECC, Zfnd, Parity, or “burn” 

Advocate: Andrew Miller

Could ECC accept jobs from this fund while remaining true to our mission?

No. ECC would not accept funding that would give special interests—such as miners in this case—control over ECC’s direction. If we took a job under these terms, we would risk being in a position where we are forced to choose between compromising our mission or being defunded by the special interests. For example: what if Zcash users want to evolve the consensus algorithm to include Proof-of-Stake, but the Proof-of-Work miners refused to allow that? Or what if a dominant miner coalition demands a change that disadvantages competing minority miners?

Additionally, FinHub has indicated that “limiting supply or ensuring scarcity [of a cryptocurrency], through, for example, buybacks, ‘burning,’ or other activities,” is a factor in determining that the cryptocurrency is subject to securities regulations.

Conclusion: ECC would wind down or pivot.

Update: The proposal was updated by the advocate to clarify and finalize language. Our initial conclusion has not changed.


Proposal 4

Dev Fund Proposal: 20% to a 2-of-3 multisig with community-involved governance

Advocate: Placeholder

Could ECC accept jobs from this fund while remaining true to our mission?

We think so, but it would require further clarity. We agree that this proposal supports necessary transparency and accountability, while distributing governance.

There are two roles described here that ECC would be asked to perform: as an operating organization and as a governance panel member.

An operating organization takes actions to maintain and develop Zcash (like the ones described in our current strategy above) after applying for funding. We would be comfortable applying for funds in the manner described.

The other role described in this proposal would be as one of the three voting entities deciding how to disburse the funds in accordance with the community’s choices. We are unsure about taking one of three seats since members of the panel should be required to recuse themselves from any decision in which they are also a potential recipient of funds, we would expect to apply for funds under this proposal, and if ECC recused itself there would only be two voting entities left.

We believe it would be important to describe in more detail the process for submissions and the selection of proposals.

Conclusion: We would be willing to consider taking the job of an operating organization, assuming the details are worked out appropriately. We would be willing to consider taking the role of voting entity pending further study and clarification.

Update: The proposal was moved to Github. No other substantive changes were made. Our conclusion has not changed.


Proposal 5

Dev Fund Proposal: 20% split between the ECC and the Foundation 

Advocate: Aristarchus

Could ECC accept jobs from this fund while remaining true to our mission?

Maybe. While the proposal is in many ways compatible, ECC would need to confirm that it could serve as the sole recipient of funds without introducing concerns that the SEC might regard the development fund as an investment contract. The mandate for on-chain voting is interesting, and once implemented it could eliminate our concern about potential negative impacts of being the sole recipient of funds. However, the on-chain voting would not be activated until year 8, and someone would need to own its implementation.

Conclusion: ECC would be willing to consider taking this funding after seeking further guidance about securities regulation.

Update: The proposal was formalized and language was clarified. 

The following stipulation was added: “Finally, in the event that the voting system isn’t implemented by year 8, the 20% of funds intended to go to the ‘voting dev fund’ should by default be sent to a burn address.”

FinHub has indicated that “limiting supply or ensuring scarcity [of a cryptocurrency], through, for example, buybacks, ‘burning,’ or other activities,” is a factor in determining that the cryptocurrency is subject to securities regulations.

Update: Our conclusion has not changed.


Proposal 6 (NEW)

ZCFS (Zcash Community Funding System)

Advocate: Dimitris Apostolou

Could ECC accept jobs from this fund while remaining true to our mission?

This proposal provides a possible funding mechanism. However, we do not believe this mechanism would allow us to effectively continue to accept work.

Conclusion: ECC would wind down or pivot.


Proposal 7

Dev fund proposal: fixed 20%, opt in/out measure, minimal disrupt

Advocate:  Autotunafish (and acknowledgements to ChileBob)

Could ECC accept jobs from this fund while remaining true to our mission?

No. See our response to Proposal 3.

Conclusion: ECC would wind down or pivot.


Proposal 8

Proposal for the Zcash 2020 Network Upgrade

Advocate: Blocktown Capital

Comment: The author has indicated they are submitting a revision. We cannot evaluate the proposal at this time. 

Update: 

Could ECC accept jobs from this fund while remaining true to our mission?

This appears to be the same proposal as Proposal 4 except for a 10% rather than 20% allocation of mining rewards to a development fund. As such, our response to this proposal is the same is our response to Proposal 4.

Conclusion: We would be willing to consider taking the job of an operating organization, assuming the details are worked out appropriately. We would be willing to consider taking the role of voting entity pending further study and clarification.


Proposal 9 (NEW)

DevFund Supplemental Proposal: Enforce DevFund Commitments with a Legal Charter

Advocate: lexnode

Could ECC accept jobs from this fund while remaining true to our mission?

This is not a funding proposal: “This proposal does not address the merits, motivations or terms of any particular development funding proposal.” There do not appear to be any provisions that are inconsistent with our mission.

Conclusion: ECC would be willing to consider accepting funding for work if this proposal is paired with a proposal that would fund work.


Proposal 10 (NEW)

Fund ECC for 2 more years

Advocate: mistfpga

Could ECC accept jobs from this fund while remaining true to our mission?

Maybe. While the proposal is in many ways compatible, ECC would need to confirm that it could serve as the sole recipient of funds without introducing concerns that the SEC might regard the development fund as an investment contract. 

Conclusion: ECC would be willing to consider accepting funding after seeking further guidance about securities regulation.


Proposal 11 (NEW)

5-Entity Strategic Council Approach

Advocate: Avichal Garg

Could ECC accept jobs from this fund while remaining true to our mission?

Yes, We would be comfortable applying for funds in the manner described. 

Conclusion: ECC would apply for funding as an Executing Entity and would consider applying for a seat on the Strategy Council.


Proposal 14 (NEW)

A Grand Compromise/Synthesis ZIP Proposal

Advocate: @acityinohio

Could ECC accept jobs from this fund while remaining true to our mission?

Potentially. The proposal contains several legal restrictions and securities concerns that require further consideration.

Conclusion: ECC would be willing to consider taking this funding after seeking further guidance about securities regulation and addressing the legal concerns raised.


Proposal 15 (NEW)

Carbon Offsetting

Advocate: @rebekah93

Could ECC accept jobs from this fund while remaining true to our mission?

This is not a funding proposal: “This proposal does not specify any funding for development. It could easily be combined with pretty much all other suggested changes to the dev fund that cover sustaining the development of zcash.” There do not appear to be any provisions that are inconsistent with our mission.

Conclusion: ECC would be willing to consider accepting funding for work if this proposal is paired with a proposal that would fund work.

Proposal 16 (NEW)

ZIP – Changing Zcash supply curve to 3% yearly after 2020 halving

Advocate: @kek

Could ECC accept jobs from this fund while remaining true to our mission?

This is not a funding proposal. Additionally, we believe that the community changing the emission rate at this time and for this purpose would cause a loss of confidence in Zcash and set back our mission to bring economic freedom and opportunity to all people. We would not accept funding.

Conclusion: ECC would wind down or pivot even if paired with a proposal that would fund work.


The following proposals have been withdrawn since our last update: