Remember when crypto exchanges were strong-armed into delisting privacy coins like zcash (ZEC) in order to protect their brittle banking covenants?
But crypto keeps moving, and today ZEC is making its debut within the bustling decentralized exchange (DEX) ecosystem in the form of wrapped zcash (WZEC). Announced Wednesday, WZEC is the first asset to be launched by “Wrapped,” a partnership between Ethereum tokenizers Tokensoft and qualified custodian Anchorage, with over-the-counter (OTC) liquidity provided by CMS Holdings.
Wrapping is the act of taking a blockchain asset like bitcoin and issuing an equivalent representation on another blockchain such as Ethereum. Wrapped bitcoin (WBTC), for instance, is an ERC-20 token that’s backed on a 1:1 basis with bitcoin held in reserve by qualified custodian BitGo Trust.
In a similar fashion, wrapped zcash is a 1:1 representation of zcash on Ethereum held in custody by Anchorage. Wrapped tokens provide a big shot of liquidity to DEXs and offer otherwise staid assets the ability to frolic in the wilds of decentralized finance (DeFi).
“I’m thrilled that there is such interest, and that people can, and do, innovate and deploy extensions on top of Zcash without the Electric Coin Company’s knowledge or approval,” Zooko Wilcox-O’Hearn, Zcash founder and Electric Coin Company CEO, told CoinDesk in a direct message.
“I also agree that it’s great for people to have more alternatives to centralized exchanges (CEXs), and the way that CEXs have to comply with arbitrary demands from their banks,” he added.
Tokenized ZEC
Today, zcash can be used in either of two ways: transparent or shielded. The shielding of the transacting crypto wallets enables a degree of privacy not found on the public-by-default Bitcoin blockchain, for example. It’s ZEC’s shielding capabilities that make regulators nervous, narrowing the scope somewhat for this clever use of technology.
The wrapped version of zcash on Ethereum “really brings the best of both worlds,” said Mason Borda, CEO of Tokensoft.
“Obviously Zcash enables shielded transactions, so now holders of zcash can have assets in a shielded pool and wrap a portion of these assets to use on Ethereum, maintaining their privacy,” said Borda. “They would love to use their zcash, but they don’t want to disclose how much they have. They just want that information private.”
Wrapping zcash on the Tokensoft platform for use on Ethereum also makes the shielded version of the coins more palatable to regulators, Borda believes. That’s because it involves a know-your-customer (KYC) process performed upstream, he said, plus the ZEC holder also has to meet with Anchorage’s compliance as a qualified custodian.
“Wrapping the zcash and putting it on the Ethereum rails does open up the door for these jurisdictions to support this asset,” Borda said. “So it’s a big deal. It’s going to open up zcash to every other market out there that is currently concerned about enhanced privacy and shielded transactions.”
But doesn't loading lots of KYC and compliance around zcash defeat the purpose of privacy coins in the first place?
"The goal with zcash was never to shield from authorities, regulators or your financial providers," said Diogo Monica, co-founder and president of Anchorage. "The shielding of zcash came as a response to the fact that bitcoin is pseudonymous. So who you're shielding from is the public at large and the internet at large. And so the fact that we're using ERC-1404 standard allows us to guarantee on-chain that we have the advantages of regulation with the advantages of zcash on-chain anonymity."
ZEC lite
Tokensoft developed the ERC-1404 standard for SEC-registered assets on Ethereum, a streamlining system that also involves Anchorage as custodian.
The ERC-1404 is basically a template smart contract with compliance functions baked in, including the whitelisting of investors so regulators know exactly who everyone is.
“There are certain things we’re switching off, but other things we’re leaving on,” Borda said of WZEC’s ERC-1404 debut. “The main difference is that the whitelisting is off, so the tokens are ERC-20 compatible and freely transferable.”
For its part, Anchorage became a qualified custodian in the state of South Dakota back in July 2019, following crypto custodian BitGo, which got the green light from state regulators in 2018.
“This is what Anchorage was built to do,” said Monica. "Anchorage was built to use private keys safely for active participation in blockchains. Our technology permits us to have better liquidity, and public auditability of every single asset that we have on the platform. And also our platform allows us to just add more wrapped assets in the near future.”
CMS Holdings, the institutional crypto firm founded by Bobby Cho of Cumberland and former Circle trader Dan Matuszewski, praised the new partnership.
“Wrapped is the best wrapping I’ve ever wrapped with,” Matuszewski quipped via email.