# Zcash ETF: Form 10-Q for the period ended Jun 30, 2023

- Company: [Zcash ETF](/companies/zcsh.md) (CIK 1720265)
- Form: 10-Q
- Filed: 2023-08-04
- Accepted by EDGAR: Aug 4, 2023, 13:01 ET
- Period: 2023-06-30
- Accession: 0000950170-23-038346
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1720265/000095017023038346/zcsh-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1720265/000095017023038346/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Total assets | at 2023-06-30 | $10.9m | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $0 | us-gaap:Liabilities |

## Management's discussion and analysis

As filed, 20,701 characters.

*The following discussion and analysis of our financial condition and results of operations should be read together with, and is qualified in its entirety by reference to, our unaudited financial statements and related notes included elsewhere in this Quarterly Report, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The following discussion may contain forward-looking statements based on assumptions we believe to be reasonable. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those set forth under “Part II, Item 1A. Risk Factors” in this Quarterly Report, or in “Part I, Item 1A. Risk Factors” and “Forward-Looking Statements” or other sections of our Annual Report on Form 10-K for the year ended December 31, 2022.*

### Trust Overview

The Trust is a passive entity that is managed and administered by the Sponsor and does not have any officers, directors or employees. The Trust holds ZEC and, from time to time on a periodic basis, issues Creation Baskets in exchange for deposits of ZEC. As a passive investment vehicle, the Trust’s investment objective is for the value of the Shares (based on ZEC per Share) to reflect the value of ZEC held by the Trust, determined by reference to the Index Price, less the Trust’s expenses and other liabilities. While an investment in the Shares is not a direct investment in ZEC, the Shares are designed to provide investors with a cost-effective and convenient way to gain investment exposure to ZEC. To date, the Trust has not met its investment objective and the Shares quoted on OTCQX have not reflected the value of ZEC held by the Trust, less the Trust’s expenses and other liabilities, but instead have traded at both premiums and discounts to such value, which at times have been substantial. The Trust is not managed like a business corporation or an active investment vehicle.

### Critical Accounting Policies and Estimates

### Investment Transactions and Revenue Recognition

The Trust considers investment transactions to be the receipt of ZEC for Share creations and the delivery of ZEC for Share redemptions or for payment of expenses in ZEC. At this time, the Trust is not accepting redemption requests from shareholders. The Trust records its investment transactions on a trade date basis and changes in fair value are reflected as net change in unrealized appreciation or depreciation on investments. Realized gains and losses are calculated using the specific identification method. Realized gains and losses are recognized in connection with transactions including settling obligations for the Sponsor’s Fee in ZEC.

### Principal Market and Fair Value Determination

To determine which market is the Trust’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of calculating the Trust’s net asset value (“NAV”), the Trust follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820-10, which outlines the application of fair value accounting. ASC 820-10 determines fair value to be the price that would be received for ZEC in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Trust to assume that ZEC is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.

The Trust only receives ZEC in connection with a creation order from the Authorized Participant (or its Liquidity Provider) and does not itself transact on any Digital Asset Markets. Therefore, the Trust looks to market-based volume and level of activity for Digital Asset Markets. The Authorized Participant(s), or a Liquidity Provider on behalf of the Authorized Participant(s), may transact in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary (collectively, “Digital Asset Markets”).

In determining which of the eligible Digital Asset Markets is the Trust’s principal market, the Trust reviews these criteria in the following order:

- First, the Trust reviews a list of Digital Asset Markets that maintain practices and policies designed to comply with anti-money laundering (“AML”) and know-your-customer (“KYC”) regulations, and non-Digital Asset Exchange Markets that the Trust reasonably believes are operating in compliance with applicable law, including federal and state licensing requirements, based upon information and assurances provided to it by each market.
- Second, the Trust sorts these Digital Asset Markets from high to low by market-based volume and level of activity of ZEC traded on each Digital Asset Market in the trailing twelve months.
- Third, the Trust then reviews pricing fluctuations and the degree of variances in price on Digital Asset Markets to identify any material notable variances that may impact the volume or price information of a particular Digital Asset Market.
- Fourth, the Trust then selects a Digital Asset Market as its principal market based on the highest market-based volume, level of activity and price stability in comparison to the other Digital Asset Markets on the list. Based on information reasonably available to the Trust, Exchange Markets have the greatest volume and level of activity for the asset. The Trust therefore looks to accessible Exchange Markets as opposed to the Brokered Market, Dealer Market and Principal-to-Principal Markets to determine its principal market. As a result of the aforementioned analysis, an Exchange Market has been selected as the Trust’s principal market.

The Trust determines its principal market (or in the absence of a principal market the most advantageous market) annually and conducts a quarterly analysis to determine (i) if there have been recent changes to each Digital Asset Market’s trading volume and level of activity in the trailing twelve months, (ii) if any Digital Asset Markets have developed that the Trust has access to, or (iii) if recent changes to each Digital Asset Market’s price stability have occurred that would materially impact the selection of the principal market and necessitate a change in the Trust’s determination of its principal market.

The cost basis of ZEC received in connection with a creation order is recorded by the Trust at the fair value of ZEC at 4:00 p.m., New York time, on the creation date for financial reporting purposes. The cost basis recorded by the Trust may differ from proceeds collected by the Authorized Participant from the sale of the corresponding Shares to investors.

### Investment Company Considerations

The Trust is an investment company for GAAP purposes and follows accounting and reporting guidance in accordance with the FASB ASC Topic 946, *Financial Services—Investment Companies*. The Trust uses fair value as its method of accounting for ZEC in accordance with its classification as an investment company for accounting purposes. The Trust is not a registered investment company under the Investment Company Act of 1940. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.

### Review of Financial Results (unaudited)

### Financial Highlights for the Three and Six Months Ended June 30, 2023 and 2022

### (All amounts in the following table and the subsequent paragraphs, except Share, per Share, ZEC and price of ZEC amounts, are in thousands)

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net realized and unrealized loss on investment in ZEC | $(1,939) | $(42,745) | $(1,486) | $(30,331) |
| Net decrease in net assets resulting from operations | $(2,007) | $(42,979) | $(1,640) | $(30,842) |
| Net assets | $10,903 | $17,879 | $10,903 | $17,879 |

Net realized and unrealized loss on investment in ZEC for the three months ended June 30, 2023 was ($1,939), which includes a realized loss of ($233) on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in ZEC of ($1,706). Net realized and unrealized loss on investment in ZEC for the period was driven by ZEC price depreciation from $39.15 per ZEC as of March 31, 2023, to $33.27 per ZEC as of June 30, 2023. Net decrease in net assets resulting from operations was ($2,007) for the three months ended June 30, 2023, which consisted of the net realized and unrealized loss on investment in ZEC, plus the Sponsor’s Fee of $68. Net assets decreased to $10,903 at June 30, 2023, a 16% decrease for the three-month period. The decrease in net assets resulted from the aforementioned ZEC price depreciation and the withdrawal of approximately 2,049 ZEC to pay the foregoing Sponsor’s Fee.

Net realized and unrealized loss on investment in ZEC for the three months ended June 30, 2022 was ($42,745), which includes a realized loss of ($75) on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in ZEC of ($42,670). Net realized and unrealized loss on investment in ZEC for the period was driven by ZEC price depreciation from $179.99 per ZEC as of March 31, 2022, to $53.21 per ZEC as of June 30, 2022. Net decrease in net assets resulting from operations was ($42,979) for the three months ended June 30, 2022, which consisted of the net realized and unrealized loss on investment in ZEC, plus the Sponsor’s Fee of $234. Net assets decreased to $17,879 at June 30, 2022, a 71% decrease for the three-month period. The decrease in net assets resulted from the aforementioned ZEC price depreciation and the withdrawal of approximately 2,101 ZEC to pay the foregoing Sponsor’s Fee.

Net realized and unrealized loss on investment in ZEC for the six months ended June 30, 2023 was ($1,486), which includes a realized loss of ($447) on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in ZEC of ($1,039). Net realized and unrealized loss on investment in ZEC for the period was driven by ZEC price depreciation from $37.80 per ZEC as of December 31, 2022, to $33.27 per ZEC as of June 30, 2023. Net decrease in net assets resulting from operations was ($1,640) for the six months ended June 30, 2023, which consisted of the net realized and unrealized loss on investment in ZEC, plus the Sponsor’s Fee of $154. Net assets decreased to $10,903 at June 30, 2023, a 13% decrease for the six-month period. The decrease in net assets resulted from the aforementioned ZEC price depreciation and the withdrawal of approximately 4,088 ZEC to pay the foregoing Sponsor’s Fee.

Net realized and unrealized loss on investment in ZEC for the six months ended June 30, 2022 was ($30,331), which includes a realized loss of ($105) on the transfer of ZEC to pay the Sponsor’s Fee and net change in unrealized depreciation on investment in ZEC of ($30,226). Net realized and unrealized loss on investment in ZEC for the period was driven by ZEC price depreciation from $143.21 per ZEC as of December 31, 2021, to $53.21 per ZEC as of June 30, 2022. Net decrease in net assets resulting from operations was ($30,842) for the six months ended June 30, 2022, which consisted of the net realized and unrealized loss on investment in ZEC, plus the Sponsor’s Fee of $511. Net assets decreased to $17,879 at June 30, 2022, a 63% decrease for the six-month period. The decrease in net assets resulted from the aforementioned ZEC price depreciation and the withdrawal of approximately 4,191 ZEC to pay the foregoing Sponsor’s Fee.

### Cash Resources and Liquidity

The Trust has not had a cash balance at any time since inception. When selling ZEC, Incidental Rights and/or IR Virtual Currency in the Digital Asset Market to pay Additional Trust Expenses on behalf of the Trust, the Sponsor endeavors to sell the exact number of ZEC, Incidental Rights and/or IR Virtual Currency needed to pay expenses in order to minimize the Trust’s holdings of assets other than ZEC. As a consequence, the Sponsor expects that the Trust will not record any cash flow from its operations and that its cash balance will be zero at the end of each reporting period. Furthermore, the Trust is not a party to any off-balance sheet arrangements.

In exchange for the Sponsor’s Fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust. As a result, the only ordinary expense of the Trust during the periods covered by this Quarterly Report was the Sponsor’s Fee. The Trust is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to its liquidity needs.

### Selected Operating Data

| ZEC: | Three Months Ended June 30, 2023 (All ZEC balances are rounded to the nearest whole ZEC) | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Opening balance | 329,768 | 338,117 | 331,807 | 340,207 |
| Creations | - | - | - | - |
| Sponsor’s Fee, related party | (2,049) | (2,101) | (4,088) | (4,191) |
| Closing balance | 327,719 | 336,016 | 327,719 | 336,016 |
| Accrued but unpaid Sponsor’s Fee, related party | - | - | - | - |
| Net closing balance | 327,719 | 336,016 | 327,719 | 336,016 |
| **Number of Shares:** |  |  |  |  |
| Opening balance | 3,777,700 | 3,777,700 | 3,777,700 | 3,777,700 |
| Creations | - | - | - | - |
| Closing balance | 3,777,700 | 3,777,700 | 3,777,700 | 3,777,700 |

|  | As of June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Price of ZEC on principal market(1) | $33.27 | $53.21 |
| NAV per Share(2) | $2.89 | $4.73 |
| Index Price | $33.22 | $53.08 |
| Digital Asset Holdings per Share(3) | $2.88 | $4.72 |

17

(1) The Trust performed an assessment of the principal market at June 30, 2023 and 2022, and identified the principal market as Coinbase.

(2) As of June 30, 2023 and 2022 the NAV per Share was calculated using the fair value of ZEC based on the price provided by Coinbase, the Digital Asset Exchange that the Trust considered its principal market, as of 4:00 p.m., New York time, on the valuation date.

(3) The Trust’s Digital Asset Holdings per Share is derived from the Index Price as represented by the Index as of 4:00 p.m., New York time, on the valuation date. The Trust’s Digital Asset Holdings per Share is calculated using a non-GAAP methodology where the price is derived from multiple Digital Asset Exchanges. See “Item 1. Business—Overview of the ZEC Industry and Market—ZEC Value—The Index and the Index Price” in the Trust’s Annual Report on Form 10-K for a description of the Index and the Index Price. The Digital Asset Exchanges included in the Index as of June 30, 2023 were Coinbase, Kraken and Gemini. The Digital Asset Exchanges included in the Index as of June 30, 2022 were Coinbase, Binance.US and Kraken. Effective April 29, 2023, the Index Provider removed Binance.US from the Index due to the exchange failing the Index Provider’s minimum liquidity requirement, and did not add any Constituent Exchanges as part of its scheduled quarterly review. See “Item 1. Business—Valuation of ZEC and Determination of Digital Asset Holdings” in the Trust’s Annual Report on Form 10-K for a description of the Trust’s Digital Asset Holdings per Share.

For accounting purposes, the Trust reflects creations and the ZEC receivable with respect to such creations on the date of receipt of a notification of a creation but does not issue Shares until the requisite number of ZEC is received. At this time, the Trust is not accepting redemption requests from shareholders. Subject to receipt of regulatory approval from the SEC and approval by the Sponsor in its sole discretion, the Trust may in the future operate a redemption program. The Trust currently has no intention of seeking regulatory approval to operate an ongoing redemption program.

As of June 30, 2023, the Trust had a net closing balance with a value of $10,886,825, based on the Index Price (non-GAAP methodology). As of June 30, 2023, the Trust had a total market value of $10,903,211, based on the principal market (Coinbase).

As of June 30, 2022, the Trust had a net closing balance with a value of $17,835,704, based on the Index Price (non-GAAP methodology). As of June 30, 2022, the Trust had a total market value of $17,879,386, based on the principal market (Coinbase).

### Historical Digital Asset Holdings and ZEC Prices

As movements in the price of ZEC will directly affect the price of the Shares, investors should understand recent movements in the price of ZEC. Investors, however, should also be aware that past movements in the ZEC price are not indicators of future movements. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world.

The following chart illustrates the movement in the Trust’s Digital Asset Holdings per Share versus the Index Price and the Trust’s NAV per Share from October 24, 2017 to June 30, 2023. For more information on the determination of the Trust’s Digital Asset Holdings, see “Item 1. Business—Overview of the ZEC Industry and Market—ZEC Value—The Index and the Index Price” in the Trust’s Annual Report on Form 10-K.

The following table illustrates the movements in the Index Price from July 1, 2018 to June 30, 2023. During such period, the Index Price has ranged from $23.70 to $365.90, with the straight average being $86.74 through June 30, 2023. The Sponsor has not observed a material difference between the Index Price and average prices from the constituent Digital Asset Exchanges individually or as a group.

| Period | Average | High Index Price | Date | Low Index Price | Date | End of period | Last business day |
| --- | ---: | ---: | --- | ---: | --- | ---: | ---: |
| Twelve months ended June 30, 2019 | $95.71 | $226.89 | 7/26/2018 | $45.75 | 2/6/2019 | $106.42 | $112.76 |
| Twelve months ended June 30, 2020 | $47.12 | $106.17 | 7/8/2019 | $23.70 | 3/16/2020 | $51.72 | $51.72 |
| Twelve months ended June 30, 2021 | $110.58 | $365.90 | 5/12/2021 | $50.82 | 7/2/2020 | $126.86 | $126.86 |
| Twelve months ended June 30, 2022 | $134.32 | $295.19 | 11/25/2021 | $53.08 | 6/30/2022 | $53.08 | $53.08 |
| Twelve months ended June 30, 2023 | $46.10 | $79.61 | 8/11/2022 | $24.09 | 6/10/2023 | $33.22 | $33.22 |
| July 1, 2018 to June 30, 2023 | $86.74 | $365.90 | 5/12/2021 | $23.70 | 3/16/2020 | $33.22 | $33.22 |

The following table illustrates the movements in the Digital Asset Market price of ZEC, as reported on the Trust’s principal market, from July 1, 2018 to June 30, 2023. During such period, the price of ZEC has ranged from $23.59 to $365.90, with the straight average being $86.78 through June 30, 2023.

| Period | Average | High Digital Asset Market Price | Date | Low Digital Asset Market Price | Date | End of period | Last business day |
| --- | ---: | ---: | --- | ---: | --- | ---: | ---: |
| Twelve months ended June 30, 2019 | $95.80 | $227.11 | 7/26/2018 | $45.80 | 2/6/2019 | $107.16 | $112.85 |
| Twelve months ended June 30, 2020 | $47.17 | $106.12 | 7/8/2019 | $23.59 | 3/16/2020 | $51.80 | $51.80 |
| Twelve months ended June 30, 2021 | $110.60 | $365.90 | 5/12/2021 | $50.84 | 7/2/2020 | $126.89 | $126.89 |
| Twelve months ended June 30, 2022 | $134.34 | $296.04 | 11/25/2021 | $53.21 | 6/30/2022 | $53.21 | $53.21 |
| Twelve months ended June 30, 2023 | $46.11 | $79.70 | 8/11/2022 | $24.11 | 6/10/2023 | $33.27 | $33.27 |
| July 1, 2018 to June 30, 2023 | $86.78 | $365.90 | 5/12/2021 | $23.59 | 3/16/2020 | $33.27 | $33.27 |

20

The following chart sets out the historical closing prices for the Shares as reported by OTCQX and the Trust’s Digital Asset Holdings per Share from October 18, 2021 to June 30, 2023.

### ZCSH Premium/(Discount): ZCSH Share Price vs. Digital Asset Holdings per Share ($)

The following chart sets out the historical premium and discount for the Shares as reported by OTCQX and the Trust’s Digital Asset Holdings per Share from October 18, 2021 to June 30, 2023.

### ZCSH Premium/(Discount): ZCSH Share Price vs. Digital Asset Holdings per Share (%)

## Market risk

As filed, 388 characters.

The Trust Agreement does not authorize the Trustee to borrow for payment of the Trust’s ordinary expenses. The Trust does not engage in transactions in foreign currencies which could expose the Trust or holders of Shares to any foreign currency related market risk. The Trust does not invest in derivative financial instruments and has no foreign operations or long-term debt instruments.

## Controls and procedures

As filed, 1,408 characters.

The Trust maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Principal Executive Officer and Principal Financial and Accounting Officer of the Sponsor, and to the audit committee of the board of directors of the Sponsor, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of the Principal Executive Officer and the Principal Financial and Accounting Officer of the Sponsor, the Sponsor conducted an evaluation of the Trust’s disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based on this evaluation, the Principal Executive Officer and the Principal Financial and Accounting Officer of the Sponsor concluded that the Trust’s disclosure controls and procedures were effective as of the end of the period covered by this report.

### Changes in Internal Control Over Financial Reporting

There was no change in the Trust’s internal controls over financial reporting that occurred during the Trust’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, these internal controls.

## Risk factors

As filed, 13,216 characters.

There have been no material changes to the Risk Factors last reported under “Part I, Item 1A. Risk Factors” of the registrant’s Annual Report on Form 10-K except as set forth below.

***A determination that ZEC or any other digital asset is a “security” may adversely affect the value of ZEC and the value of the Shares, and result in potentially extraordinary, nonrecurring expenses to, or termination of, the Trust.***

Depending on its characteristics, a digital asset may be considered a “security” under the federal securities laws. The test for determining whether a particular digital asset is a “security” is complex and difficult to apply, and the outcome is difficult to predict. Public, though non-binding, statements by senior officials at the SEC have indicated that the SEC did not consider Bitcoin or Ethereum to be securities, and does not currently consider Bitcoin to be a security. The SEC staff has also provided informal assurances to a handful of promoters that their digital assets are not securities. On the other hand, the SEC has brought enforcement actions against the issuers and promoters of several other digital assets on the basis that the digital assets in question are securities. More recently, the SEC has also brought enforcement actions against digital asset exchanges for operating unregistered securities exchanges on the basis that certain of the digital assets traded on their platforms are securities. For example, in June 2023, the SEC brought charges against Binance and Coinbase for alleged violations of a variety of securities laws. In its complaints, the SEC asserted that SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, COTI, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO, are securities under the federal securities laws.

Whether a digital asset is a security under the federal securities laws depends on whether it is included in the lists of instruments making up the definition of “security” in the Securities Act, the Exchange Act and the Investment Company Act. Digital assets as such do not appear in any of these lists, although each list includes the terms “investment contract” and “note,” and the SEC has typically analyzed whether a particular digital asset is a security by reference to whether it meets the tests developed by the federal courts interpreting these terms, known as the *Howey* and *Reves* tests, respectively. For many digital assets, whether or not the *Howey* or *Reves* tests are met is difficult to resolve definitively, and substantial legal arguments can often be made both in favor of and against a particular digital asset qualifying as a security under one or both of the *Howey* and *Reves* tests. Adding to the complexity, the SEC staff has indicated that the security status of a particular digital asset can change over time as the relevant facts evolve.

As part of determining whether ZEC is a security for purposes of the federal securities laws, the Sponsor takes into account a number of factors, including the various definitions of “security” under the federal securities laws and federal court decisions interpreting elements of these definitions, such as the U.S. Supreme Court’s decisions in the *Howey* and *Reves* cases, as well as reports, orders, press releases, public statements and speeches by the SEC and its staff providing guidance on when a digital asset may be a security for purposes of the federal securities laws. Finally, the Sponsor discusses the security status of ZEC with external counsel and has received a memorandum regarding the status of ZEC under the federal securities laws from external counsel. Through this process the Sponsor believes that it is applying the proper legal standards in determining that ZEC is not a security in light of the uncertainties inherent in the *Howey* and *Reves* tests. The Sponsor has been contacted by staff from the SEC’s Divisions of Corporation Finance and Enforcement concerning the Sponsor’s securities law analysis of ZEC. The Sponsor is in the process of responding to the SEC staff. In light of these uncertainties and the fact-based nature of the analysis, the Sponsor acknowledges that ZEC may currently be a security, based on the facts as they exist today, or may in the future be found by the SEC or a federal court to be a security under the federal securities laws notwithstanding the Sponsor’s prior conclusion; and the Sponsor’s prior conclusion, even if reasonable under the circumstances, would not preclude legal or regulatory action based on the presence of a security.

As is the case with ZEC, analyses from counsel typically review the often-complex facts surrounding a particular digital asset’s underlying technology, creation, use case and usage, distribution and secondary-market trading characteristics as well as contributions of the individuals or organizations who appear to be involved in these activities, among other relevant facts, usually drawing on publicly available information. This information, usually found on the Internet, often includes both information that originated with or is attributed to such individuals or organizations, as well as information from third party sources and databases that may or may not have a connection to such individuals or organizations, and the availability and nature of such information can change over time. The Sponsor and counsel often have no independent means of verifying the accuracy or completeness of such information, and therefore of necessity usually must assume that such information is materially accurate and complete for purposes of the *Howey* and *Reves* analyses. After having gathered this information, counsel typically analyzes it in light of the *Howey* and *Reves* tests, in order to inform a judgment as to whether or not a federal court would conclude that the digital asset in question is or is not a security for purposes of the federal securities laws. Often, certain factors appear to support a conclusion that the digital asset in question is a security, while other factors appear to support the opposite conclusion, and in such a case counsel endeavors to weigh the importance and relevance of the competing factors. This analytical process is further complicated by the fact that, at present, federal judicial case law applying the relevant tests to digital assets is scant, with no federal appellate court having considered the question on the merits, as well as the fact that because each digital asset presents its own unique set of relevant facts, it is not always possible to directly analogize the analysis of one digital asset to another. Because of this factual complexity and the current lack of a well-developed body of federal case law applying the relevant tests to a variety of different fact patterns, the Sponsor has not in the past received, and currently does not expect that it would be able to receive, “opinions” of counsel stating that a particular digital asset is or is not a security for federal securities law purposes. The Sponsor understands that as a matter of practice, counsel is generally able to render a legal “opinion” only when the relevant facts are substantially ascertainable and the applicable law is both well-developed and settled. As a result, given the relative novelty of digital assets, the challenges inherent in fact-gathering for particular digital assets, and the fact that federal courts have only recently been tasked with adjudicating the applicability of federal securities law to digital assets, the Sponsor understands that at present counsel is generally not in a position to render a legal “opinion” on the securities-law status of ZEC or any other particular digital asset.

As such, notwithstanding the Sponsor’s receipt of a memorandum regarding the status of ZEC under the federal securities laws from external counsel and the Sponsor’s view that ZEC is not a security, the SEC or a federal court may in the future take a different view as to the security status of ZEC.

If the Sponsor determines that ZEC is a security under the federal securities laws, whether that determination is initially made by the Sponsor itself, or because a federal court upholds an allegation that ZEC is a security, the Sponsor does not intend to permit the Trust to continue holding ZEC in a way that would violate the federal securities laws (and therefore would either dissolve the Trust or potentially seek to operate the Trust in a manner that complies with the federal securities laws, including the Investment Company Act). Because the legal tests for determining whether a digital asset is or is not a security often leave room for interpretation, for so long as the Sponsor believes there to be good faith grounds to conclude that the Trust’s ZEC is not a security, the Sponsor does not intend to dissolve the Trust on the basis that ZEC could at some future point be finally determined to be a security.

Any enforcement action by the SEC or a state securities regulator asserting that ZEC is a security, or a court decision to that effect, would be expected to have an immediate material adverse impact on the trading value of ZEC, as well as the Shares. This is because the business models behind most digital assets are incompatible with regulations applying to transactions in securities. If a digital asset is determined to be a security, it is likely to become difficult or impossible for the digital asset to be traded, cleared or custodied in the United States through the same channels used by non-security digital assets, which in addition to materially and adversely affecting the trading value of the digital asset is likely to significantly impact its liquidity and market participants’ ability to convert the digital asset into U.S. dollars. Any assertion that a digital asset is a security by the SEC or another regulatory authority may have similar effects.

For example, in 2020 the SEC filed a complaint against the issuer of XRP, Ripple Labs, Inc., and two of its executives, alleging that they raised more than $1.3 billion through XRP sales that should have been registered under the federal securities laws, but were not. In the years prior to the SEC’s action, XRP’s market capitalization at times reached over $140 billion. However, in the weeks following the SEC’s complaint, XRP’s market capitalization fell to less than $10 billion, which was less than half of its market capitalization in the days prior to the complaint.

Likewise, in the days following the announcement of the SEC’s complaints against Binance and Coinbase, the price of various digital assets, including BTC, ETH, and ZEC, declined significantly and may continue to decline as these cases advance through the federal court system. Subsequently, in July 2023, the District Court for the Southern District of New York held that while XRP is not a security, certain sales of XRP to certain buyers amounted to “investment contracts” under the Howey test. The SEC’s actions against Binance, Coinbase and XRP’s issuer, as well as the judgments of federal courts, underscore the continuing uncertainty around which digital assets are securities, and demonstrate that such factors as how long a digital asset has been in existence, how widely held it is, how large its market capitalization is and that it has actual usefulness in commercial transactions, ultimately may have no bearing on whether the SEC or a court will find it to be a security.

In addition, if ZEC is in fact a security, the Trust could be considered an unregistered “investment company” under SEC rules, which could necessitate the Trust’s liquidation. In this case, the Trust and the Sponsor may be deemed to have participated in an illegal offering of securities and there is no guarantee that the Sponsor will be able to register the Trust under the Investment Company Act at such time or take such other actions as may be necessary to ensure the Trust’s activities comply with applicable law, which could force the Sponsor to liquidate the Trust.

Moreover, whether or not the Sponsor or the Trust were subject to additional regulatory requirements as a result of any determination that its assets include securities, the Sponsor may nevertheless decide to terminate the Trust, in order, if possible, to liquidate the Trust’s assets while a liquid market still exists. For example, in response to the SEC’s action against the issuer of XRP, certain significant market participants announced they would no longer support XRP and announced measures, including the delisting of XRP from major digital asset trading platforms, resulting in the Sponsor’s conclusion that it was likely to be increasingly difficult for U.S. investors, including Grayscale XRP Trust (XRP), an affiliate of the Trust, to convert XRP into U.S. dollars. The Sponsor subsequently dissolved Grayscale XRP Trust (XRP) and liquidated its assets. If the SEC or a federal court were to determine that ZEC is a security, it is likely that the value of the Shares of the Trust would decline significantly. Furthermore, if a federal court upholds an allegation that ZEC is a security, the Trust itself may be terminated and, if practical, its assets liquidated.

Filed Aug 4, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-038346. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.