Title: Zcash in Compliant DeFi: Viewing Keys, ZSAs and Private Settlement

Introduction

Privacy in financial systems is shifting from blanket secrecy to selective disclosure: organizations want confidentiality for competitive reasons but must still provide auditable evidence on demand. Zcash (ZEC), with its shielded pools and viewing-key primitives, and the proposed Zcash Shielded Assets (ZSAs) extension (targeted for the NU7 workstream), offers a privacy layer that supports that balance. Recent protocol improvements (NU5 / Halo 2) and 2025 market interest have moved Zcash from academic curiosity to a practical tool for compliant DeFi workflows (CoinDesk, Nov 3, 2025).

What changed technically (brief)

NU5 (Orchard and Halo 2) eliminated the need for a trusted setup and materially improved prover performance and compact proofs. That makes server-side and custodial proof workflows practical. Building on that base, NU7 / ZSAs is a proposed extension workstream to enable shielded tokens — private assets whose issuance and transfers live inside Zcash’s shielded model. NU5 is deployed; NU7/ZSAs are in draft community workstreams and design discussions.

Why this matters to DeFi teams

A privacy layer that supports selective disclosure allows treasuries, payroll systems, and OTC desks to protect counterparty details and strategic data while retaining the ability to produce audit evidence for regulators, counterparties, or internal compliance teams on demand. In practice, this is the model many institutions accept: not full anonymity, but controlled, auditable confidentiality.

Viewing keys, payment disclosure and audit-on-demand

Viewing keys let an owner separate spending authority from visibility. A viewing key grants read access to shielded-account activity (amounts, memos if present, and incoming/outgoing transactions) without providing spend authority. A common specialized form is the Unified Full Viewing Key (UFVK), which a wallet or node can use to index all shielded activity for a given account without holding spend keys.

Two practical disclosure patterns map directly to business workflows:

• Auditor access (UFVK): generate a UFVK per institutional account and give it to an auditor for a time-limited review. The auditor runs a node or wallet with the UFVK to reconcile receipts and balances without touching spend keys.
• Payment disclosure (single-payment disclosure): the sender produces a verifiable, one-off disclosure proving that a specific payment occurred to a shielded receiver without revealing unrelated transactions. This is less invasive than handing over a UFVK and is useful for proving delivery in OTC or payroll flows.

These primitives power payroll (proof each employee was paid), OTC settlement (proof of delivery/receipt), and DAO treasuries (auditable, privacy-preserving expense trails).

Gateway pattern for private settlement (developer guide)

This pattern shows how a custodial gateway can settle privately on Zcash while reflecting state on a public chain (for example, Ethereum). Briefly: the gateway holds ZEC in shielded notes and mints on-chain receipt tokens to represent custodial balances.

1. Deposit and receipt minting: when a customer deposits ZEC to a shielded address controlled by the gateway, the gateway mints an on-chain receipt token (ERC-20/ERC-721) as the receipt of custody. The receipt is a public pointer to the off-chain shielded holding.

2. Binding metadata and proof of settlement: the gateway keeps binding metadata locally (txid placeholder, memo, UFVK, signature). To prove settlement on demand, the gateway can either: a) share a UFVK or time-limited viewing-key credential with the counterparty/auditor (interactive, broad visibility but simple verification), or b) publish a non-interactive attestation that links the on-chain receipt to a Zcash proof or a payment disclosure generated by the sender (less exposure, verifier checks the attestation/assertion). Each method has trade-offs: shared UFVKs expose more history and require careful access controls; attestations require a verifiable attestation format and revocation/verification infrastructure.

3. Outbound settlement: when the gateway moves funds (payout or OTC), it uses shielded transfers. Receivers may receive on-chain receipts or direct ZEC depending on KYC and settlement agreements.

Developer considerations and hardening

• Key custody: keep spend keys in an HSM or air-gapped signer; run a separate detection node that holds viewing keys only for deposit monitoring.
• Address hygiene: use ephemeral shielded addresses or per-counterparty/diversified unified addresses to limit linkability. Recent wallet primitives and node changes improve change handling and reduce leakage.
• Proof and attestation infrastructure: design attestation formats and verification flows (what does a verifier need to check?). Consider non-interactive, signed attestations that reference a specific payment disclosure or proof.
• Operational separation: surface viewing-key management in the admin UI, including time-limited credentials and revocation flows. Log disclosure events (who received a key/attestation, when, why) for auditability.

Proof stacks, operational constraints and UX

Modern proofs (Orchard + Halo 2) are succinct and efficient to verify, enabling server-side proof generation and recursive composition paths. That said, proof generation still consumes CPU and memory. Practical constraints:

• Batch proofs: large custodians should batch proof generation or use dedicated prover servers (oracles/relayers) to avoid latency spikes during payroll runs.
• Wallet UX: default-shielded wallets reduce user friction, but enterprise integrations must expose viewing-key lifecycle management (issuance, expiry, revocation) in the administrative UX.
• Memo and metadata: memo fields can leak data if used naively. Treat memo content as a policy item and avoid embedding sensitive identifiers unless they are encrypted and managed under the same disclosure controls.

Risks: bridges, liquidity, linkability and regulation

• Bridge risk: cross-chain receipts or wrapped assets that rely on custodial or optimistic bridges introduce counterparty risk. Favor atomic settlement or Merkleized proofs when possible; otherwise, model counterparty risk explicitly.
• Liquidity and UX: private ZEC liquidity is growing but can be thinner than transparent pools. For large OTCs, market makers may require KYC or off-chain settlement windows. Model slippage and have fallback settlement plans.
• Linkability: reuse of addresses or poor change handling can reduce anonymity sets. Enforce address hygiene and monitor reuse metrics.
• Regulatory: selective disclosure is generally easier for regulators to accept than blanket anonymity, but rules vary. Treat viewing-key disclosure as a legal control: maintain logs of disclosures (who received keys/attestations, purpose, time-limited scope, revocation events) and include these logs in compliance playbooks.

Phased rollout plan (practical timeline)

1. Discovery & Legal (0–4 weeks): map use cases, regulator expectations, draft viewing-key policy and incident playbook.
2. Development & Sandbox (4–12 weeks): build gateway prototype with shielded deposit addresses, a detection node (viewing-key only), HSM-protected spend keys, and on-chain receipt minting on testnet.
3. Pilot (12–20 weeks): run payroll/OTC pilot with vetted recipients; issue time-limited UFVKs for auditors; measure latency, proof costs, and reconciliation time.
4. Expand & Harden (20–36 weeks): add RBAC, key rotation, automated proof generation, monitoring, and formal SOPs for travel-rule disclosures.

Monitoring checklist & business metrics

Track operational and compliance metrics: settlement latency, proof-generation CPU/memory and batch sizes, number of viewing-key disclosures and audit requests, anonymity-set proxies (percentage of ZEC shielded and address reuse rates), and compliance KPIs (audit turnaround, percent of payouts with required disclosures, regulator inquiries).

Conclusion

Zcash offers a practical path for teams that need confidentiality without sacrificing auditability. Viewing keys and the proposed ZSAs provide primitives for private payrolls, OTC settlement, and treasury operations. The combination that matters is engineering discipline (hardened custody, prover infrastructure, address hygiene), deliberate UX choices (managed viewing-key workflows and ephemeral addresses), and clear legal procedures for disclosure and logging. For TokenVitals customers or teams evaluating token health, monitor shielded adoption, proof-cost trends, and bridge exposure to judge whether privacy is delivering measurable business value without increasing compliance or operational risk.

References

• CoinDesk Research — "Inside Zcash: Encrypted Money at Planetary Scale" (Nov 3, 2025).
• CoinDesk Markets — "Privacy coin bid continues as Zcash goes on lifting" (Nov 10, 2025).
• AInvest — "Zcash ZEC price surge / resurgence" (Dec 2025).
• Electric Coin Company — "Explaining Viewing Keys" (May 18, 2020).
• Zcash ZIPs / NU5 specification (ZIP 252).
• Zcash community discussion — "ZSAs in NU7" (community updates and PRs).
• ECC blog — zcashd updates and viewing-key APIs (wallet change handling).