This spotlight post was conducted by Blockdata and sponsored by Chainalysis.
New York-based Chainalysis was started with a vision for a world in which cryptocurrencies and tokens are part of the bedrock of the financial system, and safer even than traditional finance and fiat.
In late spring of 2021, the FBI was mired in an investigation that had shut down the largest oil pipeline in the United States.
Investigators believed DarkSide, a Russian cybercrime group, was the organization behind the ransomware attack that had paralyzed Colonial Pipeline, a major supplier of gasoline across the east coast. Under FBI supervision, Colonial had paid a ransom totaling $4.4M in bitcoin.
To retrieve the money, the FBI raced to trace the funds as they moved through various crypto addresses. To do so, they leveraged software created by Chainalysis, an NYC-based company that is a leader in blockchain-based compliance work. With Chainalysis’s help, agents were able to seize millions in payments and identify DarkSide affiliates.
Today, the same software, based on predictive algorithms that identify entities and assess risk on blockchains, is helping traditional financial institutions and other organizations navigate the crypto ecosystem safely.
Above: Chainalysis worked with the FBI to trace $4M+ in bitcoin that was shared between the Russian cybercrime group and its affiliate
Through robust crypto data collection and analysis software, Chainalysis is equipping financial institutions and government agencies with the information they need to make data-driven decisions on how to best enter the crypto arena. For businesses already active in the crypto ecosystem, Chainalysis offers compliance solutions that help them navigate the constantly evolving regulatory landscape.
Blockdata sat down with founder Michael Gronager to hear how Chainalysis is making blockchain technology more transparent for “crypto-curious” banks and asset managers.
The origin of Chainalysis: making blockchains trustworthy
When he began working with bitcoin in 2011, Michael’s background in data science helped him see the paradigm shift in computing crypto would spark. Yet Michael recalls that during that time, bitcoin was completely written off in the banking and corporate worlds as a tool for criminals and tax evaders.
Much of this skepticism and aversion to crypto was due to the fact that little information could be easily drawn from the on-chain flow of funds within the bitcoin ecosystem.
Michael knew the potential that blockchains had to level the playing field in the world of finance and for ordinary people around the globe. Seeking to protect crypto’s reputation on the world stage, he set out to create an algorithm that would provide transparency to this burgeoning technology.
“I thought about the core algorithm I would need to build to be able to index and search and build essentially — a map of crypto” – Michael Gronager, CEO and co-founder of Chainalysis
On a plane from San Francisco to Copenhagen in 2014, Michael crafted 80 lines of code that he hoped would solve a core problem in tracking crypto fund movements. To be effective, the algorithm had to establish whether a transaction between two addresses was connecting two separate entities or if instead it was one person or organization moving funds on its own. It wasn’t until he reviewed his results a week later that he realized he had made a big breakthrough.
Bitcoin’s blockchain ledger had already made it very easy to access every transaction happening around the globe, but without additional code it was hard to collect and link those transactions to their sources. As Michael added more functionalities to his algorithm, he built a web of entity interactions with the vast amounts of transaction data he was tapping into. As he did so, potential business ideas began to flow.
In 2014, Chainalysis was founded with the mission of “building trust in blockchains.” Today, the company has over 700 customers in more than 70 countries, with the most recent growth coming from compliance and crypto strategy teams at major financial institutions.
Chainalysis has raised north of $500M in the 7 years since its founding and is still growing at a fast clip. Today, the company has nearly 700 employees and 148 open positions.
Beyond enlightenment: how banks and other financial institutions can build a real crypto strategy
In recent years, banks and other mainstream financial institutions have warmed up to the use of cryptocurrencies. With crypto at a market cap of $1.23T, it’s only a matter of time before every finance business has to develop its own crypto strategy to thrive, or simply survive.
To describe the varying levels of crypto adoption in the market and among regulators, Michael has developed a simple framework based on five buckets:
- Ignorance, or complete unawareness of crypto’s potential
- Denial, or preventing their customers from buying into crypto
- Fear, a phase where active efforts are made to try to shut crypto down
- Enlightenment, where institutions realize that crypto is here to stay
- Curiosity, where businesses begin to think about building a real crypto strategy
Chainalysis seeks to work with institutions in the “enlightenment” and “curiosity” phases of the spectrum. Chainalysis works across the ecosystem, with government agencies, banks, and businesses. Its clients have realized crypto’s potential and want to partner with a company that knows the ins and outs of the industry.
As a bank executive said to Michael recently, “It’s not that we are entering a new market. It’s our market that has changed.”
The image above, is taken from the recent Chainalysis Crypto Maturity Model report. The white paper offers financial institutions a clear route to get started with crypto. It’s a roadmap for iteratively adopting crypto and launching new product lines.
At this point, as they move beyond curiosity and begin to build, mainstream financial players see opportunities open up as they look to straddle greater levels of maturity and activity, as shown above.
At this point, as they move beyond curiosity and begin to build, financial institutions see opportunities open up as they look to straddle greater levels of maturity and activity, as shown in the roadmap above.
Chainalysis commonly sees the following use cases across investigations, business intelligence, and market research:
To start with, financial institutions get onboarded to the Chainalysis Know Your Transaction (KYT) product, which provides them the insight needed to ensure all crypto activities meet local and global regulatory compliance standards. Alerts can be easily set for a variety of triggers associated with risk and illicit activity.
Chainalysis-partnered banks and asset managers often face an information gap and want to become more familiar with the ecosystem. Here, the Chainalysis Kryptos product helps by providing detailed metrics on the crypto landscape, from transaction volumes to asset benchmarking.
Lastly, Chainalysis’s Reactor is the investigative tool for enhanced due diligence. This enables investigators and compliance professionals to do a deeper dive into activity ranging from scams to hacks to darknet markets and ransomware. Using the search function, users can investigate a particular address or transaction and follow the source of funds, including cross-chain transactions.
Compliance in crypto: Why traditional anti-money laundering approaches and tech won’t work
Something that traditional financial businesses often inquire about is how AML (Anti-Money Laundering) differs in traditional finance vs in crypto. Chainalysis CEO Michael breaks down the difference.
“AML Compliance for banks are focused on transactions that occur within their walls,” he says. “Crypto AML, in contrast, enables investigators to trace origins of funds throughout the entire blockchain; giving more accuracy and transparency into risk.”
Chainalysis’s products dig deep into their vast amount of data to investigate the real world identity behind crypto transactions. They’re essential tools for any institution that seeks to crack down on fraud and adhere to compliance standards in this next generation of finance.
Web3 and what’s next for Chainalysis’s customers
There’s still a way to go before traditional finance fully embraces the power of blockchains, which means Chainalysis has lots of work left to do. By being a leader in crypto compliance and risk management, they are positioned to be an ideal partner in the coming wave of institutional finance crypto adoption.
Already, decentralized finance, or DeFi, applications have powered a large volume of crypto activity in key markets, such as Central, Northern, and Western Europe; Central and Southern Asia; and North America.
The above image is taken from Chainalysis’s most recent Geography of Cryptocurrency Report, which contains 133 pages of data, maps, and indices on crypto and Decentralized Finance adoption globally. DeFi, the report notes, is driving more than a 35% share of crypto activity in key markets.
On another note, cybercriminals are only going to get smarter. Thankfully, Chainalysis is at the forefront of understanding and eliminating any possible liabilities their partners may face. As crypto becomes more mainstream, staying one step ahead of bad actors will be vital.
Michael foresees a time when blockchain technology moves beyond its immediate finance-related use cases and evolves to provide different forms of utility and value to society. This means a more realized “web3,” where blockchains power things like NFTs, video games, virtual worlds, and more. It’s impossible to predict exactly what use cases may develop, but with its “map of crypto and ground-truth data,” Chainalysis is poised to offer an analytics layer across emerging applications.
Already, Chainalysis partners with other vendors across compliance, software sales, and crypto consulting to meet clients’ needs. As web3 evolves from conjecture to business reality, Chainalysis will have visibility on the underlying blockchain tech and its participants. That data will be extremely valuable to the right people.