Headline: What is Chainalysis?

Date: 8/22/22

Body:  I have now done a goodly number of these blog posts on topics related to cryptocurrency, and I have noticed a pattern, or rather, a common thread.  When you look at consumer protection for physical goods and services, you will often run into an entity called Underwriter’s Labs.  (You’ve seen this logo on almost every hand dryer at every restaurant you’ve been in.)  There is a reason why this is so ubiquitous: Underwriter’s Labs has worked hard for decades to build up the trust that people and companies have in their products and testing.  (They have a really fascinating facility in Illinois where they scientifically test everything from hand dryers to ballistic materials.)  Their logo has become truly iconic. 

In a similar vein, I have seen one particular entity over and over within these topics.  Their name is Chainalysis and they seem to be trusted by each small and large financial and cryptocurrency company I have seen.  In most articles, the first study cited is usually a study undertaken by Chainalysis.   Their results, too, seem to be taken as bulletproof.  So, how did they obtain this aura of trustworthiness?   I think this will be quite a powerful story, for cryptocurrency-based businesses and others as well.

OK, so what do they do?

I have already spoken of faith in a currency as one of the most important attributes it can have.  Chainalysis has a mission and that mission is to help others develop systems that others can have trust in their results.  So, Chainalysis consults on the best ways to audit and improve the technical aspects of cryptocurrency and compliance with regulation.  Unsurptisingly, they work with banks and governments.  Both of these are easy to see that payments might need to be accepted in cryptocurrency, or regulation might have to be considered.   But, they also work with insurance companies that insure the safety and availability of cryptocurrency exchanges.  All in all, Chainalysis seems to be well-positioned to be a first-mover within the cryptocurrency space.

Located in New York by Jan Moller, Jonathan Levin and Michael Gronager, this company was founded in October of 2014, and now has just over 100 employees.  In addition to consulting work of all types regarding cryptocurrency, Chainalysis also develops its own anti-money-laundering (AML) software.  In the most recent round of funding, Salesforce CEO Marc Berioff made a substantial investment and this is now a $2 Billion firm.  It uses this economic muscle to compete with Ciphertrace (a CA-based firm) and Elliptic, a firm based in the U.K.  In an effort to be excellent corporate citizens, Chainalysis tracked down $1 Billion, which the government then quickly clawed back from the perpetrators of Silk Road.

How serious are the illicit activities?

It really depends upon who you talk to.  Per the CEO of Chainalysis, “We are involved in conversations with regulators in the U.S. and the rest of the world,” Gronager said. “What is important to note is that this space has changed a lot and the amount of criminal activity is dropping a lot. It’s getting more and more legitimate use cases.”  He has a point, as illicit activity made up only 0.34% of transaction volume, down from 2% a year earlier.

On the other hand, this is transaction volume, not value, so these transactions might be far larger in value and it would be very significant.   Further, it seems reasonable to me that people doing illicit activities within cryptocurrency know pretty well how to layer their transactions within legitimate ones, and probably other tricks.  Point is, I think this might be an undercount.  (In a rather hilarious sidenote, the CEO’s girlfriend had her account hacked.  He asked the hacker for proof that her account would be fixed once the ransom was paid.  The hacker sent 16 statements of other incidents with good outcomes.   Gronager  used this data to shut down the account and get the miscreant arrested.)  It is important to note that many of the detractors of Chainalysis dislike their activities because anonymity is most important to them. 

The Verdict

Very often it is said that  anonymity is the highest goal of most people who use cryptocurrency.  To me, this is belied by 3 observations:

  1.   Ethereum is one of the fastest growing cryptocurrency, and their transactions are anything but anonymous.
  2. The sale of NFT’s at extremely high values suggest that people are not interested in anonymity.    The most valuable NFTs are the ones that are most unique, and easy to remember.
  3.  Chainalysis is not the only company that does this work.   There are 4-5 other major companies around the world that are nearly equivalent, and everybody knows this.  Despite this, the use of cryptocurrency continues to grow.

It stands to reason that as cryptocurrency goes more an more mainstream, the anonymity hypothesis will be more thoroughly debunked.   As anonymity is seen as going down, I think faith in that system will go up, and this seems to be upheld by research done by Chainalysis.  Whether in USD or ETH, I think the prospects for this company are very good.  Mr. Gronager would seem to agree with me.   “In the past, there were internet companies and other companies. Then, every company became an internet company. I think every company will become a blockchain company. I want to bring transparency and compliance to every transaction. I want to make it a system everyone can actually use.”





Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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