Although many people still think that cryptocurrencies are a tool of crime, this is not true. The blockchain world is extremely transparent, and anyone who knows how to search it can find out almost anything about virtual currency transfers. This is exactly what Michael Gronager is doing with his company Chainalysis. The FBI and the Israeli secret service rely on it, and its clients include large banks and fintech startups, including the biggest crypto players. Few companies have such influence in the realm of Bitcoin and its competitors.
In October 2019, detectives and secret service agents from a total of 38 countries, including the Czech Republic, conducted a large-scale crackdown on the spread of child pornography. Over 300 people were arrested for uploading, downloading and distributing objectionable content through the darknet site Welcome to Videos. It had over a million visitors and several thousand paying customers worldwide.
They weren’t very careful about how they shared the problematic videos and sent each other payments via Bitcoin. So – they thought that was enough, but they had no idea that the police had hired Jonathan Levin and Michael Gronager, the founders of the analytical company Chainalysis, which specializes in the investigation and tracing of blockchain transactions, to help them. And that they are really good at it, hundreds of arrested pedophiles soon found out.
“Having a hand in shutting down the largest online child pornography site is something that stands out and something I’m proud of.” said Gronager last June in an interview with Philippe Botteri and Amit Kumar, partners of the famous fund Accel, which then invested in his startup and valued it at $4.2 billion. But that is no longer true today – in May of this year, Accel, Blackrock or GCI sent an additional $170 million to Chainalysis, and the company’s value doubled. Even though crypto is experiencing a significant cooling of interest, Gronagera et al. like it doesn’t matter. “Everyone is interested in what we do,” he boasted in a spring discussion with Matt Turck of the FirstMark fund, adding: “We currently have 600 people, but by the end of the year we will have a thousand. I’m in hyper-growth mode.”
So what does Chainalysis do that there is such a demand for it? Simply put, it helps government authorities, financial institutions and companies from the crypto world understand what, who, to whom, how and why they sent. With their help, the Israeli Mossad cuts off the flow of funds for Palestinian terrorists, the FBI relies on their tool called Reactor to investigate hacking attacks or money laundering.
After all, American agents also mentioned the company’s analysis during a recent raid on the Tornado Cash cryptocurrency mixer. Chainalysis experts—or rather, their software products—have been called upon to shed light on most high-profile crypto scandals of late, such as the attack on cryptocurrency exchange platform Ronin this spring.
But it’s not just an investigation, banks hire Gronager’s company, which is based in New York, to help them understand how the booming world of crypto transactions actually works and how to navigate it. And how to jump into it safely. “Banks perceive that crypto adoption and its price is growing. A lot of rich people come to them and ask them how to deposit 10 million in ethers and ideally it should be directly in the bank they are used to using. But that bank does not offer any such service as a safe deposit box. And so the interest in this service is growing.” Gronager described the dilemma faced by many banks that turn to him.
The principle of blockchain is decentralization
At the same time, Chainalysis also helps players from the crypto world, its clients are, for example, the largest manufacturer of hardware wallets Ledger, the investment application Robinhood or exchanges such as Coinbase. Basically, they supervise the so-called KYC policy know your client. This means that their program monitors from whom and where bitcoins or ethers and other cryptocurrencies go, in order to prevent someone from using their account or their device for nefarious purposes.
All of this is possible due to the fact that the world of blockchain transactions is, contrary to how the lay public perceives it, very transparent. And if someone knows how, it is very easy to find data in it. In short, the vast majority of cryptocurrencies are traceable, as information about who bought them and when is stored in the blockchain.
And that’s exactly what Chainalysis does. And that’s exactly why some people from the virtual currency community don’t like him, because they consider his business to be a violation of the libertarian and cypherpunk principles that were behind the creation of Bitcoin. “I think it’s fundamentally and morally wrong for someone to work for a company like that,” magazine quoted, for example Fast Company by renowned Bitcoin expert Andreas Antonopoulos.
I decided to solve the problem of how to understand the flow of funds in the world’s most transparent financial ecosystem.
But Gronager and his partner Levin, whose essential contribution to uncovering the illegal porn portal Welcome to Videos described in detail by a magazine reporter Wired Andy Greenberg in the book Tracers in the Dark, they see it exactly the opposite – according to them, someone who brings order, rules and traceability to the blockchain world is needed so that crypto can become something accepted by mainstream society. So that it can become a new financial system that will be trusted by everyone, not just enthusiasts and crypto-anarchists.
After all, Chainalysis was created precisely on these foundations. Danish native Michael Gronager got acquainted with the crypto world around 2011, when he was still working in Europe as a project manager for several scientific institutions and raising money for research programs. He was also an amateur programmer and Bitcoin caught his attention as “new technological paradigm”.
And so he went to New York for a conference, where he met Jesse Powell, with whom two years later he launched his first multibillion-dollar startup – the Kraken crypto exchange, which is still one of the main players in the field.
Jesse Powell at a staff lecture
Parallel to how he and Powell were building Kraken, however, Gronager was thinking about the security of cryptocurrency transactions. And when at the turn of 2013 and 2014, the dominant Japanese crypto exchange Mt. Gox and it came to light that hundreds of thousands of bitcoins worth hundreds of millions of dollars had gone missing, he realized that this was a business opportunity. And since there were few people who understood blockchain and were willing to cooperate with the police, who were totally dabbling in the field, Gronager got to work. Thanks to him, it was possible to find a considerable part of the lost bitcoins in the following years. And on the basis of this initiative, the company Chainalysis was created, which today functions as such an unwritten regulator of the crypto world. Her regular industry reports also have a big impact.
Gronager likes to say that he wrote the basic code for his company’s first program on a flight from America to Europe: “I decided to try to solve the problem of how to understand the flow of funds in the world’s most transparent financial ecosystem.” After all, that’s the mission it’s still on today, and in addition to helping governments around the world hunt down hackers and digital spies, it also helps banks or rich people guard and understand their crypto-wealth. But that’s not all.
If you ask him where he will go next, he is already quite clear – although he himself did not understand the mania surrounding NFTs and did not invest in them, this is the area where Chainalysis will move. As he explained to Matt Turck: “NFTs, games, cards and much more is a business that is not regulated in any way. Some products are simply sold on the blockchain. But it will be necessary for someone to understand it, companies will need to understand their clients and how they use this platform.”
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Michael Gronager moved from Copenhagen to the USA, where he commutes between New York and Miami. He might have better chances of getting good marketing and sales staff in Silicon Valley, but the East Coast is home to key government institutions that Chainalysis works for. And at the same time, from there it is closer to the old continent, where he travels more and more not only for his family, but also for business, as Chainalysis expands to other countries. But with all this, he doesn’t forget to be very alert in private, as his girlfriend can confirm.
Two years ago, at Christmas, a hacker contacted her saying that he had blocked her access to her social networks and wanted a hefty $700 to unlock them. So Gronager did what he does best – he started searching. During a conversation on WhatsApp, he extorted a few details from the attacker about his other attacks, thereby also getting access to older bitcoin transactions and the addresses of his cryptocurrency accounts, which he uses for his actions.
Gronager immediately contacted exchanges that are clients of Chainalysis to freeze these accounts. He then sent the ransom, but he knew that he would get the money right away, because the address where the money was going was already blocked by that time. Unbeknownst to the hacker…