The world of blockchain & cryptocurrencies is construed to be opaque.
That the Crypto space is riddled with bad actors and prone to be used by them to move ill-gotten wealth across jurisdictions, bypassing the strict compliance procedures employed by traditional financial institutions, is a widely held belief.
As the blockchain is essentially underpinned by a distributed public ledger, this couldn’t be farther from the truth. Transactions aren’t opaque and instead extremely visible and transparent.
The only issue then is that traditional institutions do not have the understanding of using this public data given the privacy-preserving features of cryptocurrencies. Enter Chainalysis, who have developed tools to do just that.
If you are interested in the existential question as to how the trust deficit between governments / traditional finance & cryptocurrencies can be removed, read on!
1. Chainalysis: An Introduction
1.1. The Company
Chainalysis is a blockchain data platform, research outfit, and analytical software provider. They aim to develop and provide data and tools to government agencies, and private sector organizations in traditional finance & cybersecurity firms.
This data, research & tool kit helps to extend the facets of the investigation, compliance, and market intelligence to the blockchain space. The Company suggests on its website that the work they do has been instrumental in solving several high-profile criminal cases.
The Company was founded by Micheal Gronager (formerly COO at the Kraken cryptocurrency exchange) & Jonathan Levin (an economist by training with several years of consulting experience with Governments & FTSE 100 companies). Apart from them, the Company boasts a global workforce from different nationalities and experience from a wide range of sectors.
The most striking investment though is the one from GIC which is an arm of the Singapore government that manages its foreign reserves. It is pertinent to note here that Singapore has been very welcoming of the Crypto space, but has equally been alert to ensure its rightful use. This investment by GIC seems to be a step in that direction.
2. Chainalysis: Coverage & Product Suite
2.1. Solution Verticals
The Company states that it covers the entire crypto space and all the assets therein. This is maybe impressive to those who don’t understand blockchain architecture. For those who do, every crypto asset and transaction exists on the blockchain, so no surprises here.
The broad verticals that the company has defined for itself are as follows:
- Investigations – This is geared towards criminal organizations who use cryptocurrencies to move funds between jurisdictions and how they can be contained;
- Compliance – This is geared towards creating a compliance environment around cryptocurrencies and digital assets that can be used for the purposes of creating early warning systems;
- Defi – This is geared towards institutional compliance & risk management to ensure that Defi protocols do not end up as investment vehicles for bad actors;
- NFTs – This is geared towards NFT issuers, collectors, traders, and marketplaces with a view to providing risk management tools.
This is primarily an intelligent tool that helps follow the money from one address to another and across multiple blockchains and cryptocurrencies. This is then combined with real-world data, which helps identify the individuals & entities involved.
KYT or Know Your Transaction is an intelligent tool that helps map transactions with negative screening lists (like the OFAC) thus signaling out the high-risk activity and for Defi protocols in particular to take action.
2.2.3. Address Screening
An intelligent tool that acts as the first line of defense by automatically screening the address login with a Defi protocol against negative screening lists or proprietary data that marks such addresses as being high risk.
2.2.4. Business Data
Essentially blockchain data portal that can be analyzed by crypto protocols to create better products while managing risk. It is primarily a tool for business insight through data mining.
This product is consumer driven with a focus on using blockchain data to manage risk in interacting and investing in / with crypto businesses and protocols using on-chain activity. The idea is to verify claims made by these businesses.
2.2.6. Free Sanctions Screening
This is an API-based tool and an amalgamation of their other offerings into a limited optionality service. The idea is that it helps Crypto businesses to deploy compliance screening at their end & reduce risk from bad actors.
Given some tools are proprietary and understanding the cost of creating an in-house compliance program can be prohibitive, the Company has developed a service architecture that helps in furthering the cause of building trust in blockchains. These include:
- Investigations & Special Programs whereby the Company reverts with insightful forensic analysis for cybersecurity firms in a bid to help contain breaches and recover stolen funds if any;
- Crypto Incident Response is similar to the service above, except that this is a rapid response service geared towards the recovery of stolen funds;
- Training & Certifications to help bridge the understanding gap between traditional finance and Crypto – mostly tailored B2B programs;
- Chainalysis Academy is a quick start to short courses for the general public.
As per the Company, 850 organizations in 70 countries are using one or more of its products and services. Some of the major names include:
- The IRS in the United States of America
- British global banking giant Barclays
- The Commonwealth Bank in Australia
- The Swiss Bank SEBA
- E’Toro – the financial services app
- The Algorand Blockchain
- The Defi protocol BlockFi
- Jack Dorsey’s payments solution Square
3. Chainalysis – Opportunities
The intent of this post was to introduce to our readers the underlying trends in the Crypto industry and how Chainalysis trying to shape that future. There is no product review to leave an opinion on or an investible asset to recommend you to invest in.
However, as always, research showed up other opportunities and I felt obligated to share those with you in terms of how you can benefit personally. Chainalysis has a training program and a partner program that will help you advance your crypto knowledge and potentially become part of their movement as an entrepreneur furthering the cause of creating trust in blockchains. I would recommend Compliance as a career choice in Web 3 for those of you who are interested & both these initiatives are excellent starting points.
I remember attending and training a few years ago dealing with improving the compliance infrastructure in traditional finance. This is before it went all hip. The movement created millions of opportunities in terms of product development institutions, institutions doing advisory & jobs for users of this data. With Crypto, it won’t be any different, and I expect this to be a major hiring zone in the future.
4. Chainalysis – Conclusions
The interesting thing, for me personally, is that all the data is available on-chain. It is the insights that data mining can provide and the advocacy that Chainalysis is undertaking which has helped them make a business model that top-notch venture capital firms are ready to back and customers are ready to deploy.
Generally, enhanced compliance has not turned away customers. That being said, the big traditional financial institutions have been losing business to tech-focused start-ups. The reason is that in today fast-moving world, the generation of today just can’t afford the slow pace that these old men of the financial sector have become synonymous with.
The Crypto industry is still early & expected to become a major asset class going forward given the transaction speeds and lack of red-tapism. As it becomes mainstream, the demand for compliance products will only increase as Governments look to regulate the sector against bad actor