CEO Michael Gronager on Chainalysis’ New $30 Million Funding Round, and Why Financial Privacy Is Not Either/Or CEO Michael Gronager on Chainalysis’ New $30 Million Funding Round, and Why Financial Privacy Is Not Either/Or
02.13.2019

The past week-plus has held a string of excellent news for the blockchain and cryptocurrency industry, including a high-profile acquisition and a big new venture capital fund. The flurry of good tidings also included a $30 million Series B funding round for Chainalysis, a firm that tracks blockchain data to help fight fraud, money laundering, and other abuses.

But isn’t there something a bit awkward about celebrating New York-based Chainalysis as a crypto success? In addition to helping exchanges reduce their risk, the company contracts with governments and law enforcement to fight crypto crime. That’s hard to critique as far as it goes, but privacy has been a core appeal of crypto since the bitcoin whitepaper (see part 10). Is Chainalysis’ $30 million in new funding actually a good thing for cryptocurrency, or could it help erode the technology’s potential as a bulwark against government and corporate overreach?

To find out more, we called Chainalysis CEO and founder Michael Gronager. First, the upside: Gronager says his company’s Know Your Transaction (KYT) software makes it easier for crypto exchanges to establish durable relationships with banks, because it can flag known money launderers and other regulatory risks. “We’re showing how [a bank] can onboard a crypto exchange in a safe way and a compliant way,” says Gronager. Like it or not, a long string of exchange disasters and accompanying  systemic uncertainty have shown how important it is to play nice with banks.

Is Chainalysis’ $30 million in new funding actually a good thing for cryptocurrency, or could it help erode the technology’s potential as a bulwark against government and corporate overreach?

Chainalysis keeps an eye out for crooks using automated fraud detection methods that Gronager says are “comparable in many ways” to those already used by banks and credit card issuers. In the absence of user identity information, Chainalysis creates “personas” tied to wallet addresses, then traces their behavior and connections through the public ledger. “We look at the [transaction] data and create personas that we describe as high or low risk,” says Gronager. If you transact with a “high-risk” persona, your own address or persona might be inviting greater scrutiny when you then interact with an exchange.

Gronager says demand for that service helped Chainalysis achieve “amazing growth, mainly from the private sector,” in 2018. But the company also wants to help governments and law enforcement track crime through the blockchain. For now, there’s actually relatively little of that: a Chainalysis report from January found that ransomware, terrorist financing, and darknet markets together add up to “less than 1 percent” of bitcoin activity, down from 7 percent in 2012.

“Compared to cash,” says Gronager, “I think we’re doing pretty well.”

Better monitoring may have contributed to that decline. Transparency may even be key to crypto’s long-term, because it exposes misbehavior harmful to the developing sector. Most recently, for instance, hard-to-explain transfers by the collapsed Canadian exchange QuadrigaCX have raised serious questions that law enforcement and regulators will likely pursue. That kind of scrutiny ultimately helps discourage bad actors, and leaves the rest of us safer.

But Gronager defends the importance of transparency and tracking in terms that might give hardline privacy advocates pause. “When it comes to privacy, it’s not either/or,” he says. “The balance you have with Ethereum and bitcoin is, you don’t have any identity tied to your persona . . . It enables you to have a decent amount of privacy in your transactions, and at the same time you actually enable, at a cost and with some time, law enforcement investigations.”

In other words, the pseudonymous-but-traceable nature of a public ledger provides enough of a barrier to protect the privacy of average users, while still making it possible to track large-scale money launderers or other bad actors. Of course, there’s a tension to that framing, since the kind of automated data-mining Chainalysis is trying to refine is exactly what would make it practical to keep tabs on larger numbers of smaller-scale users. That could threaten socially useful edge cases, including the use of bitcoin as an alternative to mismanaged national currencies, or as a way to fight oppressive regimes.

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Gronager, though, seems focused on mainstream adoption, and argues that some of crypto’s most promising use cases depend on some level of transparency. As an example, he says he expects stablecoins to become increasingly important. “They have a lot of promise in not being securities . . . You can potentially do wire transfers worldwide in a split second.” Crypto advocates have been saying for years that such applications could have huge benefits for refugees, migrants, and the global unbanked—benefits which Gronager suggests could be threatened if crypto remains the Wild West.

“That’s where we come in,” he says, “ensuring that this can remain compliant. We definitely want to support that community.”

The idea that privacy and compliance are two opposing priorities may prove misguided – the new cryptocurrency Beam, for instance, is a ‘privacy coin’ working to build opt-in reporting functions. But if bitcoin or Ethereum fulfill their promise of broad adoption while remaining transparent, there will always be demand for what Chainalysis is selling.