Michael Gronager is both loved and hated in the cryptocurrency world. The Dane is one of the two founders of Chainalysis, a company that analyzes transactions on blockchains. These are decentralized databases with transactions that are maintained by cooperating computers. By tracking money flows on those blockchains, the company can in many cases show to whom cryptocurrency ends up.
Chainalysis’s software has contributed to, among other things, breaking down an international child pornography network and exposing several criminal marketplaces. The FBI uses this and the Dutch investigative services do too. And it is being deployed by crypto companies looking to tackle misuse of their services.
Blockchain technology was conceived as an alternative to the current money system. A way to make transactions worldwide, outside banks. A kind of cash, but for the virtual world. The transactions are visible, but who executes them is not immediately.
The assumption that you can trade anonymously on blockchains has been undermined by Chainalysis. And that is not always appreciated by Gronager. “Well, there are some loud screamers online about privacy,” he says. “The average consumer is not into crypto because of the perceived anonymity. They simply see it, in addition to shares and real estate, as an additional form of asset to hopefully generate passive income.”
His company now has more than 650 employees worldwide. The value is estimated at 8.6 billion dollars (7.9 billion euros). Last week, Chainalysis organized a conference at the Hilton in Amsterdam, which attracted many representatives from the police and judiciary.
It shows how much Chainalysis has become part of the established order. And it seems bitten to contain ‘crypto’. Especially since the spectacular bankruptcy of the American company FTX, which turned out to have virtually no accounting. “In terms of size (some $10 billion in losses), FTX’s fall was more of a nape than a shock. But it did cause concerned looks to be cast at the industry,” Gronager describes.
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Since then, US regulators have been remarkably active in fining and penalizing crypto companies. The first crypto law has just been passed in Europe, which will come into effect next year.
Are the times of the ‘wild west’ of crypto over?
“If so, it is a positive development. But I wouldn’t dare say it like that. Eighty percent of what we see is related to interest rates. You can’t really isolate crypto from that. What is happening now is especially striking in contrast to the hype of 2021. Interest rates were low then and everything tech and finance related was through the roof. Also the value of crypto coins.
“Investors moved into other things when interest rates went up. The value development of crypto coins went along with the shares in the tech index on Nasdaq. You can now treat crypto like tech stocks.
“It is healthy that the hype is over. When building the infrastructure for crypto, you don’t want investors who think they can get rich overnight.” He explains that for the long term not only the software needs to be further developed, but agreements are also needed. For example, about how proof of ownership of tangible property, such as a house or gold, is recorded on a blockchain. In this, it is inevitable that the crypto sector will engage with regulators. It is no longer an isolated technique or subculture. “It is about the long term, it may be our value transfer system of the future”
Blockchain technology is now 14 years old. At first, authorities did not understand how it worked. Do they have it now?
“Legislators have clearly learned. A major step forward is now being taken in the EU with the MiCar legislation that has been adopted. That is really a development. It creates clear frameworks, for example about the storage of currency, and therefore offers opportunities for entrepreneurs.”
According to Gronager, crypto entrepreneurs in the US are now looking at the EU with envy. Supervisors are very active, but at the same time it is too unclear what the rules are. “In America, there is currently a lot of confusion and a lack of coordination between various regulators. Where one regulator considers crypto as securities and applies the rules for securities trading. And the other sees it as goods, with different rules.”
Does the firmer attitude of authorities lead to less crypto crime?
“Our data shows that criminal money as a percentage of the total that is handled in crypto is declining. In absolute amounts, it will still increase somewhat.”
“The increase in Chainalysis data is mainly due to the fact that a Russian crypto exchange has been placed under US sanctions. As a result, cryptos traded there count as illegal.
What do crypto criminals mainly do at the moment?
“A trend is the hacking of infrastructure within the crypto world. North Korean state hackers are very good at it. An example is the hack in the game Axie Infinity, where 600 million dollars was captured.”
Many people will think: fine, let them destroy each other within that weird crypto world.
Yes, but that’s a bit simplistic. It is a substantial percentage of North Korea’s GNP, which buys missiles for it, which then fly over Japan. It is certainly also relevant outside the crypto world.”
Is the role of North Korean hackers still growing?
“No. We now see that stolen loot is no longer moved. The cryptocurrencies are still there, but it is not possible to cash them. We have a good network of people at crypto exchanges. We signal them to such a hack, so that they freeze the funds before they disappear.
“And if it is not possible to cash in loot, it is also less attractive to steal. It’s just like an iPhone. Why steal it if it’s locked?”
Where do the bad guys go? Are any jurisdictions benefiting from increased action in Europe and the US?
“Russia. But that was already the case. That applies to hackers: if you leave Russia alone, you can go ahead abroad.”
Were wealthy Russians using crypto to circumvent sanctions and channel their wealth?
“We have looked at that, but we hardly see it. This is because the total volume that is handled in the crypto world is too small to do so inconspicuously with large amounts. Everyone would see it immediately.”
Legislators are always behind the times. What should they look at now?
“Presumably to Decentralized Finance (DeFi).”
Many of the services that are still provided by (crypto) exchanges and banks, such as switching between crypto coins, can also be automated. More and more money is involved in that branch. That makes it difficult for investigative services.
“They can now ask a crypto exchange for data from suspicious customers. Or freeze an account. And there you no longer have a ‘throat to squeeze’, so to speak.”
How do you expect the crypto sector to develop in the coming years?
“The real innovative thing about crypto and blockchain is what I call ‘digital scarcity’. The ability to have something digital that you can’t copy, but you can move.
“If I send you a picture from my phone, I will not send you that picture, but a copy of that picture. I still have it on my phone after that. On the blockchain it works that if you send something to someone else, you no longer have it yourself. You really moved it. And that’s important because that’s how you express value.
“You could say that the TCP-IP protocol, or the Internet, was the perfect way to transfer information. So here you have a perfect technology for expressing value. I expect we will do that more and more. That does not mean that we are all going to speculate in cryptocurrencies now. You do get a financial system with faster transactions that are executed seamlessly. And that is much more accessible.”
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A version of this article also appeared in the May 15, 2023 newspaper.