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Michael Gronager didn't set out to help law enforcement catch crypto criminals. An early convert to the world of blockchain and decentralized finance, he co-founded the San Francisco-based cryptocurrency exchange Kraken in 2011. At the time, Gronager was excited by the concept of "digital scarcity," the idea of creating a digital object that could be moved but not copied, and the underlying concept behind cryptocurrencies such as Bitcoin. Gronager still believes blockchain will fundamentally change the way money changes hands, paving the way for a faster, safer financial system.
Soon after Kraken launched, Gronager realized that regulatory compliance would be a challenge because existing systems didn't work at the scale of digital money. In those early days, cryptocurrencies were often associated with online drug deals and other shady behaviors. Then, in 2014, Russian hackers stole an estimated $460 million from Tokyo-based Bitcoin exchange Mt. Gox, and the platform collapsed, casting doubt on the future of the entire industry.
At Kraken, Gronager was in charge of looking into what happened to Kraken funds that were held with Mt. Gox. He drew on his pre-Kraken background in physics and big data science, and wrote the first code for what became a new startup--tools for following the "digital breadcrumbs" that make it possible to re-create transactions and identify the wallets and users associated with those transactions. Essentially, he found ways to trace what was previously believed to be untraceable.
He realized that financial institutions and government agencies would be interested in the tools he was developing, and by the end of 2014, had launched the New York-based blockchain analytics firm Chainalysis with two co-founders.
Gronager characterizes the kind of people who've been drawn to working at his startup as a mix of former government workers and crypto true believers--"govies" and "defi degens"--drawn in by the mission of "safeguarding the future of finance." He recalls the last company-wide gathering, in Washington, DC, in 2022. "Seeing how everyone, even though they're seemingly quite different, kind of fit together and actually all feel that we are moving things in the same direction, that was very moving," he says.
Blockchain anaylsis software, research, and data turned out to be big business, too. Chainalysis has raised more than $500 million in investment capital, and was valued at $8.6 billion in 2022. Even as competitors like Elliptic and TRM Labs have sprung up, Chainalysis has grown to about 900 employees, and it has more than 1,200 customers in 70 countries. From the federal government alone, the company has secured at least $73 million in contracts since 2015, with agencies including the Federal Bureau of Investigation and the Internal Revenue Service.
"When you go home every day, there are things that we know that we've been part of," he says. "It is just more exciting than building office supplies software, as I sometimes call it when I'm trying to be a little bit naughty with friends in that space."
After Sam Bankman-Fried's cryptocurrency exchange, FTX, collapsed in 2022, bankruptcy lawyers looked to Chainalysis to help locate investors' funds--and it's recently been reported that investors are expected to be repaid in full. Chainalysis employees worked with investigators in South Korea to break up a ring producing child sexual assault material, a case that resulted in minors being rescued and hundreds of arrests. They've also trained investigators in Ukraine to identify Russian entities using cryptocurrencies to evade sanctions. The company has also drawn critics, who question whether its software is accurate enough to generate evidence in criminal trials.
Altogether, Chainalysis says it has helped authorities track and seize approximately $11 billion from different criminal schemes. Private sector institutions have shown interest, too. Last July, Chainalysis and Deloitte began working together to help clients comply with know-your-customer laws and other regulations.
For some in the crypto world, who believe they're building a decentralized financial system beyond the reach of governments, Chainalysis's collaborations with law enforcement are anathema to the whole project. But Gronager has a response to that: "We are empowering the existing authorities, and we only empower existing authorities in democratic countries," he says. "If you cannot get on board with what we're doing, you're not on board with democracy."
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Michael Gronager didn't set out to help law enforcement catch crypto criminals. An early convert to the world of blockchain and decentralized finance, he co-founded the San Francisco-based cryptocurrency exchange Kraken in 2011. At the time, Gronager was excited by the concept of "digital scarcity," the idea of creating a digital object that could be moved but not copied, and the underlying concept behind cryptocurrencies such as Bitcoin. Gronager still believes blockchain will fundamentally change the way money changes hands, paving the way for a faster, safer financial system.
Soon after Kraken launched, Gronager realized that regulatory compliance........
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