The past year has seen its fair share of blowups in the crypto industry. Big names headlined by the cryptocurrency exchange FTX have gone under, sending out shockwaves through a once US$3 trillion market. 

Now reduced to a third of that size, the market is struggling to make a comeback. Part of that difficulty is a lack of trust in crypto — far from the easiest bell to unring as news of scams, hacks and other assorted scandals have become a mainstay of mainstream and blockchain-focused media.

Michael Gronager, former COO of cryptocurrency exchange Kraken, co-founded blockchain analytics firm Chainalysis in 2014 in the wake of that year’s hack on Tokyo-based Bitcoin exchange Mt. Gox. The biggest heist in crypto history saw cyber thieves make off with over 850,000 Bitcoin (almost US$23 billion at today’s value).

A PhD holder in quantum mechanics, Gronager set out to map the crypto industry via the Chainalysis platform to help identify hacks and other forms of illicit activity on the blockchain. Partnering with governments, research institutions and other organizations in over 70 countries, the platform scans billions of data sets for signs of misuse, producing reports on themes such as crypto crime, industry maturity and digital asset adoption. 

The New York-based company, which was valued at US$8.6 billion by mid-2022, is backed by some of the biggest names in finance, including investment banks Blackstone and Bank of New York Mellon. Gronager spoke to Forkast’s Will Fee at Token 2049 in Singapore to discuss use cases for the platform’s data, its aims and the Asia focus of recent findings. 

The interview has been edited for clarity and length.

Will Fee: After venture capital firms poured around US$41 billion into crypto during the bull market of 2021-2022, funding dollars have drained out of the industry in 2023. How does that affect the blockchain analytics sector?

Michael Gronager: I don’t think that affects analytics. What we do and what we look at are the amounts moving in the crypto space. We don’t just look at crypto from an illicit activity point of view. We also look at it from the perspective that crypto has become the rails and infrastructure for traditional finance. And that means that crypto is not actually crypto anymore.

Crypto has changed. More than half of all volume in terms of value moved on blockchains today is national currencies moved in the form of stablecoins. That’s a change that happened over the last year. So the majority of all value moved on the blockchain is not moving, it’s not volatile. In fact, it’s stablecoins, it’s national currencies. That just goes to show the solidity and the value of the underlying infrastructure that has been built out over the last ten years.

Fee: At Token 2049, you spoke on a panel of blockchain analysts about the current need for the sector to cover absolutely everything that’s out there, regardless of how much merit a particular project has. The phrase you used was “nothing is everything.” Please expand on that idea. 

Gronager: The point is that you really need to look at a lot of projects. There’s constantly a new project in Crypto, there’s a new blockchain emerging, there’s an app chain, there’s a layer-2, there’s a lot of things going on and it happens with such high velocity. Also layer-2s are extremely important because the data on layer-2 will be incredibly hard to obtain a year from now. You need to be present at the time of the transactions and analyze it there and then.

At the same time, you don’t know which project is going to win. There’ll be customers or parts of the ecosystem that obsess about a certain blockchain, and you need to be able to serve them with the same quality data as anyone else. That’s why I’m of the opinion that basically everything matters. You need to support it all.

Fee: A Chainalysis report released February found that small but significant crypto funds are used to fund pro-Russia militia groups fighting in Ukraine, as well as other groups involved in global conflicts. What other key trends in crypto usage have Chainalysis discovered?

Gronager: When Russia invaded Ukraine more than a year ago now, immediately at Chainalysis we were up in arms more or less. Basically we asked ourselves how we could help. What can we actually do to ensure that this is not going to be as bad as it looks like it will be? Which is very bad indeed. We decided to focus our analytics on ways cryptocurrencies are used to fund pro-Russia militias versus how they can be used to further Ukraine’s performance in the war.

Crypto is really good at directing money at smaller groups around the globe. That goes to help smaller factions in Ukraine. It goes to help families in Ukraine. There’s a lot of things that are really, really positive there. But it is also used by Russian militias and others to enable them to buy petrol for their cars, to enable them to buy explosives, to do other things in Ukraine. It’s important to understand and map out the activities there to figure out where we can intervene and actually prevent it from happening. 

Fee: There’s clearly a fair amount of side choosing involved there. February’s report found that Russian fighters in militia groups in Ukraine were using the small crypto funds they receive to buy things like first aid kits or winter boots, as well as pieces of military hardware like drones and night goggles. Those individual soldiers are in a hellish situation themselves. Is Chainalysis’ aim to identify and prevent those kinds of small purchases too?

Gronager: It absolutely is, yes. It is a choice for Chainalysis as a company. We’re based in the U.S. We work a lot with the U.S. government and we’re very aligned with U.S. policies. We work with friends of the U.S. in various ways and one of the friends of the U.S. is Ukraine. So there’s no doubt that we have picked a side here.

Fee: The collapse of U.S.-founded cryptocurrency exchange FTX in November last year has rocked the global crypto market. Why was that failure not prevented and how can the analytics sector stop something similar happening again in future?

Gronager: I don’t think the industry wanted to listen, to be honest. I look back on the sentiment in the world a year ago when the macroeconomic outlook began to worsen. Everyone wanted to believe it was just short-term, that all was not over yet. The same thing happened around FTX. There might have been some signals. But it was really hard to show anyone. 

We’ve looked in the past at the risk associated with certain tokens and certain assets in the crypto space. Over the years, we’ve then tried to build a product out of that which people want to buy. My honest opinion is that, a little bit more than a year ago, no one cared because they kind of wanted to believe that everything was going great.

We’re also in a very awkward position where, if we were to want to call out any of these things, we would get a lot of haters. That’s because we also may get it wrong at some point. But I think the industry is ready for that now. I think the industry wants to have some of that information and we are of course building products in that direction as well to prevent the same thing (a collapse on the scale of FTX) happening again.

Fee: Chainalysis released this year’s Global Crypto Adoption Index during the first day of the Token 2049 conference. What are the key takeaways?

Gronager: Really, the key highlight is that the Asia-Pacific region makes up a lot of the top ten countries. India, Pakistan, Thailand, Vietnam, the Philippines are all high on the list in terms of crypto adoption. But what does adoption of crypto actually mean? 

Basically, we looked at how many people hold or use cryptocurrencies in a jurisdiction relative to the population in that country. Of course, India ranks high on the list with a lot of activity because India is a huge country. Vietnam too. But the U.S. is actually high on the list as well, meaning there’s still a lot of crypto activity there.

Another key takeaway, which is similar to what we saw in the report a year ago, is that there’s actually not just one use case for crypto. There are many different use cases and different geographies have different use cases. For some countries it’s speculation. Other countries it’s gaming, whereas in some countries it’s more to do with remittances and ensuring you can send funds. Then there are the countries that focus on internal payments because the established financial system there is maybe less good than what you can get in the crypto space.

Fee: Based on the report’s findings, why do you think lower-to-middle income countries are now turning to crypto?

Gronager: Banking can seem very simple for you and I. We have a bank account, we’ve been vetted and so on. But there are a lot of people in India, say, that don’t have identity papers. How can you get a bank account if you don’t have an identity? Of course everyone has an identity. You know that I’m me and you are you. But what an identity really means is that your government has a piece of paper that says you are you. 

But there are cases where they might not have that. So how do you transfer money? Well, you can use crypto and you can still get money from relatives abroad. You can get money from elsewhere. You can actually have a functioning economy. You can use cash as well. But as the world has moved online, cash is really not practical. If you are part of an online community, you can still have a phone even if you don’t have identity papers. Those are just some of the reasons why you might turn to crypto.