Transcript

Rapid Response: What the crypto crash teaches us all, w/Chainalysis’s Michael Gronager

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Everything moves fast in crypto. That's how it is. It's a little bit disgusting the same around the internet in the 90s, right? A few companies called internet companies and they say that it'll be crazy, maybe it will crash, what will go on there, and then slowly people started to be present on the internet. And maybe the first steps into crypto that's similar. So I think we are early in the phase today.

every company will become a crypto company. A cool. Change the world. That's Michael Groniger, the founder and CEO of Chain Analysis, a company that gathers intelligence on digital assets in the cryptocurrency space, monitoring a trillion dollars in transactions every month. Just this spring, Chain Alyss raised a hundred and seventy million dollars at an eight point six billion dollar valuation.

I'm Bob Safian. Former editor of Fast Company, founder of the Flux Group, and host of Masters of Scale Rapid Response. I wanted to talk to Michael because after enthusiasm about cryptocurrency soared last year, we're now in a full on crypto winter. And it can be confusing to understand where crypto fits in business strategy and how it might really impact the future of finance. Michael's been a crypto insider for a decade and offers straightforward explanations around the risks and opportunities by businesses, society, and his own company.

Chain analysis is like a private watchdog in the crypto space, chasing down bad actors for law enforcement and helping companies track and understand their own financial flows. While crypts have plummeted and bankruptcies have emerged for some players, Michael argues that crypto is hardly going away. The lessons he offers are about patience. The start and stop trajectory of new technologies, and how to move forward despite difficult marketplace circumstances. He also talks about how Russia and North Korea try to exploit crypto, the advantages that crypto can offer over traditional finance, and what it takes to navigate an environment that changes at the speed of bits.

I'm Bob Safian. I'm here with Michael Groniger, the CEO of crypto data platform chain analysis. Michael, thanks for joining us. Thanks for inviting me for this.

So There's been talk lately of what's been called a crypto winter, cryptocurrency values have been dropping and some crypto outfits Declaring Bankruptcy, Bitcoin down a ton. Other investments have been hit too, but

It feels Pretty Extreme in the crypto world. Can you explain What's going on and why this is happening?

It's important to remember the backdrop. We have like record high inflation, tech stocks that went up and up last year, certainly Now crypto has matured. Bitcoin, Ethereum, the other assets have matured to become I would say yet another thing you invest in

So when everyone moves into cash and basically wants to divest or divest from risk then they also sell their crypto. And that means that The price goes down and then you see all the leverage that was built into the system. And that's where it gets really ugly. We'll probably see some of that falling apart in a traditional finance as well. It's just going to happen slower than it does on the blockchain. We saw most notably probably

the Terra Luna that fell apart. There was a lot of investors into that platform because it generated a lot of yields. So it was very tempting to invest money into it. But suddenly that meant that they basically went bankrupt as well. We've probably just seen them on a shorter time scale than we've seen in traditional finance, where we are counting quarters and not weeks, and in crypto we are probably counting days and weeks instead of quarters. 'Cause everything moves faster in crypto? Everything moves fast in crypto. That's how it is. You've been in the crypto industry for a while and this is not the first

Crypto crash. You've been through is this just to be expected that this is the way this kind of technology in asset class works or this stage of this technology? I got into crypto in twenty eleven. Bitcoin. What really got me interested was because I read an article around How it crashed.

The first question the price goes up to Let's say thirty dollars or so. Then suddenly The price went down to two dollars. And then fast forward we went to another like hype cycle in the end of twenty thirteen where the price goes up to a thousand dollars.

And then the same again changes again, go bankrupt and the price goes down to a couple of hundred dollars. It's kind of a cycle where the way I best interpret what happens is that Technology is being built. There's this dream about what this means for the world in the future. And then we start to live more and more in the dream and less and less in the reality. And we invest in the dream.

Not in the reality. And then at some point We wake up. Yes. We can get to that dream, but it's going to take a long time to get there.

And now we need to go back and build things. Blood in the water, like when when things are are looking bad, you don't get particularly anxious. You see that more as an opportunity as a signal of where the next turn is gonna be. I would say so it's always a healthy reminder. in up times everyone would be focusing on like about how can we grow even more than like

two hundred percent. How can we grow more than five hundred percent? You take everything for granted and you forget about the risk in it, and the risk just He's too bad. This also goes very well in line with the company that I built around Genalysis. It's like We are focusing on the picks and the shovels of the industry. We are focusing on what we think is the most valuable asset in crypto, and that's data.

It's basically understanding what happens in the space. When We have good times, it's interesting when we have bad times. It's always interesting. And it just keeps growing with the adoption. We are growing in a staple pace, we see the growth of the industry, and when we see situations like this, I'm like, yeah. That would happen at some point.

And right now Some of those who said a few months ago, Yeah, but it's too expensive. You might actually the internet. So it is an opportunity for people to enter the space and say Well I can actually get in now and I can buy crypto at a price that was

Not Sixty thousand dollars, but Maybe eighteen, maybe twenty, maybe twenty one. And then they believe that it will go up to sixty again. And these aren't tulip bulbs, right? Like you've compared this in some ways to the dot com bust in the late nineties.

The foundation is real. We're just A little bit ahead of ourselves. The foundation is real. The innovation of crypto is very much about you can create digital scarcity. Digital scarcity basically means now you have something digital that have a value.

Before that it didn't have a value. Any photo could be copied, anything could be moved and copied. So it didn't kind of have a real value built into it. And now you build something digital value. First application was Bitcoin, other applications have been Built and based on Ethereum.

And the way it it more and more looks what it's becoming is like an operating system for finance. Everything that we saw as financial instruments they can now be built as apps, not as standalone devices. But as apps.

And that's going to create a lot of efficiencies, flexibility. That's going to just make everything explode. In a good way. So we basically will see a lot of value generation, a lot of new business models, a lot of unlocking of illiquid assets. But at the same time we're also far away from that dream because a lot of things need to be built. So yeah, long term positive here.

Yes.'Cause it's still early days. Still early days. Yeah. So You mentioned this train analysis. Tracks. data on blockchains. And a lot of your customers are, as I understand it, government agencies that are investigating wrongdoing, money laundering, ransomware thefts, and things like that.

As well as Private firms that are trying to track and monitor their transactions and report things to regulators. Am I capturing that the right way? If we use the industry link over here, it would be called transaction monitoring. So

If you'd go to your bank and deposit a hundred dollars. In the background there's some algorithm running and saying Bob he deposit hundred dollars and that's all fine. If you came with cash for a hundred thousand dollars, then something might be wrong here. And then someone will look at it. And now we need the same in crypto.

But in crypto it's different because it moves faster. You don't know necessarily whether the transfer were international or whether it's just local. You can't see that immediately. But we can tell you as genetices, and we can tell you where it came from, we can tell you the history of those funds. So we can basically build that into a compliance program and transaction monitoring. And that enabliance professionals to Work with the regulators. And ensure that that's part of safekeeping finance. Follow the money.

It always worked in capturing the bad guys, and it also works in crypto. Yeah, it's interesting'cause the idea of crypto, I guess, is that it's more anonymized and in that way kind of less traceable, and yet blockchains are also public. So everything should be traceable. How do you square those two ideas? Basically, you create a public ledger. It's clearly something that's not meant to be anonymous in many ways, and that's being debated over the last 10 years. So the perception were, Oh, it's anonymous money, so now I can do everything online that I shouldn't do.

And people started doing that. Then suddenly There was a reminder even back from the white paper of Satoshi. It says actually it's not anonymous. This actually trying to preserve a pretty good privacy, but it's not really anonymous. I cannot easily find any person and individual on the blockchain, but I can understand if an individual transact whether there was a risk associated with that transaction.

That's pretty good privacy to me. It's not anonymity. We don't need anonymity, but we need privacy to a certain extent. But we can find people that do bad things if the things are bad enough. And that's basically striking a balance that I think is healthy for a financial system. And I think it's been Working pretty well for crypto. So you can

Or chain analysis can sort of trace down maybe a specific transaction or learn more about that specific transaction. But you can't necessarily in real time monitor everything that's going on everywhere. No, because a lot of things require some manual input and some assessment here. If you're not going to be able to do

See uh transaction, you can see it's from a dark net market and you can see it goes into a crypchange. You can see something Potentially money laundering like happened on the blockchain, but you don't know who was behind it. So how do you figure that out?

You would send a subpoena and sending a subpoena needs that you have a batch. So that means you send a subpoena to the crypch that received that transaction and say, Who was that? And then the exchange would say, Oh That was someone and they would send back some information about that individual. And now they can start an investigation, they would probably figure out is there any history around that person? Oh, it's a known drug dealer from Ohio, so we already have something that corroborates it. Doing this at scale

No, you're not doing that. But it's actually good. It just enables the way society is built, at least here in the US, to operate the way that we like it to operate. Now there are some talk about sort of state sponsored activities, maybe bad behavior around crypto. I mean we've seen talk about a sort of a crypto nexus talked about with Ukraine and Russia, and that maybe Russia can use cryptocurrency to evade sanctions.

How realistic or practical is that? So it's like if you want to take a hundred dollars and launder them to crypto, of course you can do that. But if you want to take a hundred million dollars and loan to them through crypto, First of all There's no volume or no liquidity available in the infrastructure in crypto, so you can do it at scale.

When we look at the problem. We say like crypto is probably the smallest of all problems in terms of money laundering and sanction evasion. We can monitor it in crypto and assess Real time It's the same time an enabler. Two

creating a way that we can help funding into Ukraine, for example, that we can support people to be able to buy medicine and other things in that side of the world. So I think that the good size, good parts of crypto by far outweights The ability to alone to a hundred dollars. Yeah. I mean Ukrainians have relied on crypto to raise millions of Dollars to help their effort there. Exactly.

Is there a reason why Russia and Ukraine are sort of such centers for crypto activity. A need for some kind of foreign capital of foreign currency and why do you need a foreign currency? There can be capital flight controls that might hinder normal businesses from operating. There might be a need for other ways to move funds in and out of the country.

Or there might be a certain level of distrust in the currency of a country. And in Ukraine there's been like concern around What would the value of the local currency be? What if there's an attack? What if there's other things? Can we trust it? So it's good to have some other currency available. That's the same role as we've seen. the dollar play in, for example, Latin America in some countries there.

I noticed that your firm recently put out an estimate about North Korea that state sponsored hackers from there have stolen something like a billion dollars in crypto. That's a huge number, especially for that. country the size of that economy. It is. And it's deeply concerning, right? So we are talking about the double digits of percentages in terms of basically what is the income of North Korea.

So that's scary and that's clearly one of the things that's uh Is a reason why. monitoring what happens in crypto, being able to investigate it, following building a good regulatory framework and If you run anything in crypto, ensure that it's

Safe because otherwise someone will try to steal it. When you've built substantial wealth through your business, it's often tied up in a single equity position. The upside is real, but so is the risk, and knowing when to act isn't always obvious. Creative planning works with business owners to build a strategy around concentrated equity. When to diversify, how to manage tax risk, and how to protect what you've spent years building.

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Before the break, we heard Michael Groniger, CEO of Chain Analysis, talk about the crypter, as well as the risks of crypto money laundering and digital theft. Now he talks about how and why businesses should experiment with crypto and blockchain. He also talks about his personal journey from coder to CEO and how continuing to code every now and then feeds his leadership. Plus, he sharons on looking beyond the tumult of constant change, and why down markets are a time for building. So

A lot of the listeners to this podcast are are business owners themselves and some of them maybe Wondering. How much should I integrate my business with crypto right now, right? Should I be protecting myself? How do I protect myself and limit the risk? Should I just wait given The thefts that go on and the uncertainty through the crypto winter. How do you decide whether it's something that you should make a part of your business?

So it's a little bit discussing the same around the internet in the nineties, right? A few companies called internet companies and they created this cohort of companies that you would look at and say they're little bit crazy. Maybe it will crash, what will go on there. And Then slowly people started to be present on the internet. They got an email address, so they could be contacted that way. They got a website so people could find them. And that was like the first steps into that. And maybe the first steps into crypto that's similar to that is

enabling maybe crypto payments, if that makes sense for the business model you have. approach your customers through NFTs or other things. And assess whether that's a part of the marketing strategy. You probably end up creating something that looked like websites back from the nineties. Something people would look at for a while and then they expect them to maybe

change to something that has another level of aesthetics. So I think we are early in the phase today. But I think familiarizing Ourself and your own business model will what? it could use crypto for going forward. will be important and that's where you should probably focus today.

And then I would say. At some point every company will become a crypto company. And it will go in that direction, but it's also going to take some years before we get there. You used to work personally on Crypto investigations. No gods and Silk Road, the Welcome to Video case that Wired recently ran a book excerpt about.

What lessons have you learned in making the transition from being a coder cobble together a tool on a transatlantic flight, as I understand? to being a CEO, right? Like how does that role shift as a leader? I think my career before getting into crypto in various ways I've always been A mixture of getting deep in technology and then

When you get deep in technology, you create something and then you need to move into Basically becoming an operator and uh management. Yeah. running big European projects and computer centers. What I focus on is trying to understand the systems that we are creating. It's not coding, I wouldn't say, but it's like definitely an like a an organism or a system where everyone has a role and and has the potential for a lot of impact or less impact. Going from being a a small startup on the couch, uh sitting at home and coding, and having more than seven hundred people in in the company today, there's a lot of transitions and understanding

Of scale. That I needed to learn. Do you miss uh getting your hands dirty and just Being able to dig in and code something and make something? Of course I do. It's fun. I like that. And I would do like stuff like that every now and then where where I dive deep into something. If the time allows it, and then like hand it off to the team or say like that was just a little exercise that kept me sharp and made me understand something.

It's also like how I work, I understand. best things when I play with them a little bit and and sometimes you need to go to play with them. And I guess it's good to remind the team that you know how to do some of the things that they do also, right? I do, yeah. The crypto world, as we mentioned, seems to be constantly moving. And certainly from Bitcoin, they're now tons of different currencies. It's like a multi-chain universe.

With new things emerging Every day, every second. What do you focus on? Like how do you decide what really matters in an industry that's Changing so Constantly. It's not really up to us to decide it as a data company. We basically provide the data for people to assess it.

The latest product that has been announced is called Storyline. storyline is interesting because it basically Abstracts a lot of things away for the user. So it'd be like If I send money to you, it's a very simple event, it's a transaction. It can be displayed in a simple way and understood. But if I do the same in a smart contract, and smart contracts are part of Ethereum and a lot of more modern blockchains. Then I can invoke other smart contracts in the same transaction or event.

And then suddenly There might be 10 or 40 counterparties involved in that transaction that all play a role and different tokens involved. And that's basically visualizing that in a very simple way. So that's been a lot of, I would say, COVID time spent for me in like Thinking through how do we Make that approach real.

You've got this product roadmap. And at the same time this external environment that's Fluctuating I know for a lot of folks listening running their own startups and businesses, they're like Can be uneasy about how much do you accelerate in a moment, you know, where the environment is unstable, versus like, oh, let's just batten down the hatches and be protective and ride things out. How do you think about that?

It's been said a lot of times in crypto that like bear markets is time for building and now it's time for building. And I do think it's time for building because As I started out saying We basically invested in this dream and then we woke up to find out that the dream was not real yet. So we need to invest more. And it also means that What happens in a bull market like last year, you have an influx of new customers. They need to be educated about the ecosystem, they need products, they need onboarding.

And that takes a lot of time away from the building. So this is a good time to build product. And it sounds like there's a Ongoing priority to like continue to normalize crypto. For businesses and for individuals. Is that what's at stake for chain analysis right now?

I would say it is of course like When we first built the company we had one cryptocurrency, that was Bitcoin. It was definitely simple in many ways. And then there was a few others, but then you go from a few to many. And as soon as you go to many, you need to say Okay, how do we make the entire system scale? How do we do it all? And I think we are in that phase right now, and that's where

Well, whatever happens in crypto right now, we have a lot of resilience because we build for Not just one or two, but for thousands. And that's basically the mindset and how you need to think about it. It also means that the fluctuations that we see today. And the chaos in the market is basically just parts of what we can see and measure and analyze in our products.

Well, Michael, this has been great. You have educated me about this in a way that's super useful. Is there anything that I that we haven't talked about that we should have anything that I didn't ask you about? You didn't ask me about the price of crypto tomorrow and the next year, but I probably wouldn't have answered anything because it can go in any direction. But it sounds like as you in the beginning you went through each of the previous crypto winters like The bottom keeps going up from two dollars to a hundred dollars to a thousand dollars, right? And yes, that certainly indicates Something.

It indicates something. Right now it's hard to assess where it is, but the bottom is definitely higher than it was last time. And I think that's a good reminder to say like this is something that's growing and it's long term and it will Change the world. Well, Michael, again, thank you so much for doing this. I I really appreciate it. Thank you so much. Take care.

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