A Closer Look at Chainalysis, a Stand-Alone in the Crypto Universe
Key Takeaways
Chainalysis was first mover in the field of blockchain analysis and maintains a position of trust and authority in the industry today.
The company’s client base skews toward government and law enforcement agencies, providing top-line stability that is rare within the crypto universe.
Several trends are likely to contribute to the company’s continued growth in the years ahead, including widening acceptance of crypto worldwide and the continued success of fraud prevention efforts.
The world of cryptocurrency was created with the goal of giving users a way to transact in full privacy and fluidity, apart from the regulations and oversight of the world’s banks. This new, decentralized financial (DeFi) system relies on blockchain—an encrypted, online accounting ledger that records the details of every transaction in a distinctively tamper-proof way. While cryptocurrencies have given legitimate participants greater access to capital, they have also provided cover for a range of nefarious actors, and consequently the need for regulation.
Crypto Regulation’s First Mover
In 2015, Chainalysis became the first company to step into the role of blockchain analyst and detective. The company has dominated that space ever since. Now valued at $8.6 billion, privately held Chainalysis is the industry’s trusted authority in crypto forensics. A recent New York Times article observed:
“As federal agencies orchestrate an aggressive crackdown on crypto fraud, Chainalysis has come to occupy an increasingly important position in the industry. The company markets itself to the government and private companies as a force for good in a badly behaved sector — a firm whose business is solving crimes and cooperating with public officials.” 1
Monitoring the Playground
Nikkl co-founder and CEO Dan Siciliano recently spoke with Enzo Villani, CEO and CIO of Alpha Sigma Capital, to discuss Chainalysis’ unique position within the crypto ecosystem. Since its beginning, Chainalysis has worked to forge a sterling reputation in the field, growing trust in its role as what Siciliano calls the guardian of the crypto playground. “You don't want to have a fellow kid monitor the playground, but you also don't want the principal, who's known to not always be friendly with kids. You have to have a third party,” explains Siciliano, adding, “This is why we have audit firms [for public corporations] and not the government as an auditor.”
Chainalysis continues to benefit from a multi-year head start over newer competitors, an advantage Siciliano sees as paving the way for future growth. “The monitoring of bad actors has to be in the hands of a trusted third party. What's remarkable is that Chainalysis is well trusted already. I'm excited about it,” he says.
Building Trust Among a Stable Base of Clients
One of Chainalysis’ key differentiators is its client base. Two-thirds of the company’s revenues are sourced from government and law enforcement agencies worldwide. Within the U.S., that includes the IRS, DOJ, FBI and SEC. This type of client base translates into revenue streams that are more predictable, making Chainalysis less impacted by economic cycles—a quality rare among crypto companies.2
Villani notes, “If you look at the customer list of a Chainalysis, it's not just the DOJ and the FBI and the IRS; it is literally every major crypto company in the world and every fund because no one wants to be a bad actor.”
Transparency Inroads Sharpen Fraud Prevention Efforts
In an ironic twist, the world of crypto, which was created to provide anonymity, is becoming more trackable than the traditional banking system. “If you can connect the on-ramp and the off-ramp, there’s a perfect forensic record of everything that happens with all [blockchain] transactions,” says Siciliano. Villani adds, “There's almost no place on blockchain that's genuinely opaque.” For law enforcement agencies, “That's going to allow them to track every dollar and every digital euro in the world.”
Villani’s firm checks the digital wallets of its clients regularly for compliance reasons. He believes that checking across multiple cryptocurrencies and blockchains will require fund managers to increasingly use the kinds of tools Chainalysis provides. Because most companies do not have the kind of expertise required to perform this kind of due diligence in-house, outsourcing will likely remain the norm.
A Port Within the Current Crypto Storm
In the months ahead, Chainalysis’ prospects will remain closely linked to the continued proliferation of cryptocurrency. While the industry is currently facing headwinds from several directions, growing transparency and broadening acceptance (vendors from Microsoft and AT&T to Burger King and Pizza Hut now accept Bitcoin) make it unlikely that crypto will disappear anytime soon.3 The role of sophisticated, dynamic analytics that can keep pace with rapid change is therefore likely to remain in demand.
Learn About Investing in Private Companies like Chainalysis
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Footnotes
Yaffe-Bellany, David. “The Crypto Detectives Are Cleaning Up.” The New York Times, 22 Apr. 2023.
Ibid.
“Who Accepts Bitcoin as Payment? 50+ Companies that Accept Bitcoin.” Cryptowallet.com. 21 July 2023.
Disclaimer
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