Unmasking Anonymity in Bitcoin Transactions

Bitcoin and its underlying blockchain technology have revolutionized the financial world, particularly the decentralized finance (DeFi) sector. Blockchains have also made significant strides in addressing computer science problems previously considered intractable, such as Byzantine Fault Tolerance. The Blockchain ecosystem, however, also harbors a dark side. The extent to which criminal interests attempt to abuse the anonymity afforded by Bitcoin is examined in Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency, by Andy Greenberg, an award-winning senior writer for Wired. Parts of Tracers in the Dark read like a nail-biting detective novel, with Michael Gronager, the founder of the blockchain analytics company Chainalysis, cast in the role of the protagonist. As a cautionary warning, parts of the book also address deeply unsettling topics. The story of Chainalysis's inception and its utility in law enforcement's cryptocurrency crime-fighting efforts, as depicted in the book, is both inspirational and a significant factor in choosing Chainalysis as the subject for the business plan paper that follows. However, there are also two sides to the Chainalysis technology coin, pun intended. The role of analytics on the Bitcoin blockchain to identify and interdict criminal activity clashes with the concerns of privacy advocates who fear its use by oppressive governments and their efforts to track dissidents and their cryptocurrency transactions.

In today's headlines, any attempt to reference the ethical dilemma of Bitcoin or its privacy concerns will surely be obscured by conversations regarding the value of AI versus the danger of AI to society. Are those prominent discussions, along with the immense wealth being created by Bitcoin, helping to subdue conversations about Bitcoin as a vector in criminal transactions, terrorism, scams, and wallet hacking, among other concerns? Just as OpenAI's original mission "to ensure AGI benefits all of humanity" has seemingly pivoted to a “capped profit” model, where investors' returns are capped at 100 times their original investment, has Bitcoin's original raison d'être, to "create a decentralized digital currency," also become tarnished, shifting to more of a vehicle for speculative investment?

In recognition of the Bitcoin halving quadrennial event, we are sharing a business plan for Chainalysis, the leading blockchain analytics company. The business plan was an academic exercise with factual underpinnings, developed for the MS in FinTech program's Capstone class, led by Dr. Cuneyt Akcora, Associate Professor of Finance, Computer Science, and Artificial Intelligence at the University of Central Florida. The business plan goal was to analyze a FinTech company with sections for the business model canvas, a SWOT analysis, and a stakeholder analysis. The business plan mockup explores how Chainalysis has evolved its blockchain analytics technology into profitable products that enable law enforcement agencies to take the adage 'follow the money' into the modern realm of cryptocurrency. We invite the reader to delve into these details and reach out with calls to action in the comments below on any of the above points and related topics.

Business Model Canvas

The Chainalysis business model canvas identifies how the company creates, delivers, and captures value. We begin with a high level view of the company and its product offerings.?

Company Overview

Chainalysis, a blockchain analysis firm considered as one of the first start-ups dedicated to the business of Bitcoin tracing, was co-founded by Michael Gronager, Jan M?ller and Jonathan Levin in 2014. Gronager previously co-founded and was the CTO of the Kraken cryptocurrency exchange and Levin previously co-founded and was the CTO of the cryptocurrency data analysis company Coinometrics. Currently headquartered in New York City, the origins of Chainalysis can be traced to the investigation of the Mt. Gox hack, when Gronager vowed to find the missing coins, an effort that finally came to fruition in 2023 when two Russian nationals were indicted for the 647,000 Mt. Gox BTC that were stolen. The indictment came from the US Justice Department with help of Chainalysis tools used by the IRS/CIU.?

Product offerings

The primary Chainalysis applications are:?

Reactor - tracks the flow on a blockchain, connecting cryptocurrency transactions to entities

KYT - real-time, anti-money laundering (AML) compliance

Storyline - insights and visualizations into smart contracts, NFTs, chain hopping

Kryptos - exposes potential ransomware entities and darknet markets

Business Data - track customers' use of cryptocurrency

Address Screening -? evaluate addresses in connection with use of illicit services.

Crypto Sanctions Screening Tools - API validates addresses, checking if they are on a sanctions list

Value Proposition

Chainalysis has emerged as the established leader in the field of blockchain analysis, offering applications that cater to stakeholders requiring crypto-currency analysis tools, and delivering on transparency, trust, compliance, emerging challenges, market leadership, proven track record, scalability, strategic partnerships, and data access. Chainalysis enable customers to analyze, track, and better understand blockchain transactions.? The effect is consistent with the company's mission to legitimize the use of cryptocurrencies through transparency.?

Chainalysis initially focused on law enforcement customers that were looking to track and apprehend criminals involved in the theft of Bitcoins and to locate darknet market operators and shut down their sites. This has resulted in an impressive series of successes including:

• an instrumental role in the seizure by the IRS of an estimated $10US billion of? cryptocurrency.
• recovery of over $1US Billion from the take down of Silk Road by US law enforcement
• the shut down of the largest child-abuse marketplace in 2019 by the US Department of Justice.?
• identification of the North Korean Lazarus Group in multiple 2021 cryptocurrency thefts
• tracking $0.1US Billion stolen from crypto firm Harmony, also by North Korean hackers

Customer Segments, Channels, Relationships?

Law enforcement uses Chainalysis tools to generate evidence in pursuit of,? and to convict, users employing cryptocurrencies for illicit activity. These agencies include the FBI, DEA, IRS/CIU in the US, and the NCA in the UK.?

Financial institutions, use Chainalysis to automate AML compliance processes as well as for risk management. Customers includes Barclays and SEBA Bank.?

Chainalysis has formed strategic partnerships with a cryptocurrency platforms like BitGo, Binance, and Coinbase, helping? increase further Chainalysis data coverage. As such, Chainalysis is able to claim access to? 90+% of cryptocurrency transactions.?

Chainalysis employs a multi-channel strategy to connect with customers. Its website is a primary access point for information on products, use cases, industry insights, and customer testimonials. Social media presence includes LinkedIn, Twitter, and YouTube. Chainalysis Academy offers educational resources and training programs suited for onboarding new customers.

Chainalysis direct sales force employs a consultative approach, upselling products in the areas of regulatory compliance, risk management, and additional blockchain analysis tools and builds upon relationships to better understand customer needs and develop new features and/or tailor custom solutions to address those needs.?

Revenue Streams and Cost Structure

A portion of Chainalysis's revenue comes from annual or multiyear subscriptions, primarily from the Reactor, KYT, and Kryptos products. Chainalysis also licenses proprietary blockchain data and offers professional services, including investigative assistance and compliance consulting. Fees are also collected for API access and integration of services with third-party platforms.

Chainalysis employs over 700 personnel worldwide, a team comprised of cybersecurity, data science, blockchain technology experts as well as financial analyst whose expertise address compliance requirements. Cost include salaries for R&D personnel and developers delivering features and updates, personnel and costs associated with infrastructure, and?data acquisition costs for the blockchain transaction data. Other costs are for salaries for sales and marketing teams, the 24/7 customer support staff, office spaces, utilities, legal fees, insurance, licensing. All these are necessary to maintain a company that stays competitive and profitable.

Key Resources

Chainalysis platforms use advanced algorithms to analyze blockchain data that trace transactions, aiding customers in identifying sources of criminal activity and potential risks of doing business with questionable entities.? For financial institutions, these tools help to ensure regulatory compliance. In addition, sophisticated machine learning algorithms detect patterns on the blockchain and help to further identify illicit activities.

SWOT Analysis

This section identifies the company's internal strengths, weaknesses, opportunities, and threats.

Strengths

Chainalysis posses proprietary technology for advanced blockchain analysis tools. These tools are primarily comprised of the Reactor, KYT, and Storyline products. Chainalysis applications are capable of analyzing blockchain transactions, identifying illicit activities, ensuring compliance, and other capabilities that provide Chainalysis with a significant technological advantage in the cryptocurrency market. Another strength is the company's machine learning and data science expertise used to develop and deploy models to effectively detect suspicious activities on the blockchain.?

As of September 2023, Chainalysis has 1,200 customers from the private sector and over 250 from public sector institutions. Chainalysis reputation as a provider of reliable tools has been supported by the role it played in high-profile investigations, using its reputation to claim prowess and reliability in blockchain analysis. The wide range of global customers that the company acquired provides Chainalysis with a critical mass making it difficult for competitors to catch up. Having a large broad base of customers provides the advantage of a steady revenue stream and is? a window into a varied set of requirements across the cryptocurrency ecosystem, including law enforcement, cryptocurrency markets, and financial institutions.?

Weaknesses

Weaknesses that could impact Chainalysis operations and growth includes regulatory vulnerability, ? where unfavorable future regulatory changes could necessitate? redesigns and re-implementations of key compliance products, increasing costs and impacting revenue.?

Blockchain obfuscation technologies used by cryptocurrencies like Zcash and Monero? pose a threat to the effectiveness of the Chainalysis tools. Currently, uptake of these technologies is limited and these technologies too may have have vulnerabilities? that Chainalysis could or is already exploiting.? Governments could also make it harder for Zcash and? Monero to operate exchanges within their jurisdiction. While government interference could sometimes be positive, Chainalysis’s work with government agencies and law enforcement has raised concerns from cryptocurrency developers and privacy advocates. Moving forward this could be a sensitive area for Chainalysis and they will have to tread carefully to maintain the trust of the broader cryptocurrency community.?

Opportunities

Increased adoption of cryptocurrency on a global scale could open up new opportunities for Chainalysis. As global acceptance cryptocurrencies increase,? new customers will reach out for help in use and tracking of transactions on the blockchain.? New cryptocurrencies and blockchains could also provide Chainalysis with additional revenue streams. An uncertain regulatory landscape on the one hand could also be an opportunity if new regulations are addressed with new products.

Advancements in AI/ML can provide more sophisticated insights into behaviors and patterns on the blockchain, with Chainalysis holding an advantage in this area through its large transaction dataset repository. The concern of privacy groups, could also be a renewed opportunity to create new products that comply with regulatory requirements and innovate in ways that allay the concerns of privacy groups.?

Threats

Threats that could upend the Chainalysis business model include global regulatory disparities,? overregulation, privacy enhancing cryptocurrencies, DeFi and anonymity tools, competition, data security, data integrity, shifts in cryptocurrency use, and ethical and privacy considerations. Some of these threats have already been presented, like those from the Monero and Zcash privacy enhancing cryptocurrencies and their potential to make it more difficult for Chainalysis tools to work as advertised. Other threats, like? global regulatory disparities, refers to the potential for different laws across different jurisdictions to act in ways that limit Chainalysis growth and potentially make it more difficult for the company to operate. Cryptocurrency itself could be subject to overregulation, although that appears to be less likely as Bitcoin and Ethereum continue to gain momentum in price and acceptance by Wall Street and Main Street.? Momentum, however is a double edge sword and could also make blockchain analysis more attractive to competition. Some of the? most formidable Chainalysis competitors include:

Elliptic - founded in 2013, raised $100 million, blockchain analytics for crypto asset compliance.

Elementus - founded in 2018,? raised $23 million in funding, a blockchain analytics company,

CipherTrace -? founded in 2015, acquired by Mastercard in 2021, works on crypto-related systems.

TRM Labs -? founded in 2018, raised $150 million in funding, works on crypto-related financial crime. ?

TRM customers include Shopify, MoonPay, Circle, Binance, Anchorage, and the Treasury Department. TRM Labs and Chainalysis both worked on the FTX bankruptcy investigation.

Often Chainalysis is brought it to "follow the money" when ransomware is paid in cryptocurrency or when a crypto theft occurs. These same bad actors could target Chainalysis? itself, as a custodian of sensitive transactional data. Chainalysis itself could be a high valued target for cyberattack by criminals, privacy-rights hack-tivits, or in retribution by lawless governments like North Korea. A more tempered response from privacy groups that are concerned about? the harmful implications of surveillance could lead to a negative effect on the Chainalysis’s brand and on its customer relationships.

Stakeholder Analysis

Chainalysis stakeholders include partners,? investors and shareholders, customers, regulators, public interest groups, and industry associations. Strategic partners, including cryptocurrency exchanges Binance and Coinbase, provide Chainalysis with access to transaction data used to further improve Chainalysis' analytics tools.?

Investors and shareholders provide capital for the company to operate and grow and are focused on the financial health of the company in order to get a high return on their investment. They encourage growth, market expansion, and sustainable business practices. Chainalysis raised $536.6 million in total funding, providing a metric by which a startup's valuation is calculated. In May 2022, Chainalysis announced a $170 million Series F financing led by GIC, Singapore's sovereign wealth fund. Previous investors Accel, Blackstone, Dragoneer, and FundersClub also participated, along with newcomers Bank of New York, Mellon, and Emergence Capital.? Chainalysis was subsequently valued at $8.6 billion.?

Regulatory entities using Chainalysis products play a significant role in the products Chainalysis develops. These regulatory agencies includes the Financial Crimes Enforcement Network (FinCEN) in the United States, the Financial Conduct Authority (FCA) in the UK, and other similar bodies responsible for enforcing AML/CFT regulations worldwide. Additional regulatory bodies that are tracking cryptocurrency transactions include the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Internal Revenue Service (IRS), European Securities and Markets Authority (ESMA), Financial Action Task Force (FATF) and other national and regional regulators such as the Authority of Singapore (MAS), the Japan Financial Services Agency (FSA), and the Australian Securities and Investments Commission (ASIC).

Law enforcement customers are the most important stakeholders and include agencies, such as the FBI, DEA, IRS Criminal Investigation Unit (IRS/CIU), and UK's National Crime Agency (NCA). Financial institutions that are Chainalysis customers include Barclays, and SEBA Bank. Cryptocurrency exchanges and wallet providers customers include Gemini, Bitfinex, Bitso, and Coinchange. Other stakeholders include industry trade groups such as Global Blockchain Business Council (GBBC) and the Blockchain Association. The efforts of these industry trade groups on Chainalysis could be significant as they work towards industry standards and practices.

One other very important stakeholder group is the firm's employees, which expect job security, growth, positive work environment, and an alignment with company values. For its part Chainalysis, being in a highly technical and technically demanding business, must do all it can to attract and retain the top talent needed to grow its business.?

References

Chainalysis. (2024, March 13). In Wikipedia. Retrieved March 31, 2024, from https://en.wikipedia.org/wiki/Chainalysis

Copenhagen Fintech. (2022, November 16). Chainalysis: The Founder's Story. LinkedIn. Retrieved March 31, 2024, from https://www.dhirubhai.net/pulse/chainalysis-founders-story-copenhagen-fintech-1e/

Greenberg, A. (2022). Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency. Doubleday.

History. (n.d.). Chainalysis Careers. Retrieved March 31, 2024, from https://www.zippia.com/chainalysis-careers-1395267/history/#

Jenkinson, G. (2023, September 27). Blockchain detectives: From the collapse of Mt. Gox to the birth of Chainalysis. CoinTelegraph. Retrieved March 31, 2024, from https://cointelegraph.com/magazine/blockchain-detectives-mt-gox-collapse-birth-chainalysis/

Narula, G., & Maini, S. (2023, April 27). Chainalysis. Contrary Research. Retrieved March 31, 2024, from https://research.contrary.com/reports/chainalysis