Michael Groanager, CEO of Chainanalysis, Inc. (State Dept Image)

MODERATOR: Hi, everyone. Thank you so much for joining us here today at the New York Foreign Press Center. We are very pleased to welcome Dr. Michael Gronager, is it?

MR GRONAGER: Gronager.

MODERATOR: Gronager.

MR GRONAGER: Good, good.

MODERATOR: There we go. Co-founder and CEO of Chainalysis, Inc. Chainalysis is a leading provider of blockchain research tools for regulators and government agencies, as well as anti-money laundering solutions for companies and financial institutions. Mr. Gronager will provide an overview of his work and insights on the blockchain and Bitcoin space.

Just a few reminders. Today’s briefing is on the record. When Mr. Gronager is done and we open up the floor for questions, please state your name and your media affiliation. And Mr. Gronager is speaking in a personal capacity and does not represent the official policy views of the U.S. Government. Thank you.

MR GRONAGER: Thank you so much. Yeah, and thanks for all for coming here. That’s a pleasure to see all of you. I’m just going to give, like, the first presentation right now, and then we take the questions afterwards.

So just briefly around cryptocurrencies, I think we can jump to the next slide, please. Yeah, cool.

So briefly, around Chainalysis, Chainalysis is – it’s a company. We are based here in New York. We are – were founded back in 2014. We raised around 18 million in venture funding so far, and we are a team of more than a hundred people today. We have offices in New York, where we have the headquarter, we are in D.C., and also in Copenhagen, where we have a development office in Europe.

In terms of customers, we are covering around 130 customers, mainly bigger accounts. So it’s anything from law enforcement agencies here in the U.S. Most of the bigger ones here are using our services and tools. We have law enforcement in Europe, in Asia as well, and we have a lot of the crypto exchanges and different crypto businesses in the world that use our tools and offerings as well. And on top of that, we also work with some of the more cryto-progressive banks, mainly here in U.S. but also some in Europe as well on that one. Next slide, please.

So this slide here is – it’s a little bit controversial. But essentially, if you look at what is really the blockchain and what is – crypto is about, and I usually say that if you think about what actually happens with crypto is that a technology has been created that enables you to – enables everyone to make a bet on what’s on the front page of New York Times tomorrow, and no one can prevent you from doing it. So that’s like the interesting thing – part about that is that essentially enables you to model all financial instruments using technology instead of a third party.

And that also means that essentially now we have the possibility for everyone to have part of hedging contracts to do international wires to, like, essentially transfer values across the globe, and do it without anyone, like, asking permission to do it first. So everything is permission-less, everyone have access to do this, and it’s essentially changing the world in different ways. And let’s jump to the next slide.

So if you look at, like, what that actually means is that if you looked at, like, before crypto, we had, like, 2.5 billion adults were unbanked worldwide, so that’s roughly half the population. You could say today that that doesn’t exist anymore because everyone are banked today by definition because they have access to banking through crypto. And banking means, like, all the services you request from banking, from sending money, being part of different financial instruments and so on, and also added, like, the 99 percent there. And that’s like – it’s interesting; when you talk about unbanked, you typically think, like, you don’t – you can’t receive your payments, you can’t, like, send money and so on. But it’s also other instruments. It could be, like, hedging, access to that one, access to buying equity and so on. And that’s, like, reserved for typically credit investors and so on today, and that makes it very hard for everyone else to actually participate in that part of the financial system. But again, with the emergence of blockchain and crypto, you actually have the possibility to do that today.

But it’s also, like, that should be worrying. At the same time this is extremely interesting, it’s also very worrying because it means that we have no – what are now the controls? How do you kind of – before you show your passport, you get, like, KYC procedure in a bank, and that enables the bank to say, like, you’re okay to actually – you are now a credit investor or it’s like you’re not a dangerous person to send money and so on. And that was the way that we had controls in place in the past. But that changes completely because this is like an open-access system, and that can be misused in many ways. And the way that we have to enforce or more, like, do oversight of the system is changed completely. So let’s jump to the next slide.

Yeah, just to stress that this is actually growing a lot. If you look at the trend, this is just – on one of the bigger services, you can see that that’s up to like 30 million users. We are probably more like in the hundred of million of users of crypto worldwide today, that’s actually using the system. I remember sitting in a theater in London just before Christmastime, and if you looked around, everyone in the break were looking at their crypto portfolio. So it’s just like this is there, it’s growing, it’s a big trend, it’s actually there to stay. So let’s jump to the next slide.

Yeah, so what I usually say we are doing in Chainalysis is about building trust in blockchains, so essentially ensuring that if you have a system like this, everyone have access. There’ll be a lot of scams, there’ll be a lot of crime – and I’m coming back to that – and how do you actually build trust in a system like that. And this is about, like, connecting the real world with the digital world, but we come back to that in a minute. So if you jump to the next slide.

So if you look backwards on the history of crypto, typically the first ones to use a new technology are people – well, with a high risk profile, so that’s typically criminals. And what – back in 2013, 30 percent of all transactions on the Bitcoin blockchain were actually related to criminal activity. And if you look at it today, it’s down to less than 1 percent. So a lot of cleanup has happened in that process and a lot of legitimate business has entered through the last five years, and that’s very interesting to look at. But let’s look at the process from like – we’ve got stuff from 2013 till today. So let’s jump to the next slide, please.

Yeah, so in the beginning, the main – like the main crime that happened on crypto were essentially thefts. So how do you store cryptocurrencies? How do you keep them safe? So far, we’ve been used to everything on a computer. Well, it could be stolen, and that would be like possibly violating – well, you wanted to keep the information private, but it was not something you can directly monetize. And now that changed completely with the emergence of crypto, because suddenly what you could store on a computer had a direct value. So you could hack into a system and you could take out millions or billions out of that system.

We’ve seen a lot of different heists. Probably the most – like one of the more famous ones are the Mt. Gox hack that happened over like a period of two years. Chainalysis were the official investigator in that case, and we solved it very early on, actually back in February of 2015, where we figured out like what happened. It had ties to Russia, and the way the money were laundered had tied to an exchanged in Russia. It’s out there in the open now and there’s been arrest in the case and so on, and it’s also like – I think it’s important to stress that even a lot of these criminal cases, the bigger one here like the Mt. Gox case have actually been solved. So even though crypto seems quite scary and hard to comprehend, it’s actually possible to solve criminal cases and figure out who did it. So let’s jump to the next one.

So another important trend we saw in the early days of crypto were the darknet markets, and this, like, is a little bit informative than the former slide. So here you can actually see what happened in the crypto market, like the darknet markets, over the last five to ten years. So, again, 30 percent of all transaction in ’12 and ’13, they were related to criminal activity, mainly from darknet markets. And then the Bitcoin price went up and more and more legitimate commerce went in there, and you see a huge, like, drop in the volume back last summer, last year.

And what happened summer last year were essentially that a lot of darknet markets were taken down. So that was like darknet market in – there was one out of, essentially, like – most of those are worldwide, but there were like more European-based darknet markets, and some market – there was one running in Europe. There was a darknet market, Alphabay, that were taken down as well, and we had Russian markets being taken down. So, like, there’s a huge drop in that activity. And it’s still there, it’s still happening, but as you can see, we moved from something that were higher percentages of the users of crypto and into being like less than 1 percent. So it’s really, like, been a cleanup in the space.

And at the same time, I think what’s also important in the graph is that it’s still there. In terms of like monetary value, it’s still like in the tens of millions of value being transacted there. So it’s actually – it’s still a concern. It’s something you can solve and you can kind of contain, but it’s still an issue, and that’s why, like, you need solutions and you need oversight to ensure that it’s not, like, going crazy again. Let’s jump to the next slide, please.

So another thing we saw in the crypto space over the last couple of years were, like, the extortions, mainly the ransomwares. The different ransomware families that we show on the graph here, there’s been like – some of the early ones were Lucky, the Lucky ransomware. There was a huge revenue gained by that one. We’ve seen WannaCry – that’s one the more famous one, even though that was like a more special ransomware, and there’s been other, like, ransomware families. Again, I think the important conclusion from looking at the slide here, and also from like the history of these ones, there are actually cases going on, and people have been arrested in these different cases around the ransomwares. So even though it seems like completely impossible, you receive an email you sent Bitcoin somewhere, after a while, material is gathered, suspicious activity reports are filed, FinCEN will send out, like, investigations, and suddenly you have the possibility to do arrests and find out who did it and apprehend the criminals behind it. So again, crypto is transparent, you can actually contain the criminal activity to some extent. Let’s jump to the next slide, please.

Another type of threat that’s been discussed a lot, and also we’ve been talking about that for – and briefing the Senate on that one, that’s, like, terrorist financing. Actually, the real – it’s something that has happened in a number of cases. This is actually, to the best of our knowledge, is actually a real picture and something that’s for real. And it’s stuff that has happened. It’s – again, the transparency in crypto means that it’s very, very hard to actually get away with funding terrorist activity that way, and it will very often be more risky than using cash. At the same time, it gives the opportunity to contribute to activities like this from all over the globe, and that’s why of course it should worry everyone that that’s the case. But again, it’s been like very much in – of the attention also here in U.S. that that’s something that could happen. It’s still like some – a problem that’s very contained. Let’s jump to the next one, please.

Yeah, this one, you all know about that one, that’s a very recent affidavit we have here. That’s the case around the hacking of the Democratic servers and other stuff during the last election. And what we saw there – this is a very interesting affidavit. This contains a lot of details, way more details than you normally see around like the actual investigation, and you will also find there that the fact that you could trace cryptocurrencies tapped very much into how this case were actually solved. So again, it’s – crypto has been used for crime, but I think the main takeaway here is that the transparency behind cryptocurrencies were actually one of the main drivers to be able to solve the case here. Let’s jump to the next slide, please.

So I think that – just to give a little bit of the evolution of crypto, I think it’s important that – important takeaway is essentially what has happened over the last couple of years is that the bank is no longer something you need to think about as being in a barred building somewhere. It’s something that’s actually a technology in your pocket. So a lot of these things that you need to access in a bank is actually something that you can solve through technology. What’s important is that we need to have institutions and regulation adapt to this. It’s no longer possible to prevent, but it’s way more possible to do oversight than it was in the past, and that’s like one of the main takeaways, I think.

Also, some of the thoughts around – and fears around cryptocurrency, meaning anonymity and anarchy and so on, it’s actually been shown, and also like through the last, like, five slides where I showed the different types of crime, they have all been solved to some extent, and it’s actually something that you can investigate simply because of the transparency. So it definitely shows there’s a lot of transparency around there. Still it’s happening, and we are also – I think the trend you’ll see right now, especially with the volumes that are like growing into hundreds of billions of dollars today, it’s – we expect this to move into white collar crime as well, money laundering in different ways and so on. And that’s probably tax evasion as well. So that will probably be some of the scenarios in the futures that needs investigation. Let’s ump to the next slide, please.

So how does it like – how do you do these – what is, like, the reason why this is so transparent? So one of the key things that we are doing in our company is essentially that we connect the real world with the digital world. So essentially, if you have a Bitcoin address, there’s – and like send a Bitcoin transaction, there’s an 80 percent probability in terms of amount that we know who sent it or who received it. So it’s actually – a lot of the stuff that goes on there is stuff that we can more or less monitor and put names or entities on what the movement of funds are.

And that means that you very soon will have some kind of input to an investigation. So if I send money to someone, it’s actually possible using our technology to figure out, like, who sent it, what happened, and who received it, and so on. So this kind of transparency is something that you don’t have normally in a banking system where everyone can tap in; in the banking system you need to send subpoenas, wait for replies, send subpoenas further because the money had left the account now and so on. And using cash it’s completely impossible to do these tracings, and that’s possible with cryptocurrencies. Next slide, please.

So the way this data – so essentially what we have is the biggest database in the world of attributions between the real world and the digital world of finance, like the blockchains. And what you can use this for is, of course, like investigation purposes, if you had crimes and other things happening, but it’s also compliance software, what is like in terms of if you want to receive a transaction or not, if you need to monitor different customers and exchange, that’s stuff you can do here. And at the same time, you can also use this for research and insight purposes. So for example, what’s the volume, is there capital flight happening out of a country – we can measure that; we can do analysis on that.

And one other slide to show here around, like, the size of crime. That’s simply something we can derive directly from looking into the blockchain. Next slide, please.

So this is like, the conclusion. So I think the major themes here for this briefing is essentially that definitely I think that what governments still need to look into is crypto is like something that’s happening, it’s big, but it’s also important to look at the implications that could be – using crypto in terms of, like, national security threats, as we saw here in U.S. recently. I think it’s a space where we really need to stress that it’s important to work together in public-private partnerships, because there’s a lot of things we can learn from each other there.

Technology needs to evolve in different ways. We need the institutions, the banks and so on to understand, like, how this works, how it changes how you do compliance, how it changes from prevention to – and, like, different kinds of red tape into more like an oversight and transparency, and use it the right way. And I think for that reason it’s also important to work with regulators and regulation to see that we kind of move to a new regime where we need to think way more about oversight in different ways than about prevention. And that’s, like, the important part, the takeaways here. And next slide, please.

Yeah, so that’s like the main takeaway here, and I’m happy to take any questions from you. Yeah, please.

QUESTION: Thank you very much for this very interesting presentation. I’m Majeed Gly from Rudaw Media Network. I have two questions. The first one is if you could tell us: What do you do for U.S. Government? Is U.S. Government your clients? And the second question is – I’m from Middle East; my agency is Middle Eastern. And as you can imagine, there’s – the conventional banking system in Middle East is not that developed, and there’s a lot of cash. And cryptocurrency surprisingly is popular. People are really curious about – not just people, businesses. I mean, because we are based in New York, we get questions – we are a media organization; we have no idea about this – because they heard about what’s going on in New York especially. So there’s a lot of interest in the Middle East, but the problem is the security, is people in general don’t trust that cryptocurrency. It’s a great idea, but we don’t trust it.


QUESTION: Can you tell us what kind of services your company provide in that region? And have you heard about any companies that operate in the Middle East?

MR GRONAGER: Yeah, so definitely. Yeah, to the first question, it’s like, oh, are we doing – working with the U.S. Government? We are working with the U.S. Government. There’s like public procurement databases here. You can look us up and you can find that we’ve been selling to most of the bigger agencies here in different deals. So yes, we are working with the government, and that goes for a lot of governments worldwide as well.

In terms of building of trust and, like, how should you trust these systems, I think it’s very much like the early days of the internet where there was a huge – people didn’t really trust it. So if you booked an apartment for a vacation somewhere around the world, you didn’t know whether there was an apartment. It could just be a webpage. And there was a lot of systems built out to actually label this trust. Search engines were one of them. Like, the search engines’ ranking helps you kind of weed out a lot of the scammers, and that’s definitely part of it.

It’s kind of similar, what we’re doing. We’re offering services mainly to stakeholders in the systems where they can help their customers to make informed decisions. But I would still say that building of trust is important in the blockchains, and that’s something that happens with the increasing digitization of the space.

QUESTION: And have you had business in the Middle East or other regions —

MR GRONAGER: So there are definitely – I know that there’s a lot of crypto exchanges in the Middle East or at the World Government Summit in Dubai and talked to some of the exchanges there. And there is huge interest in also using our tools. It’s stuff that we have – I’m not – actually can’t remember whether we have contracts there right now, but it’s something that could be used for, like, doing checking of transactions, figuring out whether it’s related to terrorist financing, whether it’s relating to other kind of criminal activity, and that can inform, like, your decision to whether you want to bank, like open an account for certain uses and so on.

MODERATOR: Just a reminder, if you’re going to ask a question, please state your name and media relation.

QUESTION: Ariana King from Nikkei Asian Review. Just a clarification first, a clarification question. You said it was 30 percent criminal activities in 2013 and now it’s down to 1 percent.


QUESTION: What’s the number of users that were in 2013 versus now? Do you have —

MR GRONAGER: So I would say in 2013 we – around a million users, I would say, around that, yeah. And now we are more like around 100 million. Yeah.

QUESTION: Okay. And also what’s the scale of fraudulent activity coming from individuals, non-state actors versus from state actors, like North Korea for example?

MR GRONAGER: Yeah. So it’s one of the things that’s hard to put like the exact scale there. I think that for individuals like trying to scam others and so on, I think a lot of – for example, the ransom wares have been smaller groups. To my – like, as I see it, the main concern around the ransom wares are that you can download kits for building ransom wares and then you can distribute them using like bot networks to like send out the mail campaigns and so on. So it’s like stuff that’s relative accessible if you want to run those campaigns. The hard part is to actually launder the funds afterwards. And the only thing that really helps you there is typically like the existing financial system and well, the dark spots we have in that one. So as soon as you get money of the more regulated part of the world, it gets harder to trace there.

In terms of state actors, there have been some investigations pointing to the fact that some of the latest like ransom ware attacks were at least orchestrated by North Korea, as you mentioned. And we’ve seen, like, some indications on that. So that’s something that’s a concern, of course. And I would say that the interesting thing about that is that it’s actually something you can monitor and do oversight. If you move to cash activity, it’s extremely hard to figure out what actually happens there.

QUESTION: And Chainalysis worked on the WannaCry and other —

MR GRONAGER: Yeah. We’ve been, like, providing briefs and our tools have been used in the investigations and so on. Yeah.

Yes, please.

QUESTION: Astrid Doerner with Germany’s business daily, Handelsblatt. Can you talk a bit more about how it works? You look – I send you a Bitcoin. You see the long number. How do you get to know that it was me?

MR GRONAGER: Yeah, so how do I get to know that it’s you. So typically, some users, as I mentioned – like the banks moved from buildings to your pocket essentially, and users can use the blockchain that way. Most users actually use different services. So let’s say you have an account with Bitcoin.de, like one of the German services, and now you send me a transaction using Bitcoin.de. Our system would most likely have identified most of the addresses or like Bitcoin addresses of Bitcoin.de. So if I’m now a Coinbase user, for example, and I receive some of your funds, Coinbase would now be able to look up in our system and say, “Oh, they were from Bitcoin.de, and received from that.” And to a normal exchange they would say, Bitcoin.de is a regulated entity. They have an agency agreement with a German bank, and that would enable – could be considered like a low-risk transaction and say, like, everything is fine here. That’s roughly how it would work.

QUESTION: But would you be able to see it’s actually Astrid that send the transaction?

MR GRONAGER: Not without asking Bitcoin.de for that information. But I would know where to ask.

QUESTION: And then the exchanges would give it to the FBI or someone —

MR GRONAGER: The exchanges would typically like – typically it would be an MLAT process. Sometimes it’s just send an inquiry and say like, “Can you send this material to us?” Some of them would do it. Normally it goes through the MLAT process, so FBI goes to Bundeskriminalamt, and Bundeskriminalamt go to the exchange and get the information that way, and then it goes back to FBI that way, if it’s like proper process (inaudible). Yeah.

QUESTION: Thank you.

MR GRONAGER: Yes, please. Here.

QUESTION: Yes, Michele from the newswire Agence France-Presse. You mentioned that there should – we should go towards a new regime in terms of oversight. How do you work your – in these different regulatory environments right now, because even the U.S. regulation is not the same in every state? And how – what kind of system of new oversight could that be?

MR GRONAGER: Yeah, so it’s actually a very good question. So what was very fortunate in U.S. from the very beginning were essentially that everyone that transacts more than a thousand dollars in values from someone else is like considered a money service business. And that means that normal AML rules and money laundering rules applies. They should have a compliance program and so on. So it means that a lot of the activity regarding, like, finance on the blockchain were covered here in U.S. from the very beginning.

When you look, for example, in Europe, that’s – in Europe there’s not the same laws around how to consider value and Bitcoin were not considered and crypto were not considered a value in the beginning. We’ve been working closely with the regulators in Europe in a – like in a group there and been influencing how the fifth anti-money laundering program has been shaped and the directive have been shaped, and it will be in effect in 2019. And that essentially means that some of the ideas about registering as a money service business – it’s not a money service business in Europe, but it’s roughly the same concept that if you are active as a – as like a merchant in the crypto space, you need to register your activity, and it also enables you to actually report suspicious activity.

And that’s stuff that you haven’t been able to do in Europe so far, and that’s been probably hurting investigations in Europe because most of the cases have been driven from U.S. side where, while a suspicious activity have been identified from here and then send further to Europe for further investigations, but no collection of material inside Europe have been happening so far, and that changes from next year. So that’s like ways where the regulators actually have moved into a good regime and enabling like a proper oversight that way.

QUESTION: But people are working on, like, a new agency to oversee all of this?

MR GRONAGER: No, this is not like a new agency. It’s more like enabling the existing agencies to actually collect this kind of information. So the best example is, for example, we have customers in smaller European countries that come to us and say we can see suspicious activity happening. If we go to our regulator, they say that you have two options – either just forget about it or go to the police. And if you’re a bank and you would – you would never report your customers to the police, but you’re okay reporting it to a regulatory and say we have activities here that are considered suspicious, you are the state, you need to investigate this. And that possibility hasn’t existed in Europe so far, and that’s something that now it is enabled from next year where you can actually initiate these investigations, and the existing financial regulators are kind of spearheading that.

QUESTION: And it’s in Europe and in Asia or in —

MR GRONAGER: So similar – similar developments happened in India and Japan as well in – we see it also in Australia, where there’s similar, like, regulations emerging right now.

QUESTION: (Inaudible) from Turkey’s Anadolu Agency. Mr. Gronager, when I look at Asia, especially Japan, China, and South Korea, I see more regulation compared – in cryptocurrency compared to any other part of Europe, and Europe is also trying to introduce some regulations. But when I look at the U.S., it more feels like the regulators want to see how the market and how the players are going to be – they want to see how this cryptocurrency market is going to evolve because the CME group said it will introduce cryptocurrency exchanges as well. So do you think the U.S. is lagging behind in regulating cryptocurrencies compared to Asia, or they’re just waiting for how the market is going to respond?

MR GRONAGER: I think, actually, U.S. were – as I mentioned before – quite fortunate to have anti-money laundering regulations that could capture also crypto. So just the fact that money service businesses were – even from day one that you were trading crypto you are considered a money service business and you actually had a regulatory framework that fit it pretty good. In New York we had the bit license back from 2015 still, like, in effect, and stuff that happened, so I think that’s an example of very early regulation into crypto. So I don’t see U.S. lagging. I think they have, like, probably a more – well, a framework already that fit it quite well. And to that extent, I think it’s probably the reason why we have seen the development the way we have.

Yes, please. Yeah.

QUESTION: Hi, Tina Trinh with Voice of America. My question concerns the – this idea of decentralized transactions that occur on the blockchain. It is technically possible to create a proprietary protocol that lives on a decentralized network, so it is not, in fact, really decentralized but it operates on the decentralized network. You can create a token with a protocol that is not fully decentralized. So how do you regulate and make sure that that actor is not suspect?

MR GRONAGER: Yes, I think what you are explaining is essentially you have, for example, ICOs and other things where you essentially have an entity issuing tokens.


MR GRONAGER: And it very much gets into the concept of e-money, to put it that way, so you certainly have an entity behind an asset and that entity is backing that asset, but it still lives on the blockchain. And that’s – I agree that’s kind of some clashes in terms of regulation in this setup because you have, first of all, if it’s e-money there’s certain requirements from the issuer to KYC everyone and so on, and if you put it on the blockchain, by definition, everyone have access and you don’t really know how it’s moved around.

So I think definitely that’s an area where another kind of regulatory regime would exist where you have some kind of oversight and can say you have an obligation to have a good understanding on how your asset is being used and how it moves around. You might not be required to actually know the single individual that uses it, but you need to know, like, the bigger trends and be able to have some kind of enforcement action enabled if it’s being misused.

QUESTION: But as of now there’s no kind of regulatory or oversight body for individual companies issuing ICOs?

MR GRONAGER: So I would say there is, and that’s like the existing regulation. And the existing regulation essentially prevents you from doing this because you would essentially – you would be required to have knowledge about everyone’s name and address and so on, and using this system you can’t, right? By definition, you can’t do this. So that essentially means that as soon as you open, like, issue an ICO and so on, you have some issues. And that’s like what we have seen already. We have seen SEC cracking down on the – on different ICOs. Some ICOs have actually shaped their smart contracts in a way where you can actually identify the different players and buyers of the ICOs.

There are some clashes between what are called utility tokens compared to what is more considered like equity kind of tokens, and you could say that if you have the utility tokens, they’re very much similar to – I typically say theater tickets in Manhattan, so that’s a huge secondary market for theater tickets, and that’s essentially the same as, like, a security. Because you buy the theater tickets; you resell it in expectation that you actually gain from it. And that’s how it works, so it’s also a security. There’s no regulation being enforced on that. It’s just, like, accepted. So that there seems to be some kind of gray zone where it’s accepted as long as it’s not really being used in – for speculation big time, but it’s actually used for a utility.

Yes, please.

QUESTION: I wanted to come back to the cleanup that you mentioned. Would you say that the illegal transactions moved to other blockchains, like Monero and chains that are actively hiding where the transactions are coming from?

MR GRONAGER: So if you look at the actual volume on exchanges of Monero and Zcash and other, we haven’t seen – they are more, like, dropping than growing. So especially if you look at the relative fraction of how big they are today, it’s definitely that the more anonymity or privacy-concerned coins, they are not really growing as fast as the other ones. So the fact that they are more – they’re harder to use and so on definitely stifles their growth, and that’s the trend we are seeing today. So I wouldn’t say that we see, like, everything that happened before on Bitcoin is now just exploded on other blockchains. That’s not really the trend we see today.

I think at the same time what we see is that the fact that law enforcement now have – like, have good investigations, ways to actually look into what happens, that definitely puts a damping factor on the growth there. It will happen. It will always – crime will always exist, but the fact that there’s so much legitimate use and trading, speculation, investment in the different cryptos, it just dwarfs the activity of, like, the more nefarious activities.

You had a question?

QUESTION: Mengda Li for Shanghai Observer. Is that – what you mean is you have the company and you sell your tool to have a collaboration with the government side to regulate this case, and how do you – can you introduce a little bit more is – which government authority do – you collaborated with? Is that CFTC or SEC or also someone else?

And the second question is: How do you regulate it yourself to preventing your debtor to releasing – from releasing or selling to stop criminal organization and individuals?

MR GRONAGER: Yeah, I’d take them in, like, reverse order. So essentially we do a due diligence process ourself when we sell our software, so you can’t – we don’t have a webpage where you can download our software and just get the data. So the way we do it is that every customer is like someone we know. We set up a process, due diligence around the customer, figure out what the purposes of use case. Typically, they are either government institutions or they are regulated entities. So that’s like the main customers. And that gives, like, some framework of regulation. There are some databases where you can look up and ensure that they exist and so on. So that’s, like, ensuring that our software is not misused in the first place.

In terms of, like, private-public partnerships and where I see a need for a lot of discussions and so on, as I mentioned, I see a need for a change in how you do regulation, and essentially we need to move to – from a regime where we think about “I know where you sleep so I can always come after you,” and that means that all processes can last for – can happen months later, and then you can do enforcement at that point, to a regime where we do oversight and assume that we – the process of actually identifying who did a transaction is more expensive but it’s still possible, and it means that we probably need to react faster and be better capable of actually identify activities that’s suspicious or something we don’t want to happen on our platform. And I think that’s something regulators need to work with and understand, like, that this is a change in the concept what we had from before, from more, like, prevention to actually doing oversight and then enforcement after that.


QUESTION: Can you comment more about how – which government in U.S. organization or authority do you collaborate with?

MR GRONAGER: Yes, we don’t really share, like, our uses in public, but it’s – you can find some of them in public procurement databases and find – I think there’s some articles out there that mention, like, who we collaborate —

Yes, please, yeah.

QUESTION: So I have a kind of silly question, but it’s – considering that the most (inaudible) disaster sometimes, how come some people (inaudible) and how do they manage (inaudible)?

MR GRONAGER: Yeah, so I think that it’s – again, I think the fact that you can get away with things in the system is – first of all, if you are a careful criminal, you can always get away. It’s like you can get away with murder. You can get away with anything if you are – if you’re sufficiently careful and don’t repeat it enough times where you’re not careful anymore. So that’s not an advice but it’s more like a fact that that’s how it will always be.

It’s also a feature of the existing financial system. So there is not – if you do wire transfers – for example, one of the examples where wire transfer fraud or, like, an actually theft happening from a bank in Asia, $80 million was stolen that way and sent out in wire transfers to a lot of other banks, and that was carefully prepared, so they were sent to banks, for example, in the Philippines, and then mules were essentially withdrawing them in cash and then they were gathered later, and you couldn’t do anything about it because they were just, like, a well-orchestrated operation where you could steal, like, $80 million using wire transfers. That’s, again, possible to do that, and you can’t – these criminals haven’t been caught yet. That’s not cryptocurrencies, it’s just the existing banking system and the fact that even though you have full oversight, there is still possible actually to do that. And I’ve mentioned, like, the feature of the existing financial system is that you don’t have, like, the same level of both KYC and knowledge about the uses in other jurisdictions, in all jurisdictions around the world, and there’s some jurisdictions that’s not collaborating to the same extent about, like, reporting these kind of activities and so on. So as long as it, like, there exists places in the world when you can get away with crime, then as long as you can get your money in there using Bitcoin, using the existing financial system, it’s very hard to do anything about it.

QUESTION: And another question – you mentioned at the beginning cryptocurrency banks. These – those financial institutions that are willing to invest in cryptocurrencies, what are they asking you for as a service provider? What kind of protection do they want?

MR GRONAGER: So for the banks?


MR GRONAGER: Yeah, so banks typically – the typical scenario we see today with banks are that they want to provide bank accounts for crypto exchanges one way or the other. So if you want a crypto exchange, you want some – to give your customers the ability to buy and sell cryptocurrencies, and for that you need, like, to actually wire U.S. dollars or euros or whatever to a bank and have an account there. So if you were a bank and you want to provide that account for a crypto exchange, it’s a good business because you are going to do a lot of wire transfers. You will have a lot of assets under management. These are like billion-dollar businesses today, so it’s definitely worth doing.

At the same time, you need to understand how that exchange actually operating, so you would need a tool like ours and a service like we can provide to tell you what is the risk profile associated with the client that you just onboarded, how they are actually doing their enforcement, how are they actually solving, like – do they have problems? What are their month over months, like, trends in terms of the use of their services and so on? And then they can use that as to inform their decision whether it’s a good area to keep the customer or whether it’s time to have, like, a more serious discussion with a crypto exchange.

QUESTION: Can you say who the more progressive banks are?

MR GRONAGER: Yes. I think that the more progressive banks out there – so definitely in Germany we have Fidor Bank. Fidor Bank has, like, been known from the very early days to bank both Bitcoin.de and Kraken. In U.S. we have Silvergate Bank as one of the more progressive banks that’s banking both with ICOs and exchanges. Yeah, so I think that’s probably like the most known ones there.

Yes, please. Yeah.

QUESTION: How would you rank the top four cryptocurrencies in terms of their security – strength of the their security of transactions and why?

MR GRONAGER: Top four? I think that’s a hard one. But again, I would definitely say that historically Bitcoin is —

QUESTION: Like Ether, Litecoin, Ripple, among those.

MR GRONAGER: Yeah, I probably wouldn’t include Ripple, but I would include like – so Bitcoin, yes. That’s, like, been around for so long. It’s really well tested. I would say – and like the support of the network is huge, so it’s definitely, yeah, quite secure and probably the securest one you have out there.

If you look at Litecoin, for example, it’s more or less a clone of Bitcoin with another mining algorithm. It’s the biggest one using that mining algorithm, so it creates a lot of security around it for sure.

Ether is – had some, like, issues around some of the smart contracts, but apart from that the system is very secure. It’s a lot of developers from different kind of jurisdictions helping out with the system there. So I would definitely say that they are the top three of the cryptos.

QUESTION: And your thoughts on Ripple?

MR GRONAGER: So I would say Ripple is – it’s very much centered around a company and it means that you don’t have this same level of, like, code oversight, and there’s been – well, the way that Ripples are distributed comes from, like, one organization and are sent out from that, so you don’t have the same – it makes it harder to claim that it’s not a security because you have, like, an initial giveaway offering or selling from a specific organization. So there’ll be some questions there that’s not clear today, where there have been statements around Bitcoin and similar currencies and Ether that they’re not securities. The same statements have not been made from official side for Ripple, so that’s still an open thing and an open question whether that’s – that might – what direction that might go.

MODERATOR: All right. Well, if there aren’t any more questions, we’ll wrap it up. Last minute. Well, in that case, thank you all very much for joining us today. Thank you, Michael, for briefing us. And we will have transcripts of this event made available shortly.

U.S. Department of State

The Lessons of 1989: Freedom and Our Future