Bitcoin and cryptocurrency use has piqued the interest of law enforcement and government agencies around the world this year, according to influential blockchain analysis firm Chainalysis.
The New York-based company has reported recurring revenue year-on-year for its 2020 third quarter has doubled, mostly driven by “increased demand for investigative blockchain technology from public sector agencies” looking to crack down on illicit use of bitcoin and crypto.
That government interest includes a controversial recent IRS contract to trace privacy token monero—with Chainalysis chief executive Michael Gronager warning such privacy tokens have a limited future.
“I’m excited about the growth that we’re seeing in the public sector,” said Gronager, who thinks bitcoin and cryptocurrency represent the “future of finance,” speaking over the phone.
“There’s a lot of optimism over the how the public sector is going to help the private sector grow. Government is a big growth part of what we’re doing and will be over the next couple of years. Every time we earn contracts on the government side we help the private side grow as well.”
Increased government and regulatory oversight has received a mixed reception among the bitcoin and cryptocurrency community, many of whom see cryptocurrencies as a tool to avoid government overreach.
However, Gronager, who first began working in the bitcoin and cryptocurrency space in 2011, is confident that companies such as Chainalysis will help the nascent crypto industry thrive by working with law enforcement and government regulators.
“It’s become more clear that bitcoin and crypto is here to stay,” Gronager said, pointing to what he calls a “macro trend” of crypto becoming more trusted and less feared.
Gronager, who sees the emergence and popularization of decentralized finance (DeFi) this year as the latest evolution of bitcoin and cryptocurrency technology, expects blockchain to help create “a better system than existed before.”
“There’s an understanding now that crypto can enable compliance and regulatory oversight,” Gronager said, naming the recent large-scale Twitter hack as an example of how bitcoin and cryptocurrency analytics can be used to help law enforcement. The perpetrators of the Twitter hack were apprehended just weeks after hijacking many prominent Twitter accounts.
Meanwhile, the company’s work with government agencies such as the IRS has sparked a backlash against Chainalysis, with a recent contract with the IRS to “break” privacy token Monero attracting negative attention.
“Privacy coins are a very interesting technology,” Gronager said, who thinks privacy tokens such as monero and zcash, which work in a similar way to bitcoin but are harder to track, don’t have enough take up to be successful.
“If you look at their use cases, which includes the likes of crime syndicates, you need liquidity and adoption and you need a lot of people to use it. That works for bitcoin as it has liquidity. Monero and zcash are niche purposes that can’t be used for criminal activity at scale. There will be privacy coins and there will be privacy features but they’re niche products. Long term it’s not something we should be very concerned about.”
In July, Chainalysis announced it raised an additional $13 million to expand its Series B round to $49 million with an investment from Ribbit Capital and Sound Ventures to meet demand from the public sector. Last month, the company announced the opening of two new offices in Tokyo and Singapore.
Chainalysis has reported its huge increase in revenue as the U.S. Department of Justice (DOJ) last week warned the emergence of bitcoin and similar cryptocurrencies is a growing threat to U.S. national security, with the attorney general William Barr’s Cyber-Digital Task Force calling it the “first raindrops of an oncoming storm.”