It was February 2014. Mt. Gox, one of the biggest Bitcoin exchanges in the world, disappeared almost overnight. With its disappearance, customers lost over 750,000 bitcoins, while the company lost over 100,000—together, they are pegged to be worth $473 million.
The company blamed hackers, a moment the crypto industry dubbed its Lehman Brothers moment. Yet, amidst this chaos, Michael Gronager, then a founding member of global crypto exchange Kraken and now co-founder and CEO of Chainalysis, remained unfazed. He saw this as an ‘astonishing’ opportunity to make a difference in the industry.
“I was looking at the Mt Gox bankruptcy closely. The bankruptcy trustees and investigators had little understanding of blockchain or crypto, highlighting a problem to solve,” says Gronager in an exclusive interaction with edge/.
This led to the birth of Chainalysis, the code he wrote on an 11-hour flight from San Francisco to Denmark. Today, Chainalysis, focusing on Bitcoin tracing, has a global presence. It works with over 250 government customers across 50 countries, a testament to its significant role in the cryptocurrency industry.
Chainalysis’ Dubai office serves the region, southern Europe, and Africa. “We see Dubai as a hub for commerce and innovation,” he says.
The $8.6 billion valued company plans to grow the office and work with other companies in the space, leveraging Dubai’s position as a regional hub for fintech and crypto.
The Mt. Gox crisis that started it all
Even during his time at Kraken, Gronager’s interactions with several banks showed how concerned they were about transaction management and customer funds’ sources. Gronager saw this as an opportunity to build a system that addressed these issues.
“When I built Chainalysis, it was the product that was shaped around the investigation of the Mt. Gox case. It focused on what queries needed to be run and where the money went, and with time, we realised that the money had been stolen over two years. It was siphoned off as some people had compromised private keys since 2011. The money was sent out of the exchange every time people deposited money in,” explained Gronager.
What started as a product designed to investigate the Mt. Gox case quickly evolved into something much bigger. As Gronager worked on other similar cases, he realised the potential of Chainalysis. His assistance to the US Department of Justice in San Francisco was a turning point, solidifying his belief that Chainalysis could be more than just a product-it could be a company.
“We incorporated in April 2015, mainly to set up a Stripe account for accepting payments,” said Gronager. Initially, the product was just a database of entities on the blockchain. For Gronager, a PhD in Quantum Mechanics, this was a no-brainer.
Making sense of the world around
“If I see a pattern that doesn’t add up, I want to understand why. I felt that quantum mechanics was a fun way to dive deep into something and get an understanding of the world around me,” said Gronager. This governing principle got Gronager to dive deep into Bitcoin later.
“I initially worked in theoretical quantum mechanics, utilising distributed computing. This led me to build virtual reality centres using distributed computing, which evolved into grid computing, the predecessor of cloud computing. Grid computing involves a lot of cryptography to set up correctly, which led me to teach cryptography classes. With a background in distributed computing and cryptography, I was well-positioned to understand Bitcoin when I encountered it,” he explained.
By his admission, working on a few significant distributed computing projects and his understanding of cryptography, Bitcoins naturally intrigued him. By 2011, he had seen two mentions of Bitcoin on Slashdot, a popular tech news website.
“At the time, I dismissed it as just another project. However, in 2011, Bitcoin started gaining attention due to its price rising from $1 to $10, which piqued my curiosity. Typically, open-source projects on Slashdot appear and die, so seeing Bitcoin mentioned multiple times caught my attention,” recollected Gronager.
He started exploring the world of Bitcoin in the summer of 2011.
“I initially got frustrated when mining on my laptop didn’t yield any Bitcoin, as the computing power required was already beyond a laptop’s capability. One needed a mining farm. I then attended a Bitcoin meetup in New York in August 2011, where I met other enthusiasts and realised that Bitcoin was more about finance than computing.”
The value that blockchain brings
He was particularly interested in the innovation behind Bitcoin’s digital scarcity. In the digital world, where most things can be copied, Bitcoin allowed for a digital object that could only be moved, not copied.
“This makes it the perfect representation of value because scarcity defines value. This convinced me that the value would eventually move to the blockchain, whether it took 5 or 50 years,” added Gronager.
He first worked around a micropayments demo website but quickly realised that if this product worked, it would kill the blockchain as it would simply have too many transactions.
“During this period, I met Jesse Powell, who had the idea to start a crypto exchange, which eventually became Kraken, and he invited me to join him in this endeavour. Kraken was a new kind of financial institution, and since my background was in distributed computing and cryptography, rather than finance, it was a new challenge for me,” recollects Gronager.
Kraken started as a small venture but proliferated as the demand for crypto trading increased. The initial challenges were typical for any startup: figuring out how to scale, making the different teams work well together, and finding suitable hires.
“I also learnt that the rest of the industry was like me; they didn’t know much about finance. What the crypto industry had imagined doing was similar to what the tech industry does—onboarding billions of people within seconds and allowing them to transact for millions of dollars. And while this is a great idea in tech, it is a bad one in finance, as you don’t know who you are onboarding and are allowing them access to your infrastructure,” explains Gronager.
They needed systems to be implemented to tell them who could be onboarded and check this in real-time. That is where the database needed to be on top of the blockchain to get every person’s breadcrumbs, background, and all other essential details of what they do with their money. The breadcrumbs on the blockchain make compliance faster.Â
The breadcrumbs that started the chain
These learnings helped Gronager build Chainalysis. In 2015, Gronager met Jonathan Levin, who became the company’s co-founder.
“In early 2015, my co-founder Jonathan joined after a vacation in China, and we moved to New York to join an incubator program with Barclays and TechStars. We already knew our customer base would include banks, crypto exchanges, and governments, so being close to DC and based in New York was strategic,” says Gronager.
Raising funds, though, remained a challenge because investors did not favour Bitcoin.
“I pitched to around 50 serious potential investors. Still, we kept going because we saw revenue coming in. We managed to bootstrap, securing some early investment to tide us over. We kept going by delaying bills and focusing on revenue growth. We ended 2015 with $300,000 in ARR, and the revenue was $150,000 in serving customers across different segments,” explained Gronager.
The revenue that kept coming in helped the team. “We had a lot of business. We had a crypto business that paid us $50 monthly, as they couldn’t afford $150 then,” recollects Gronager. The team also worked with the FBI and other US agencies, and international customers started coming in.
The turning point came when the team secured its first investor, Point Nine, from Europe.
“From there, we secured other investors and grew our customer base across law enforcement, banks, and crypto businesses. Our product initially focused on investigations, then shifted to a compliance API for private sector clients as they grew in size and needed compliance solutions. The product evolved to cover more blockchains and tokens, reflecting the changing crypto landscape. Today, we have extensive data on virtually any blockchain and token, including stablecoins, which now dominate blockchain transactions,” explains Gronager.
Today, blockchain is the infrastructure for sending digital dollars. “This has become the first real use case of the blockchain, and the value of stablecoins and crypto is pervasive. The database can help you understand the normal and illicit economies that can help you solve any crime,” adds Gronager.
He believes that today, the crypto space in the GCC and MENA regions differs because it is more institutional, with more significant investments from family offices and high-net-worth individuals. The area is also open to crypto, and the response to the FTX collapse showed a commitment to regulating and continuing to support the industry.
Gronager says the best part of being an entrepreneur is solving problems that matter to people and creating a company that people can depend on and benefit from.
“Be honest about your ambition. If you want to build a small company, know that and signal it. If you want to build a large company, understand it’s a long journey. Align your ambition with your co-founders and team, which drives the company’s growth and success,” advises Gronager.
Chainalysis plans to broaden its product offerings and footprint, expanding from solving crypto crimes to general investigations for public sector clients.
