Extra episode: Philip Gradwell (Chief Economist Chainalysis) (transcription)

Transcription: Extra episode Philip Gradwell

Philip Gradwell art Money2020 in 2021 after his conversation with Jeroen Broekema for the Leaders in Finance podcast

This is Leaders in Finance, a podcast in which we look for the person behind the success. We are talking to the leaders from the present and the future about what drives them, both in their careers and at home. Why? Because in the financial sector, we should be more open. First, a great thank you to our partners in this podcast for their support. They are: Kayak, FG Lawyers, Odgers Berndtson executive search and Roland Berger. Live from Money 2020, we are talking to Philip Gradwell, Chief Economist of Chainalysis. Here’s your host, Jeroen Broekema!

 Jeroen: Welcome to a new episode of Leaders in Finance. This is not a regular episode where we discuss the person behind the success, I tend to call it, but it’s an extra episode. Today, we’re live from Money 2020, Amsterdam, Europe. I’m delighted that Philip Gradwell, the Chief Economist of Chainalysis takes the time to talk to me about his business and about everything around that business. Welcome, Philip!

 Philip: Thanks for having me here, it’s exciting to be in a place where I can actually sit across the table from you and have this conversation.

 Jeroen: Isn’t that amazing? I’m very happy about that as well, after such a long time with Covid-19. So, first of all, Philip, about you, can you just tell me a little bit about your background and what you’re doing?

 Philip: I’ve been an economist for actually a number of years now. I started in the world of energy and climate change economics and helped grow a small consultancy into a bigger consultancy. At some point, I felt like a change. I had covered cryptocurrency, it was a personal interest, for a few years before and I knew the co-founder of Chainalysis and was looking for something new. I had a conversation with him and he said, “Well, why don’t you come join Chainalysis?” At the time, it perhaps wasn’t so obvious. This was back in early 2017, we started having those conversations. But I’m very glad that I’ve dived in because really for me, cryptocurrency is a world with a huge amount of data and as an economist, it felt like a natural transition to go and understand how the future of finance is starting to develop and really understand the dataset and it helps us understand that.

 Jeroen: What was the biggest change for you when you started this job?

 Philip: The similarity. Before I was telling people, “Climate change is this thing that’s happening, here’s some data. Try and understand it, it’s probably going to change the world.” In cryptocurrency, it’s like “Cryptocurrency’s here. Here’s some data to understand where’s going, it might change the world.” So it’s the same type of story, I think, that I’m telling. But definitely a big shift actually from consultancy to a software company. In a software company, you’re really making a big investment to make sure you have the best products that your customers can use. And so, the business is run in a very different way. It’s a lot longer term thinking than what I was used to before.

 Jeroen: That makes sense. I can imagine – I like the comparison – in both worlds you need to convince people of the story, right?

 Philip: Yeah. And crypto’s definitely had that. It’s been a sector that’s just been growing up and every year, it gets a bit more mature. I think we actually hit a tipping point in the last twelve months where it hit the mainstream. But it’s taken a lot of busting of myths to get to that point.

 Jeroen: Yeah. And just for people that don’t know Chainalysis, my listeners know I love to structure it by going from one stakeholder to the next. You can add as many stakeholders as you wish, but maybe start with either the clients or your colleagues.

 Philip: I’ll describe the clients, because that’s a tangible description of the company. At its heart, Chainalysis is a blockchain data platform. So, we have this core data set of how cryptocurrencies are used and how they’re actually transacted between people and different customer sets, you need that same data but we provide it to them in different ways. Actually, the earliest customer set was law enforcement. Talking about the story of cryptocurrency, Bitcoin potentially got off to a bit of a bad start where the first mass use case was the Silk Road, a famous darknet marketplace where people could go online and buy drugs using Bitcoin. And so, the first people who really needed to understand how Bitcoin was being used was law enforcement. They needed to actually trace the funds from that darknet market to a place where the Bitcoin could be sold for fiat currencies and our software helps them do that. 

 Jeroen: Just a little bit more specifically, who are the customers? Do you have names you can share?

 Philip: I think we provide our software to almost every government in the western world and law enforcement agencies and it really goes across the range. So, you actually might have a local police force where they have arrested someone and they found a piece of paper that’s got this strange string of letters and numbers and that’s a cryptocurrency address. That might actually be where a local drug dealer is keeping a lot of the cash, they’re converting it from cash to Bitcoin and now, because they’ve got that address, they can actually see the broader passing of activity. That can help them in their prosecution and help bring up a larger case. So that’s a very local law enforcement agency and it goes all the way up to national security concerns. People might remember that Twitter was hacked a few months ago and there were some cryptocurrency addresses that people associated with that hack. At the time, Twitter, if you had hacked into that, you had access to some very powerful Twitter accounts. Donald Trump was using it as a platform. And so, that became a national security issue. Through the use of tracking through those cryptocurrency addresses, they were able to identify the people that had hacked in. So even though cryptocurrency wasn’t directly involved in that, they were able to use our blockchain information as an extra path in their investigation.

 Jeroen: These are government agencies but they’re not your only clients, right?

 Philip: No. Perhaps the original start of the business, I’m sure people have heard all the cryptocurrency exchanges. You’ve got your companies like Bitpanda or Bitstamp and so on. Very big businesses now where we tell customers and increasingly institutional customers “Come to trade cryptocurrencies.” Of course, these businesses have to do some AML on the Bitcoin or the other cryptocurrencies that they receive and that they send. And so, we provide our products, it’s called Know Your Transaction, it’s an anti-money laundering software for cryptocurrencies.

 Jeroen: That makes sense. Moving on to the next stakeholder, your colleagues.

 Philip: Well, there’s one other customer group that we serve as well, which are the more traditional financial institutions. It’s really been this path of adoption. Law enforcement had to get in there early, then it’s the crypto-native businesses, but increasingly traditional financial institutions want to offer cryptocurrency. They actually need data to understand the size of the market, how much money has been made, how many customers are there, what are the types of financial products they need? All questions that you can answer using our data. And of course, if they actually want to custody the assets themselves, they need to do the same AML-work that the exchangers do. So, for us, that’s the next horizon.

 Jeroen: Makes sense. I’m sticking to the stakeholders, so on the colleague side, what kind of people work with you and how many people are there? Where are they?

 Philip: It takes a big group of people to build a business like Chainalysis. At the heart, our software is a service company, and so there’s a lot of engineers. We’ve got a big engineering team in Copenhagen, although the main offices are in New York and London. Two of the co-founders are Danish, that gives us a nice root there. And so, a lot of software developers, really from everything from those blockchain experts who know how to get that unique data source and then transform it through all the data pipelines. Of course, we’ve got a product team, we’ve got to respond to our customer needs and build the products they want. And then of course you’ve got the sales and marketing team. All the things you need to be a big company. I think there’s now over 300 of us and we grow very fast.

 Jeroen: What is the success? Why is it growing so fast? Before we move on to the other stakeholders.

 Philip: Obviously, we’re rising with the tide of the cryptocurrency adoption. But I think Chainalysis has been able to offer something special. We offer the highest quality data set. If you don’t have Chainalysis, you could see the raw blockchain data but you wouldn’t be able to make any sense of it. And so, we really take that very complicated world and we make it very simple by mapping it to the real world. And that allows people to take actions. So that provision of accurate actionable data has been essential. As Chainalysis provided products, it helped the industry grow. Because you really can’t do things in financial services until you’ve got your compliance in place. We have both actually helped push the cryptocurrency industry forward and also, we’ve benefitted as it’s grown and we have secret sources providing that good accurate data and workflows that are helpful to the financials of the world.

 Jeroen: That’s amazing. The other stakeholders are of course the owners of the business. I don’t know what’s public about it and what’s not, but can you tell us a little bit more about who owns the business?

 Philip: Obviously, there are the original founders. Michael Gronager, and he’s one of the Danes. Before that, he worked at Kraken. Actually, he has an interesting story. So, Kraken is a big cryptocurrency exchange and his real challenge while he was there was to try and get Kraken bank accounts because people don’t just want to trade crypto to other crypto; they want to take their euros and exchange that for Bitcoin. So, he had to go and convince traditional banks – and this is very early on in the early 2010’s – that they should offer a Kraken bank account. These companies said “We have no idea who you are, how are you going to do an AML-obligation?” And so, he realized there was a business to be built on to that. He was joined by Jonathan Levin and also Jan Moller, who was our first CTO. They played a big role in the company. And we’ve taken a lot of VC funding, so Benchmark was our series A. It got very famous for investing in fast growing tech companies. We also have funding from Ribbit. It’s been a wild ride, the last year. I think we’ve raised about 300 million dollars. So, we’ve really been diversifying our cap table in that last year.

 Jeroen: That’s an amazing amount for a relatively young company. Moving on to another stakeholder, society. Like your previous work in climate change, there’s a lot of opinion on cryptocurrency and everything around it. What was the mission of the company in terms of society at large?

 Philip: I actually do think that we have a unique role because we can connect so many of the different stakeholders. It’s actually pretty rare, even in other industries, to have a central data company that’s providing the software to the regulators, to the government, to the law enforcement and to the private sector businesses, both in the traditional finance world and also in this new crypto world. And so, we really act as a connector and we think that’s so important. Going back to that story of Bitcoin’s origins and its first mass adoption use case of Silk Road, that scared a lot of people in government and law enforcement. We were able to say, “We’re able to provide the transparency that allows you to manage this risk and trust the activities that are happening on the blockchain.” And really, the law enforcement side of the world actually relaxed once they knew there was that solution. They said, “We’re willing to let this innovation continue, because we think we can manage the risks.” And now, it’s actually the financial regulators who are going, “What do we do in this new area?” But again, we can provide that data. So, for us, it’s all about building trust in blockchains by providing the data, the transparency, and by bringing all of those participants together. That’s the hard work that needs to be done to drive adoption of this new technology forward.

 Jeroen: That makes total sense. You mentioned the word ‘trust’. Ultimately, financial services in general is about trust. Especially the business you’re in, trust is even more important because a lot of people don’t trust it. You have all the government agencies that are also dealing with this and need support from companies like yourself. I wonder, to what extent are these government agencies also regulating you? Or is the fact that you work for them enough? How does that work?

 Philip: We are actually a data provider, so we don’t actually undertake any regulator activities and we provide that data for our software. And so, I think there is a good customer business relationship but there isn’t actually a regulatory system that we have to comply with. But I think we help them understand where the regulation should go. Because we actually can act as a third party. If there was that regulator/regulator entity relationship, there’s a different set of incentives. But actually, we can be the central platform and provide advice and connect people from both sides.

 Jeroen: That’s very interesting, because normally fintechs and stuff I talk about, the regulator obviously is one of the stakeholders. But for you it’s a large client, in a way, or government institutions. But I wonder, that first government institution that came on board with you, I don’t know if you were there already or one of the first that came in, it’s very hard to get them on board with a private company, or not?

 Philip: I think this is one of the things that is so fascinating about this space, governments have realized that the technology is evolving so rapidly, it’s hard innovation to deliver, even within the private sector. So, it would be almost impossible to deliver in the public sector. And so, I think they say, “We know that we need to partner with this company, it’s the only way that we can get a handle on this.” I would like to say that our success is revealed, actually that partnership has worked really well. And perhaps we can be a bit of an example for private sector companies that are saying, “We’ve actually got a solution that governments need, let’s go and work with them.” That builds a nice solid base to our business as well and lets you serve the private sector that emerges on top of that.

 Jeroen: So, criminal activity through cryptocurrency and the like, how big is it? Do we know that at all?

 Philip: One of the fascinating things about the blockchain and why I actually joined Chainalysis is this data set about economic activity. Every single transaction that someone makes in the cryptocurrency is published to the blockchain. And so, we can see 100% of what’s going on. A lot of it is pseudo anonymous, so we don’t know the names behind it. That’s actually good; sometimes you don’t need to see all that person identified information. But we are able to see which addresses are for example controlled by ransomware or by a darknet market. And that means we can actually say, out of all of the economic activity on the blockchain, “This is the amount that’s gone through a darknet market or another type of illicit entity.” And so, when we do that calculation, we actually find that in recent years the level of activity that’s related to illicit actors is actually only around 1% of the economic activity that’s happening in cryptocurrencies. Really the vast majority of cryptocurrency use is currently a speculation in investment. Criminal activity is actually a small percentage. 

 Jeroen: But apparently, it feels to people as if it’s much bigger.

 Philip: Once you actually get into the crypto industry, you start to realize that it’s relatively small. The media definitely creates some sensational stories, from darknet markets to ransomware. Some of it is very serious and needs to be dealt with. But I think it actually takes people away from some of the opportunities in this space. They get a bit too scared of a relatively niche and also crucially manageable risks. So yes, there’s ransomware. Yes, there’s darknet markets. Scams can also be a big source of the illicit activity. But there’s also a lot of innovation. People working out new ways to send money across borders or create new financial products. And that, if you like, is the 1990 set of activity. So it might seem like a big thing from the outside, but actually once you scratch the surface, you realize “This is about much, much more than that illicit activity.”

 Jeroen: From a product perspective, to what point is it tech and to what point is it people that you offer?

 Philip: I think the area that Chainalysis excels at is taking that raw data and making it meaningful for people. But there’s a lot of data, and so there’s a big amount of tech and you also need to think very carefully about how to serve that to customers in this new industry. So, we spend a lot of time translating, taking this raw slightly technical data and turning it into something that really is understandable to humans. We build workflows for them, so it’s not just “Here’s a bunch of data”; we say “Look, if you’re actually running a compliance program, do this. Do that.” So, a very large amount of data, but actually a larger number of people. We’re doing that crucial task of translating because we know we’re early in the space and therefore we’re the experts and we can be the guides. And we bake that in our product design.

 Jeroen: In terms of tips for the cryptocurrency industry, what would you give to them? What would you say? How can they work on their reputation and how to deal with governments? What are the tips you have for them?

 Philip: I think a lot of cryptocurrency businesses are in a strange place, because their branding is almost intentionally very retail-focused, it’s looking to the future and that can be quite fun and cool, but is that what regulators always want? Is that what their counterpart always wants? There sometimes can be a little bit mistrust. We’re talking to some very different cultures here. So, I think spending a bit more time on places like Money2020, talking to those different types of people is actually the very first step. Sometimes I think there’s a bit of suspicion between the two sides and honestly, if they got together they would realize they’re much more similar people. And then I think the thing that people perhaps don’t realize, because it happens a bit behind closed doors, is that there’s actually a huge amount of regulatory effort and compliance effort that’s already going on. If I’m a cryptocurrency exchange, I’m actually covered under the same AML-laws as any other money service business. I just don’t think that’s communicated enough. So, I think there’s actually more communication needed than action. Because the industry does work quite hard to do that. Certainly keeping up with the frontier, it’s hard for people in the crypto industry. So I guess that would be my other tip: spending more time trying to communicate where we think the space is going and helping regulators understand that. Because honestly, that’s one of the biggest challenges, keeping up with where this might be going.

 Jeroen: That is actually one of my two last questions. One is: Where is it going? It’s a good bridge to that question, maybe we can start with that one.

 Philip: Bitcoin was the first cryptocurrency and it’s been around for more than ten years now. I think it’s soaked into the public psyche now. Everyone kind of knows Bitcoin. A lot of people are getting exposure to it by buying it. The thing is, Bitcoin is a little bit boring, in a way. The only thing that you can do is you can transfer it and hold it. That’s why it’s known as digital gold. What’s happening now is that people are creating cryptocurrencies where you can do more things with it. You can take more actions. You could lend it, you can swap it, you can run lotteries using a sort of smart contract. So, we’re creating much more complex financial products and that’s not even just the future; that’s actually what’s happening now and it’s going to be a major trend in the next couple of years, decentralized finance. I think what we’ll see after that is more financial assets will exist on blockchains. Maybe we’ll start to see shares be added onto Blockchain. You can already trade Apple and Tesla stock as a cryptocurrency. So you can trade it 24/7. But maybe we go beyond financial assets into real world assets. I think cryptocurrency is going to move from cryptocurrency into digital assets and how that plays out, we’re not sure. But I think there’s just going to be a much faster cycle of innovation entering the financial sector than we’ve seen for a long time. Because this sector has that freedom and culture of innovation.

 Jeroen: We should check in a couple of years from now and see where we’re heading. The last question. Although this is money2020, it’s a global thing, or at least a European thing, we are in The Netherlands and most of my listeners are either Dutch or Belgian, are you active here in this area?

 Philip: Yes, we actually have a team of four people. It’s been growing very fast.

 Jeroen: Both working for government and banks?

 Philip: Across all of our stakeholders.

 Jeroen: And you want to grow faster here in this area?

 Philip: Absolutely! We probably had 100% growth rate over the last couple of months in Amsterdam.

 Jeroen: Wonderful! Philip, I want to thank you a lot for your time and I’ll follow you and the company.

 Philip: I appreciate it!

 Jeroen: Thank you!

You’ve been listening to Leaders in Finance. We hope you’ve enjoyed this episode and we do appreciate very much any feedback you might have. What’s keeping you busy and whom would you like us to talk to in the future? Please let us know through an Apple or Google review. You can also contact us through social media platforms or directly by sending an e-mail. We would very much appreciate it if you reach out to us. We would also like to thank our partners for their ongoing support in making this podcast possible. They are: Kayak, FG Lawyers, Odgers Berndtson executive search and Roland Berger.

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