Chainalysis: Bringing Trust & Compliance to Blockchains
Chainalysis: Bringing Trust & Compliance to Blockchains
This week we discuss massive early-stage value creation occurring in blockchain which is fueling the need for robust enterprise-grade compliance tools and emerging compliance category leader, Chainalysis, which is rising up to meet the demand.
Early-Stage Blockchain Value Creation is Exploding
If you saw the mid-year edition of our bi-annual Meet the Blockchain Unicorns report or caught the webinar last week, you already know the value creation in this sector is exploding. As of mid-year 2024, there are 108 private enterprise blockchain companies worth >$1bn, up more than 10x in the past 4 years and up by 5 net new unicorns already in H1 ‘24. Similarly, as we move out of the most recent crypto winter and into a potential bull market, there are currently 78 public liquid crypto token projects worth >$1bn (as of July 1st), up by more than 2x since December 2023.
Taken together, these 186 blockchain enterprises and token-based projects worth >$1bn (of which we are investors in more than 90) represent roughly 15% of the world’s 1,200+ unicorn companies. To the pundits dismay, a sector once described by Blackrock CEO Larry Fink as an “index for money laundering” now boasts more unicorns and than the healthcare & life sciences industry, claiming 10% of the world’s unicorns, industrials at 15%, media & entertainment (7%), or insurance (2%).
Even excluding the public liquid crypto tokens trading above $1bn, which we believe in practice represent a large part of the true early-stage value creation occurring in blockchain, enterprise unicorns still eke out media & entertainment unicorns, insurance and rival healthcare & life sciences unicorns at over 9%. All evidence of the incredible early-stage value creation occurring in our sector.
But Massive Growth Necessitates Compliance
Given the rapid adoption of blockchain technology, however, this is not all that surprising. Stablecoins are now settling the same transaction volumes as the leading legacy credit card networks like Visa, at nearly $12tn annually. The Bitcoin spot ETF launches earlier this year were the most successful ETF launches in history. More than $1bn in US treasuries have now been moved onto digital rails (or ‘tokenized’). Blackrock’s tokenized money market fund product saw more than $240m in inflows in just its first week after debuting in March. And Larry Fink, who was one staunchly against this sector, now sees tokenization as “the next generation for markets”.
But as the share of global economic activity settled on blockchains continues to increase, so does the need for software-based risk and investigative solutions, as businesses and governments contend with the demands of a regulated, global and (now, natively) digital economic system. Which is why our mid-stage growth fund made a follow-on investment into an emerging compliance category leader and enterprise unicorn which we’ll discuss today.
Meet Chainalysis: The Palantir of Blockchain
Chainalysis is one of the leading blockchain analytics companies providing data-driven risk and compliance solutions to governments, financial institutions, and cryptocurrency businesses. Founded in 2014, the company’s mission is to build trust in blockchains by offering transparency and compliance in a rapidly evolving industry.
Often described as the Palantir ($60b market cap) of blockchain, Chainalysis uses data analytics to provide insights into blockchain transactions, which helps both governments and private businesses detect and prevent criminal activities such as money laundering, fraud, and terrorism financing. The company’s software platform, Reactor, enables its clients to investigate and monitor blockchain transactions in real-time, track illicit activities, and comply with ever-increasing regulatory requirements.
As a result, the company has quickly become a trusted partner for governments and law enforcement agencies worldwide, having partnered in recent years with organizations such as the FBI, DEA, and Europol. Its clientele also includes leading cryptocurrency exchanges, payment processors, and financial institutions like Coinbase, Bitfinex, and Barclays. (Check out some of their recent case studies and customer success stories here - they’re pretty impressive).
Strong tailwinds for Crypto Compliance
Chainalysis’ 2024 Crypto Crime Trends Report shows that despite a market downturn, 2022 saw all-time highs in terms of illicit crypto activity, reaching nearly $40bn. Similarly, 2023 remained in excess of $20bn and private businesses and governments increasingly need sophisticated analytics and investigative tooling to prevent costly attacks and track such illicit flows.
Moreover, more than 60% of 2023’s illicit crypto activity was associated with sanctioned entities, up from 43% in 2022. OFAC continues to expand sanctions related to the crypto industry into 2024 and in order to remain compliant, businesses and governments must take proactive steps to not interact with sanctioned addresses and entities. Comprehensive digital asset regulatory frameworks are also going up around the world and businesses need compliance solutions to meet with the growing list of regulations, especially around AML and KYC.
Which is why we were so keen to invest further in Chainalysis and worked to give our LP community exposure to this emerging category leader, which is backed by some of the biggest names in blockchain and beyond. In addition to their impressive customer base, their cap table includes GIC, Viserion, Dragoneer, Accel, BNY Mellon, Blackstone, Coatue, Benchmark, Addition, Marc Benioff, and more.
Designed to Demystify crypto Transactions
At its core, Chainalysis provides real-time anti-money laundering and compliance software for blockchains. Operating principally a software-as-a-service business, the company offers three primary products:
Reactor: the investigation software that connects cryptocurrency transactions to real-world entities. With Reactor, customers can examine criminal activity, such as the movement of stolen funds, as well as legitimate activity like flash loans and NFT transfers.
Chainalysis KYT (Know Your Transaction): KYT is a cryptocurrency compliance solution that combines industry-leading blockchain intelligence, an easy-to-use interface, and a real-time API to help organizations reduce manual workflows, stay compliant with regulations, and safely interact with emerging technologies such as decentralized finance (DeFi).
Market Intel: Through products such as Storyline, Business Data, and Address Screening, Chainalysis allows entities to understand the parties they are transacting with despite the complexity of many web3 transactions. This allows customers to stay ahead of the curve in terms of not only security and compliance, but also market trends.
Altogether, these tools allow businesses to traverse this new emerging industry with confidence (and in compliance) and Chainalysis is poised to be the clear market leader for providing these services to both government agencies and private businesses. As a result, Chainalysis’ customer base has exploded in the past few years, including many of our own portfolio companies as our combined portfolio now sits at over 1,250 companies in total.
An Emerging category leader in public & private Contracts
Chainalysis’ key customers include both governments and private businesses. Their main government customer segments are law enforcement agencies, intelligence, defense, and financial regulators and their commercial sector customers include cryptocurrency firms, exchanges, fintechs and financial institutions. (Like Robinhood, Opensea and Commonwealth Bank of Australia).
In terms of size and scale, we believe Chainalysis has a headstart on its smaller competitors. In addition to their 1,300+ customers, the company has nearly 1,000 employees and has raised $536m in venture-backed financing. Their most recent Series F funding round closed in April of 2022, at a post-money valuation of $8.6bn.
Similarly, while we do not have exact data, it appears that Chainalysis is the clear market leader with regards to US government contracts. A 2020 analysis of public records by Coindesk showed Chainalysis made more than $10 million in the five previous years from the U.S. government, dwarfing its competitors in the blockchain analytics industry.
As IPO activity picks back up in the next few years, we believe Chainalysis may also be a strong IPO candidate. For this reason, we looked to double down on our existing exposure through our mid-stage growth fund, and were able to get access to attractive secondaries based on our longstanding relationship with the company.
Poised to lead blockchain Compliance by Storm
Backed by a veteran team and a track record of success, we believe Chainalysis is poised to lead the industry in blockchain security and compliance. The business has a stable and growing recurring revenue model and has already landed more than 1,300 customers, among which are some of the world’s most sophisticated government agencies and financial institutions. And Chainalysis has a unique opportunity to replicate the success it’s had with the US government, around the world.
Already today, Chainalysis’ data powers investigation, compliance, and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases and grow consumer access to cryptocurrency safely. Looking ahead, Chainalysis is well-positioned to play a critical role in ensuring the safety and security of this burgeoning ecosystem for decades to come.
Author
Christopher Nelson
Head of Digital Asset Research