The blockchain data firm’s co-founder has seen a lot of ups and down in the industry as it grew from a few cryptocurrencies to 10,000 or more. But this time it’s different, Gronager told PYMNTS’ Karen Webster, noting that crypto began in the wake of the last major financial crisis, the Great Recession of 2007-2008.
“It’s very different in the sense that the entire world is in the middle of a financial crisis,” he said. “We haven’t really seen that in the lifetime of crypto.”
Beyond that, the difference this time around also means that crypto is maturing, Gronager believes, as it begins to react to the same economic forces and price movements that drive traditional markets. That isn’t to say he expected it.
Gronager said when COVID-19 started, he was surprised when bitcoin tanked alongside the stock market. There are a couple of reasons it happened, he noted, starting with the reality that there were a lot of retail-level investments in crypto — that number grew from 16% of U.S. consumers in 2021 to 23% in 2022, according to PYMNTS’ U.S. Crypto Consumer study.
Simply put, when the rest of the market tanked — and many traditional stocks have done worse than bitcoin, he said — a lot of buyers realized that crypto “is extremely liquid,” and sold it to support other investments that are harder to unwind.
In a longer time frame, Gronager said he believes crypto will be more tied to innovation-focused investments like tech or cloud computing.
“I’m a firm believer that what we saw in the ’90s, you’ll see the same in the crypto space going forward,” he said, noting that despite a big shakeout when the tech bubble burst, internet companies outgrew the rest of the market. “In the next 10 or 20 years, the crypto [firms] will outgrow the rest.”
A Bad Rap
Stablecoins have gotten a bad rap lately, and at least on the surface, it’s hard to argue with it. After all, the Terra/LUNA stablecoin ecosystem collapsed within a week in May, taking $48 billion worth of investors’ money with it.
And with Washington, D.C., already in full crypto regulation mode, it seems likely that tougher rules could be in the cards. Besides, concerns that stablecoins could usurp national fiat currencies’ place as the main payments currency are serious enough to be behind a good bit of the pressure to launch central bank digital currencies (CBDC) around the world.
From Gronager’s perspective, it’s time for the cryptocurrency industry to do one of the things it does best: come together as a community.
For one thing, that means educating lawmakers on why and how to audit those stablecoins, and creating industry-standard certifications that provide not only some certainty, but also some clarity to the dollar-pegged cryptocurrencies.
A key is differentiating between the two main types of stablecoins. There are fiat-backed versions like Circle’s USDC, and there are far-less-stable algorithmic stablecoins like TerraUSD, which relied on a form of incentivized arbitrage to maintain its one-to-one peg.
“I think it’s important to distinguish between the two main types of stablecoins,” he said. “Let’s take USDC. Every dollar that you deposit to get a dollar stablecoin that you can use on the blockchains, you deposit into a big bank account at Bank of New York Mellon. Everything is super strong. I doubt that anyone believes that the money will disappear there.”
He also pointed to signs of strength in the stablecoin segment. While Tether’s USDT lost its peg slightly in the aftermath of the TerraUSD stablecoin’s collapse, there was something of a run on Tether. But it did not collapse.
“They managed to redeem $14 billion within a week, hardly moving the price of the stablecoin at all,” Gronager said. “I think that’s another example of the efficiency in that system — any bank today, where people withdraw $14 billion, would properly stop transacting. So, it shows that the efficiency in these systems are extremely good and extremely high.”
From a regulatory perspective, he said, requiring regulator audits that provide confidence that the backing reserves are what they claim they are would be an important step. Doing so would also likely help fight off parts of the various legislative proposals that are politics-based, he added.
“I also feel that pushing the industry to create stablecoin certifications is another way they can do that” via legislation, he said.
At the same time, Gronager noted that regulators should be reminded that crypto is “inherently global,” and regulating it too tightly will simply push people to invest elsewhere.
Another part of the struggle, he said, will be convincing regulators and lawmakers that “crypto is far more transparent than traditional finance, and it’s actually really easy to investigate crime, to do compliance in crypto.”
Gronager added that another key piece of this is to focus attention on what crypto is doing that is new.
“We are basically building an operating system for finance that never existed before,” he said. “There’ll be so many new financial instruments, and more and more of traditional finance will migrate into the crypto space.”
While a lot of things will gain liquidity from that, Gronager said, “We’ll see more transparency.” That also means a growing need to analyze that data for “regulators and investors to be able to navigate it in a good way.”
Testifying on Capitol Hill in March, Gronager’s co-founder, Chainalysis Chief Strategy Officer Jonathan Levin, said that one strength of crypto is that it helps people to build new financial communities that can have significant impact on both the economy and the world at large.
Asked about that, Gronager gave Webster several examples, starting with the way cryptocurrencies have been used to support Ukraine in its war with Russia. With Ukrainians struggling to get access to capital as the traditional financial system buckled in a war zone, there is a need to buy things ranging from basic necessities to medicines, Gronager said.
“The crypto industry was able to orchestrate and organize a huge effort in helping and facilitating donations,” he said, adding that it worked “surprisingly well,” raising funds faster and getting them to people on the ground quicker.
“It had a real-world impact,” he said, adding that Ukraine has become “one of, if not, number one on our list of the highest adopters of cryptocurrencies in the world. That was a good example of a community being built basically overnight around helping a country that was in need — creating a global community around it.”
While of less real-world importance, Gronager also pointed to the growing use and acceptance of NFTs, the non-fungible tokens used to hold original works of art, collectables and other types of media.
“I think we had a kind of Warhol moment a couple of years ago,” he said, pointing to the art community saying that Andy Warhol’s works were “reproductions … of no value.”
The same thing happened at the beginning of photography, with skeptics claiming that photographs were of no more value than the paper they were printed on, in part because of the lack of scarcity. NFTs, he argued, provide the same scarcity to digital artworks that are far easier to copy perfectly.
The NFT “ecosystem solved that in many ways,” Gronager said. “It’s an example of a community that had no economy tied to it — was basically hobbyists in the past — and has now completely changed and become something that has value and could increase in value over time.”
The same sense of community applies to chasing hackers, a core competency at Chainalysis, which has provided a great deal of training and tools to law enforcement and intelligence agencies seeking to track cryptocurrency transactions to their originators and recipients, as well as other government agencies, exchanges, financial institutions, and insurance and cybersecurity companies in more than 70 countries.
When it comes to dealing with the regulators and legislators in the process of creating a legal framework for cryptocurrencies, Gronager said, “Sometimes there is a lack of knowledge … that crypto is far more transparent than traditional finance, and it’s actually really easy to investigate crime, to do compliance in crypto. That’s just education.”
Tracking those hackers and thieves is another area in which the crypto industry works well together, he said.
That’s something Chainalysis is trying to make more efficient with the establishment of a new Crypto Incident Response program. The program will provide rapid response investigations support for an industry in which more than a few hacks — even major ones — have been spotted not by the companies affected, but by security firms, researchers and even investors on the lookout for major movement of funds. Often the initial alert is launched over Twitter.
“Time is of the essence” as hackers move stolen or ransomed crypto, taking them through mixing services to try and hide their funds, he said.
“We follow the funds. Certainly they end up on an exchange, and we can reach out and help facilitate seizing the funds, and then work with law enforcement to get them back. That ability is crucial, and tightening that network and that workflow is crucial for the industry.”
When hacks are reported, everyone jumps in, Gronager said. But that is still a very ad hoc process at a time when hacks are funding North Korean nuclear weapons research, and ransomware attacks can shut down huge and vital parts of the national infrastructure — as the Keystone Pipeline incident showed.
Major exchanges that have the liquidity to move large sums quickly put their own intelligence teams on alert. Chainalysis and other companies put their incident response teams on stolen funds regardless of whether the victim is a client or not, Gronager said. Of course, clients get priority, as well as assistance in longer-term tracking of stolen funds and working with law enforcement to retrieve funds.
With a great deal of experience, including solving some of the most difficult cases, Chainalysis has “hundreds of cases behind us and have been behind the seizure of billions of dollars in the crypto space.”
That’s one reason why, Gronager added, “It makes sense to say everyone reached out to us anyway.”
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