The Pomp Podcast - Jonathan Levin, Co-Founder of Chainalysis: Catching the Bad Actors in Cryptocurrency

Episode Date: March 20, 2019

Jonathan Levin is Co-Founder of Chainalysis. In this conversation, Jonathan and Anthony Pompliano discuss how to build a startup, what it's like to pitch a Silicon Valley Venture Capital Fund, why Chain Analysis tools are important, what the bad actors are doing in cryptocurrency, and how Chainalysis is being used to catch them. ----- Join the Off the Chain newsletter. Pomp's daily email analyzes the crypto market for institutional investors. Simply, it’s the best crypto newsletter delivered to your inbox every morning. No frills. No bullsh*t. Just everything you need to know in a 3-minute read. https://offthechain.substack.com/ ----- ZenLedger simplifies crypto taxes for investors and CPAs. We provide the best software for importing crypto transactions, calculating gains and income, and auto-completing tax forms like 8949, Schedule D and FinCEN. If you had losses in your crypto investments, ZenLedger can help you save up to $3,000 on your income taxes, with our tax loss harvesting tool. ZenLedger is also a TurboTax partner and has the best support for EOS owners. Finally, a simple tax tool that saves you a ton of time and headache!Visit Zenledger.io/OffTheChain to get your taxes done with ease, and as an Off the Chain listener, save 20% of your 2018 tax forms! ----- Totle is a rare blockchain investment opportunity, one that offers a live product, active customers, an established revenue model. Totle solves three significant problems with blockchain asset exchange: 1) Security 2) Complexity and 3) Pricing. Over $4 trillion of blockchain assets were exchanged in 2018 and growth is forecast for at least the next 10 years. Totle’s sophisticated platform powers the blockchain economy with safe, simple decentralized asset exchanges at the best price for traders, wallets, businesses and other financial apps. Totle’s B2C Web App and B2B API are live and serving customers today. Visit totle.com/pomp for more info. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Jonathan Levine is the co-founder of Chainalysis. In this conversation, we discuss how to build a startup, what it is like to pitch a Silicon Valley venture capital fund, why chain analysis tools are important, what the bad actors are doing in cryptocurrency, and how Chainalysis is being used to catch them. I really enjoyed this conversation and I hope you do as well. All right, guys, before we continue with this episode, a quick word from our sponsor, Zen Ledger. For all you accountants and crypto investors out there trying to get through this

bear market, Zen Ledger is a fast and simple tax reporting tool that saves you a ton of time and headache. Ain't nobody like dealing with their taxes, so let Zen Ledger do it for you. You can learn more by visiting zenledger.io off the chain to get your taxes done with ease. And as an off-the-chain listener, you'll save 20% of your 2018 tax forms. That's right. Listening to this podcast makes you smarter and saves you money. I got you. One more time, that's zenledger.io slash off-the-chain. Boom, another ad. Total. Total's sophisticated platform powers the blockchain economy with safe, simple, decentralized asset exchanges at the best price for traders, wallets, businesses, and other financial apps. That was a mouthful. They do a lot. Similar to

using kayak for finding the best flights totals platform aggregates decentralized exchanges and optimally routes trades for execution they've got a simple api and it eliminates the need for any business partners to understand the fragmented decentralized exchange landscape and it integrates with many exchanges and protocols total it looks like toddle but it's spelled total they got the whole misspell the name on purpose to sound cool. So Total is T-O-T-L-E.com slash Pomp. Go check it out. Total.com slash Pomp. When you go, take a screenshot, tweet it to me. I'll drop you some fire emojis. They'll be happy. You'll be happy. I'll think I'm cool. It's a win, win, win all around. Total.com slash Pomp. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions

expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. Let's go through your background, and then we can talk about how you got into crypto and then we could talk about chain analysis and what you're building there and everything sounds awesome thanks for having me we're just down the road in union square so it's not not too bad union square in manhattan is becoming like uh crypto like head hq of manhattan isn't it

we should uh we should start like an open cry bitcoin market in union square take over take over the farmer's market and start an open cry market so i there will be people there for sure i uh i actually got i'm from the uk from london originally i got into cryptocurrency 2012 2013 i was studying economics at the time and really i came in like nuriel rubini i was super skeptical Dr. Doom saying that crypto is never going to work. Bitcoin has all these flaws. There's no way that it could ever take off. The mining incentives are all out of whack. And yet, I consistently got disproven time after time. And eventually, I said, well, maybe economists aren't the best people to understand a technology that's transformative for the status quo.

Probably a good idea. So essentially, I was in Oxford at the time. I went to the pub, had a beer with my friend Tom. And he was running a cybersecurity company at the time. And he said, we need to start arbitraging between Mt. Gox and Bitstamp and Bitcoin. I was like, Tom, I don't even understand what you're talking about. And after that, I sort of fell down the rabbit hole. I started doing the first fundamental economic research on Bitcoin.

So I started understanding, you know, how are miners incentivized to broadcast transactions and secure the network. And I really wrote some of the early academic work. But I fundamentally believed that there needed to be a company that actually tracked how and why people were using this technology. And I thought that the company that knows the most about how and why people use cryptocurrencies is going to be one of the most important companies in this ecosystem. And that's the only way that it can actually go mainstream. And the lack of information, I used to go to these, did you ever go to those cryptocurrency conferences where people would put pictures up on of like flying cars

and, you know, the future, the future is here. But I said, well, this is meant to be an open financial system. Someone needs to be putting out graphs. Someone needs to understand, you know, what is actually being used? What is actually the state of the market? And so I set off on this mission to essentially build a company that knows the most about what happens on the blockchain. Okay.

So that was a bedroom idea. I sort of went off and started a company called Coinometrics. Coinometrics. This is, yeah, Coinometrics. This is back in 2013. Okay. Started a company, met my co-founder on Reddit. Okay.

Don't do that. This is a classic crypto story already. This is my early crypto experience. And then eventually that company didn't work out, but was still obsessed with this mission and knew that there needed to be a team out there that would be able to build this. So joined forces with Michael Groninger and Jan Muller to form Chainalysis. And that has been what we've been doing for the last four years. Okay.

So before we get into Chainalysis, what you guys are doing today, you guys just raised a bunch of money, et cetera. let's talk about building companies, right? You know, on Twitter, you talk a lot about, hey, here's some of the things that founders should be thinking about. Here's how to present and pitch all of that. Maybe let's just go through literally the kind of early days of a startup. So around ideation. And once you have an idea, I think this would be interesting, kind of those first couple of steps to go test that idea. Maybe just talk a little bit about how you think about that, what you've seen people be successful and maybe some of the pitfalls as to what not to do.

Yeah. So I think, again, for us, it started with an idea. And that didn't actually start with exactly who we were solving that problem for. So I was, I sort of had this big idea that there needs to be a company that organizes the blockchain information, layers on a layer of intelligence, and gives that to people, for people to understand what's going on in this ecosystem. them. But that's not solving a problem for anyone. And what you need to do as a startup is start with a targeted focus on like a clear problem statement, where you can test certain hypotheses. And what we found was, our hypothesis was when we came to the US in 2015, and we went through tech stars, we wanted to prove out that actually, we could get a global financial institution to actually use our software to be able to onboard cryptocurrency businesses. Okay. So we actually...

Just one. We just said, like, if we could get one, if we could get one global bank to get to a point where they have the onboarding procedures to onboard a cryptocurrency exchange, then we are actually going to prove out that this is going to be a significant business in the future. And so that was one of the hypotheses that we need to prove. And when you're building a company, what you want to be doing is writing down those hypotheses and proving those out and meeting those objectives, which takes you to that

next stage. So we said, if we can do that, we can raise some money from investors and then take it to the next level. So for me, it's about getting clear on what is that initial target market? Who are you solving a problem for? Writing those things down and then proving those hypotheses over time. And when you do that, you can actually explain to investors that you're going to prove out these three things that then take the company to its next inflection point. And that's where an investor is going to say, actually, it's going to take you a million and a half.

It's going to take you a million and a half dollars to get to that point, to prove those hypotheses, to access this market opportunity. What you're describing, it's funny because I probably describe it a little bit differently, but it's actually the exact same thing where most founders who are unsuccessful, what I've seen as a commonality when it doesn't work out is when you do kind of an after action review. And you look and you say, what did you do and why didn't it work? There's usually not a fanatical focus on one single thing. So for you guys, get one institution to do this. Right. And once you get one, then we'll figure out what to do from there. But if we get one, we got a shot. If we can't get one, we're dead in the water.

Right. So so kind of a very specific goal that's easily measurable, that's very concise, clear, et cetera. And you can actually articulate to other to investors. And then two is when fundraising, not only being able to describe that mission or that goal, but two is. i usually see folks say i want x dollars or say lead with the money and then they get asked what are you going to do with the money and what they describe are the actions that they are going to take i'm going to hire people i'm going to spend on marketing i'm going to do whatever instead of what they probably should be doing is describing the milestones they will hit with the money correct right and i think that's what you're describing here that's super valuable yeah so i've

been i've been mentoring on the blockchain tech stars program in new york very cool and really what that is about especially for a thematic accelerator like blockchain or crypto there's not a generic problem that you're solving there what you want to do is get like really tight on a market opportunity to to say that that's what you're going after and you're going to leverage this technology and so what i like is saying you know we are going to take a million and a half we're then going to seed our marketplace maybe it's on the demand side or the supply side and if we can seed that on the demand side for example then we can raise additional capital to attract supply or the other way around so the the key is to be clear in what are the what are the key things

that you need to prove out in order to make a massive company uh i usually talk about this as a video game right so many people probably heard me use this analogy but um when you're playing a video game you start on level one or round one right and you can't go from round level one to winning the game you have to beat the first level and then you're allowed to play the second level and once you beat the second level you go to the third level fourth level fifth but you have to be successful at each level in order to win the opportunity to go to the next level and eventually you win the game right yeah company building fundraising sales it's all very similar so we We actually have a value at Chainalysis that we call radical gradualism.

Oh, okay. Tell me more about this. I like this. So our view is that if you're going to get into cryptocurrency, you don't believe that the state of the world is going to continue just being the status quo, right? You believe in change. You believe in change. You believe in something potentially radically different, right? And yet, what Chainalysis does is it serves the world's leading institutions that exist in the world today, that govern our financial system, that take care of society.

We serve really important global institutions. And so they are going to gradually adapt and adopt this technology. And really, what we want to be able to do is have that radical gradualism. Someone who's going to see what that end boss looks like, but understand all the levels that you need to take in between. And it's really the belief that, you know, tokenize the world. That probably happens at some point in the future, not happening today, not happening tomorrow, and not happening this year, right, in terms of the whole place. And so it's, you know, how much did you guys think about when you first started? Okay, we want to get one financial institution to use this.

did you have a good sense of what they would use it for or what that like first you know really specific use case would be or was it more the goal is to get one institution to use this let's go talk to a bunch of them and figure out what they need and then build it for that need like which path did you go down so actually we had a lot of experience internally of the problem set that we were trying to solve okay so michael michael was a co-founder of kraken and he was the chief operating officer and his job was to go knocking down all the bank doors to try and get bank accounts. And what Michael found was that that was a pretty tough ask in 2013, 2014. And so he decided that actually there needed to be a set of tools that were available to both the cryptocurrency

businesses, but also the banks to bring them together to be able to put in place controls and allow cryptocurrency businesses to get bank accounts at these financial institutions. And so our hypothesis from the beginning was Chainalysis is the company that bridges the gap between cryptocurrency businesses and financial institutions. We're going to build critical infrastructure so that cryptocurrency businesses like Kraken can get bank accounts at places like Barclays. And part of this is that kind of radical gradualism, which I love that term. kraken or another digital currency or cryptocurrency exchange would love to not have a dependence or a kind of a single point of failure with the legacy system but they still need

it yeah and we've actually seen um i think it's india where uh last year the government came in and rather than go after the crypto companies they said to the legacy financial institutions you are not allowed to work with cryptocurrency companies or individuals that that uh have money from cryptocurrency. And if you think about kind of a two-sided market to some degree of participants, going after the people who operate in a regulated world who are going to listen to the government, right, for sure, is actually the better strategy than going after the crypto companies, right? Yeah. So actually, this is actually how almost all financial regulation works. So essentially, the government can't invest enough money and personnel to monitor

all of the different financial transactions that are going on in the world, what happens is they write regulation that deputizes the financial institutions in order for them to monitor and comply with those regulations to protect the integrity of our financial system. And so cryptocurrency is no different. And in fact, the regulations have in the US and actually increasingly around the world, have pushed the responsibility on the financial intermediaries. So those are the exchanges, the merchant services, and those types of businesses in the cryptocurrency ecosystem. They push on those in order for them to monitor the riskiness of their clients and the transactions that are going through. So really, the whole of financial regulation is set up in a

way that the banks are sort of in our ecosystem are like the de facto regulators. They are explaining to people what is possible and what's not possible. So our hypothesis is if we can give banks the approach, the operational software so that they can monitor cryptocurrency businesses, then our cryptocurrency businesses will be able to access the financial institutions that makes sense let's um before we go talk specifically about the company uh pitching investors let's talk a little bit about kind of once you've got the idea what's the best way to kind of go test that idea and gain traction um you guys now have raised multiple rounds of funding yeah uh and some of it comes from angels some of it comes from some you know excel and kind of

silicon valley type tier one firms first let's just talk about in general how you approach pitching investors and then let's talk about the difference between you know kind of uh individual high net worths versus uh a silicon valley firm yeah sure so we i would say split it out between the rounds um raising growth fund capital is very different to raising your first check and and really when it came to chain analysis we had to we were raising our seed round in 2015 okay if you remember 2015 was not a fantastic time to be raising money for a cryptocurrency business yep and so the story that we really needed to be able to tell was that Chainalysis actually works with stakeholders that are outside of the cryptocurrency ecosystem we're not purely dependent on

cryptocurrency to be successful so our story in 2015 was really around how we're building a solid SaaS company. And we have a big market in the government space, even if you don't believe that cryptocurrencies are going to take over the world, and we're going to tokenize everything. And so the initial investors, one consistent theme is, can you explain your addressable market? Can you really help an investor wrap their head around everyone who's going to use your product in the future and explain how you have a big enough total addressable market and so for us a lot of the challenge in the early days of chain analysis was to explain that just considering the government market we have a massive opportunity and so i would say for people who are raising

their first sort of round of funding again get really targeted with the idea and the hypotheses that you're trying to prove but make sure that you have a good story about how that ends up being in a massive market where you you've got a real shot at gaining a good share of that so that's that's that's sort of the key i would i would say look at it's about it's about running a process it's about making sure you've got a target list of investors that you think are going to be who are going to see the way you see the world and connect with that we had to pitch 70 people to get our seed round done. Because at the time, it was a pretty contrarian view that cryptocurrency were going to be a big thing. And that has changed over time. And as we've

developed as a company, our metrics and traction just speak for themselves. And really, it's about comparing ourselves to the leading SaaS businesses out there. When we're fighting for investors, or we're fighting for talent, like we're competing with the best companies in the enterprise software market. So that's how we think about it. Do you remember how many investors you guys had in the first round?

Or like what the average check size was? So we actually did a, the average check size was, so we had a lead that led sort of the majority, but we also had smaller investors writing 100K checks, 250K checks. and that that really helped begin the process so we actually went out closed a few notes convertible notes and that led to the momentum to be able to actually close the seed round

somebody once told me that um as you are fundraising getting one check doesn't even matter the size anything once you take the one check everyone else believes this is happening yes right doesn't mean that you're going to raise the round that you want to raise doesn't mean it's going to be from the people you want to raise but they know you have now taken money and there will be a round of fundraising, even if it's just that one check. 100%. Right? And so it's building the momentum.

And I think a lot of people, especially those unfamiliar with Silicon Valley or New York, LA tech scenes, they think that the best way to raise money is to go raise millions of dollars in a single shot from one or two firms. Most companies don't start that way. Most companies actually start with small checks from people you know who, frankly, might not even believe what you're going to do is going to be successful. they're betting on you right and they're saying look you're a smart person i trust you i know you uh and i'm gonna bet that you can go figure this out rather than oh this is a great company and i

think it's super de-risked and let me go put money in because all you need is to just keep doing what you're doing yeah i mean early stage you've got you've got to believe in the team i think that the other thing about that is some of those people actually are going to really be helpful to your business, right? Like, if you are starting a healthcare business, getting a few of those entrepreneurs who've been successful, who've scaled those businesses, getting them in early and giving them a bit of equity can really help you along the journey. For sure. Okay. And then any anecdotes or kind of advice for people around specifically fundraising, pitching sandhill road firms uh especially being a crypto-based company uh i mean you guys went

and raised money in the heart of a bear market right so kind of 2015 you did it to yourself and then you came back from war in 2018 yeah um uh it probably was a little bit easier just because you had some metrics and stuff that you could really kind of talk about and it was less about do people believe in crypto and now it's more about is your business something that we think can grow exponentially from here but talk about you know just kind of your strategy and what you learned along the way yeah i mean i think that the in our last round of funding even now what we're looking for is institutional investors who have strong conviction on the market they they do need to have a cryptocurrency thesis what we what we really optimized for was someone

who understood cryptocurrencies understood our enterprise software go to market and and really could help us develop operational excellence. That's really what we need at this stage of our business. What happened with Benchmark in our Series A was we were pitching up and down Sand Hill Road. A lot of that comes from having good metrics and being able to get those meetings. But really, that's how you operate a process where you get everyone onto the same page at the same time and drive that sense of urgency among those investors. Those investors are pretty much like any others in the world, operating on a sense of FOMO, operating on, am I going to lose this deal? Is this really something that I want to let slip? And so we found Sarah Tarvel early

in our process and actually as someone who operates with strong conviction she came very fast through understood all the intricacies of our business and moved us very quickly through her process that got us in front of the partnership very quickly that's when you know you've got an a hot iron and you're gonna strike absolutely um do you remember how long the process was to raise the series a just in general so our series a was actually very short we from meeting sarah to closing that deal was less than a month wow yeah that's incredible speed so that's so when you meet an investor that has that level of conviction that you know benchmark is a really unique firm uh has just general partners and really sarah did a lot of the work herself to

to do the due diligence, spoke to us individually, understood what was going on in the crypto market already, and had a strong conviction that actually this is what she calls a meat and potatoes company. Really critical infrastructure for their entire thesis. That was easy for them to actually get convinced that this was a great deal. Got it. Let's talk about what you're actually doing. So all these investors are excited, right? They've given you quite a bit of money to go and build a really large software company. What exactly do you do on a daily basis for customers? So Chainalysis provides anti-money laundering compliance software for cryptocurrency businesses and financial institutions. We also provide investigation software for law enforcement

to prevent money laundering in cryptocurrencies. So let's talk about the criminals first, the bad people, right? What are they doing with crypto? What are you guys seeing? What are some of the tactics that they're trying to leverage in order to get around regulators or law enforcement?

Let's talk about what they're doing and then we can talk about how you guys actually then back into preventing this or catching them doing it. Yeah, so I'll give a little history and people have probably read that Bitcoin's used in the Silk Road and it's only for the dark net

and stuff like that. It's like they've never heard of U.S. dollars, right? So essentially, in certain stages of Bitcoin's history in 2012, there were weeks where Silk Road was 30% of all transactions on Bitcoin. That was an initial use case of Bitcoin was the use in the dark web for drug trafficking. And that's really something that law enforcement got interested in and has been actually really successful in going after the administrators and vendors of these marketplaces. And what we found is that we could provide the visibility into how those marketplaces were moving those funds so that law enforcement could actually track down who was moving the

majority of those funds? Where were they cashing out and then moving from those venues into real world people and really disrupting that activity? And in the early days, it was cybercrime and drug trafficking, which was sort of the main illegal uses of cryptocurrency. As cryptocurrency becomes more ubiquitous, as more and more people use cryptocurrency, it really starts to touch every aspect of society like you can't get surprised when someone robs someone's house at gunpoint and they're looking for not just the cash but they're also looking for cryptocurrency and uh we've seen child abuse material and we've seen human trafficking and we've seen cryptocurrency touch national security programs uh and even you know exchange hacks and stuff

like that. And that really, as cryptocurrency becomes more like the US dollar, it gets used for a whole variety of things. And so what needs to happen is the actors who are responsible for compliance need to have the software available for them to prevent that activity. And is most of the criminal or nefarious activity, it is true money laundering? Or is it people are using this as a medium of exchange to buy illegal things do illegal things like where is it everything is it money laundering is like 80 percent of what law enforcement thinks people are doing bad things with like just walk me through kind of how that happens yeah so i i would i it's it's a great distinction right and and for listeners let's let's just make sure that

we know what we're talking about. So there are money laundering charges that get brought against people who are using cryptocurrency to buy goods and services, because laundering those proceeds of crime is money laundering. It's basically making money by committing a crime, then taking that money and going and buying a legitimate good or service. What you're essentially doing is you're trying to wash that capital back into the system without it being assigned to you anymore. Yeah. So we have a lot of what the focus is in law enforcement is on crime that emanates from cryptocurrencies. So that could be ransomware, that could be darknet markets, that could be child abuse material for sale for cryptocurrency, that is a lot of the cases that

we see is focused groups that are targeting, how do we disrupt illegal activity that is being facilitated by cryptocurrency? Then a lot of the use of our software also gets used in money laundering cases which have some nexus with cryptocurrency got it so you have you have basically a person who was laundering money yesterday um say they were running a money laundering business in some part of the world you would have them who were offering suitcases of cash yesterday they now could be offering suitcases of cash and bitcoin or whatever cryptocurrency today. Got it. Okay. And so as people are doing this, how do you guys go about the technology, identifying this activity, reporting the activity, or even stopping it?

Yeah. So we actually don't do the monitoring ourselves. We provide the software that enables law enforcement to do investigations and to go after that activity. So we have spent four years training law enforcement, educating governments around the world who are looking to target this type of activity. And they come in usually after the fact and are looking to disrupt that type of activity. The exchanges, though, are now under an obligation to monitor the use of their systems. And actually, we can prevent them from facilitating money laundering in real time. We have a product called Chainalysis KYT, Chainalysis Know Your Transaction, which essentially allows businesses like exchanges to monitor in real time the transactions that they are receiving and sending on the cryptocurrency side and know whether they're about to deal with a darknet market or potential terrorist financing or something potentially illicit. So we're looking really for the activity and looking to see whether the users of the cryptocurrency platforms are sending or receiving money from those types of activity.

Got it. And when you give, let's talk about the law enforcement side first. So when you give that software to law enforcement, this is like a traditional SaaS product, right? They go on, they've got some software, they can probably target certain searches or filter and all that kind of stuff. Are many of them going and doing what I'll call more targeted searching, meaning I think that you did something wrong and now I'm going to go try to figure out what you did and where it is on chain and all of those transactions? Or is it more broad to begin with where they're saying, I think that there's some kind of activity. I don't know who's doing it. And so I want to back my way in from a broad search down to identifying the individual transactions that actually broke the law. So do they start small and go large, or do they start with a broad search and then go more targeted?

There are definitely both. I would say both come from, in general, complaints. So victims. So where are the victims? So if you have ransomware, someone then should report that to law enforcement. Law enforcement will take that address that is associated with that ransomware. They'll plug it into Chainalysis and start an investigation. The nice thing about what we do is we take all cryptocurrency transactions.

We then associate which ones of those are done by the same entities. And so maybe you report a small ransom payment that you had to make to unlock your computer. You pay into that. What Chainalysis does is it connects that payment to all the other victims. And so law enforcement can then take that payment and build it as part of a much larger investigation. So this comes up all the time when, I don't know whether this has happened to you or some of the listeners, but say, for example, you get phished and there's some stolen funds

and it's one Bitcoin or it's half a Bitcoin. What's important is that that goes reported because the nice thing about cryptocurrency is that there's a degree of transparency. And actually, law enforcement is going to be able to triage and say, well, usually a $500 ransom payment isn't enough to get the FBI interested. That would sit at the local office. But really, what chain analysis allows them to do is to aggregate that and see which other victims are involved,

and maybe that fits into a much larger case. So a lot of times they're working from that type of information, But sometimes they're also working for what are the major targets that they're interested in? Is it a child abuse material site? And then they'll start from this site and they'll build out from there. So one thing that I hear a lot when I go and I talk to institutional investors is they usually say, well, isn't this stuff really hard to track or is it illegal, all that? And we can pretty quickly describe to them, no, look, there's actually a transparent, public, immutable record of every transaction. So probably not the thing you want to do or use if you're a criminal.

And then they usually bring up a question of, OK, great. So you understand the wallet address, which is a pseudonymous locator or identifier. How do you find who the person is behind that wallet address? And I think that obviously if law enforcement knows, oh, somebody sent money in a nefarious activity to this wallet, that's step one. Step two, though, is who owns the wallet? And it's not like they can call up a bank and say, whose bank account is this? Because it's a wallet. Where does that come in?

How do they normally navigate that to try to get closer to stopping people from doing things that they shouldn't be doing? Sure. So, again, the obligation sits mainly with the intermediaries. If it sits with the exchanges for them to monitor what their customers are doing on their platforms. And so, if their customer is about to send to an address that is potentially nefarious or Chainalysis has identified this activity as being high risk, then actually the exchange can prevent that activity in real time. or if they can't prevent in real time and they notice after the fact they can then report that to law enforcement and when they report it to law enforcement they send not just hey one bitcoin went to this nefarious address they'll send you know this person who lives at this address who sent us this passport photo who had this phone number who accessed our systems this many times over this many months, they'll file that in what they call a suspicious activity report.

That gets filed with the financial intelligence unit in that country. In this country, it's FinCEN. And really that helps seed an investigation at law enforcement. So if law enforcement are starting from an address, they'll want to end up at one of those intermediaries and send legal process to say, can we have some more information about the person behind this Bitcoin address that's controlled at your exchange? Got it. And obviously Coinbase recently acquired a company that does some kind of analysis, right? And there's a whole bunch of people, some are excited they're doing this, some are upset, some have questions about the team, etc. Let's not worry so much about that specific team, but just the idea that an exchange acquired

what you know again some of you use the word surveillance type company some use it as analysis etc why would an exchange want this capability in-house versus the ability to let's say interact with a chain analysis etc as like a sas customer right what would be the difference between having it in-house versus being a customer yeah i think there's firstly i think it's great news okay i think it's great news that a company like coinbase deems it really important to understand what's happening on the blockchain and is investing heavily in making sure that they can be a compliant entity and and understand all the risk of their customers like that's a really positive market signal for me that we're doing the right thing the it's a great validation point for you

It's a great validation point, right? It proves the hypothesis. The reason why it would be good to use us as a SaaS platform is that you can actually rely on us to gather intelligence with what happens outside of your company. Got it. So Coinbase is going to be good at understanding all of the activity within their exchange.

they're not going to be able to invest as much effort as we have in understanding what goes on in the rest of the blockchain and the rest of the blockchain it applies to the other exchanges who are our customers and also to all of the nefarious activity that exists in the world that's our that's our bread and butter that's what we do every day that's why we raise money to invest in making sure that we know the most about what's going on on chain so really what companies like coinbase need to rely upon is to provide that intelligence about what's going on in the whole blockchain i think this is this is great for them to understand sort of what's going on within their exchange i think one point of clarification in in the communications that's

that's sort of being put out on the deal is that we do work with uh exchanges but we don't require people to send us customer data uh okay so really what this is about what our business is about is making sure that exchanges send us information about what transactions those exchanges are doing on the blockchain we don't need to know that it was bob who sent this transaction or joe you basically have the wallet address you don't know who owns the wallet we don't know who owns the wallet, law enforcement have to provide legal process to the exchange themselves to uncover who is actually behind that wallet. And so our exchanges share with us wallet addresses that they control that helps us actually understand more intelligence about what goes on in the

blockchain that gives all of our customers access to that information. And so they will know the most about where the money is coming from, where the money is going. But it's great that people are investing in understanding what's going on within their ecosystem. I'm just curious if you know this, what percentage of transactions do you think get labeled as suspicious? Do you think it's over under 10%? So there is, I think it's under 10%. Under 10%, okay. Yeah. And that's not even they did something wrong. That's just would be labeled as potentially doing something wrong. Yeah. And you're very sophisticated in your terminology. You deem something as potentially suspicious before you deem it as suspicious. And so we are flagging to our customers what could potentially be risky. And it's up to our customers to decide their risk tolerance and their protocols and how to deal with that. And so you could think of it as about, yeah, less than 10% are flagged as potentially risky.

Also, you could think of behavioral indicators as not just are you sending to a darknet market, but how fast are you making these withdrawals? You know, does this fit into a fraud typology? does it well i'm assuming somebody signs up for an exchange account and then all of a sudden puts you know a thousand bitcoin on it yeah something might be going on there something might be going on yeah i got it um okay and then uh on the exchange side um i've seen a number of announcements where uh nasdaq and some of these large kind of traditional financial players they have some kind of market surveillance type stuff that they use in the stock markets and things like that yeah It looks like in the tokenized securities world, there's a number of players who are trying to leverage the legacy infrastructure for that stuff.

Do you think that there is a separation from where you guys started on the cryptocurrency side to the tokenized securities and some of that stuff? Or do you think that really to you guys it is wallet to wallet transaction with some unit of value and you're able to kind of interface regardless of if it's a cryptocurrency, a crypto stock or whatever? Yeah, we think about the most generic model as possible. So I think about cryptocurrencies as just transactional. And what we have built is infrastructure to understand transactions that happen on cryptocurrencies. And so we don't distinguish between tokenized security versus an ETH. That doesn't matter to us. What matters to me is the application and what you're really looking for.

What we have found is that trade surveillance is starting to be a conversation that our customers are starting to have. And I'm glad that some of them are trying to repurpose legacy technology. There's also new companies out there trying to do this type of stuff. I think that it's an important thing for the industry to mature. It's kind of the next problem that people want to tackle after money laundering. Got it. Okay. Let's switch gears real quick.

Now, you've talked a lot about how to build companies, what you guys are doing. Hiring is going to be a huge issue, right? Just in terms of any time a company raises money, they're usually using it for marketing, just doing whatever they're doing already better, right? And then bringing on new people. What's your guys' kind of thought process or just you personally, why somebody should come work in crypto, right? I get a lot of people, it's actually usually like Twitter DM, right? They say, hey, I've got X job at Y organization. It's usually their tech company or a financial institution.

I'm spending all of my personal time looking at this stuff. I need to find a way in. So those people are already convinced that they want to come work in crypto. Those you don't have to sell. That's easy. There's a lot of people who are probably really talented who you got to sell pretty hard to come work in crypto. what's your kind of pitch to those people as to why they should come work in this industry versus maybe another sas you know enterprise type company you know for me what keeps me interested

on a personal level is that cryptocurrency continues to ask the best questions about should the financial system be structured this way should the internet be an oligopoly how how should things be different even if cryptocurrencies today you look at them and you're like that's not the solution to the problem what's important is that there is enough entrepreneurial spirit and capital going in to asking those fundamental questions about the way the world should be in 10 years and so the companies that are being built today to answer those really important questions like how should finance be structured and how the internet should be structured if you want to work at a company that focuses on that type of big problem

that can last for the next 10 to 20 years, you're in the right place. Got it. I think that's fair. And one of the things I keep going back to is really smart people want to work with other really smart people, right? And they want to be successful together. And the amount of intellectual capital rushing into the market is probably unlike anything else I've ever seen. And it just feels like it feeds on itself to some degree, right? Oh, my really smart friend just went and worked on this stuff. what do they know that I don't know, right?

And so we think a lot about, for our portfolio companies, how they can leverage that, right? Like, hey, we just recruited X person who's a great engineer. How do we immediately get them to go back right out into their network and go find five more, right? And there's a period in time where it's actually, right when they join,

they are likely to be able to convince somebody because people want to work with other smart people that they know. Yeah, I think for engineers in particular, we we find that people love working with the data that we have people come to us because they say there's no other place that actually understands what's going on in this industry like i want to be close to the source of truth i want to understand why people are using it i want to tackle some of those hard problems of analyzing these trends and maybe they'll stay with us for

a few years and learn how and why people are using cryptocurrencies and then go off and build their own companies eventually. But really, they come to us because they see the data at Chainalysis as just something awesome to work with. That's awesome. Before I finish up, I always do a rapid fire questions. What do you think is the most important company in crypto other than your own that's a great question i'm gonna go with i'm gonna go with i'm gonna go with bitgo bitgo oh interesting okay why no one's ever said that before yeah so i think that um and and not necessarily because i think bitco is going to be the biggest company in in the space i think that it's a very interesting sort of technical solution to actually getting

people to custody cryptocurrencies and has done a really nice job of of breaking in and providing like real infrastructure for people building real businesses custody is huge problem they're one of the leaders if not the leader and that's it yeah and and has been building sort of infrastructure over time got it okay i think it's fair uh what one regulation would you change or improve if you could i would clarify a lot of the obligations that are put on cryptocurrency exchanges to understand what their what their what their aml obligations are being slightly more prescriptive around what U.S. regulators understand to be best in class anti-money laundering solutions and what are the requirements. I mean, I think the U.S. has done a really nice

job of saying that existing regulations apply, but would love more examples of what those expectations are. That's fair. What's your one thought in crypto that you think most other people would disagree with you on um the most controversial thing that you believe while you're thinking somebody once said to me i can't believe you bring guests on and then ask them to say something controversial yeah i said they usually don't say anything controversial they usually say something that they believe right and some degree of other people don't want to agree but but uh it's usually not that bad yeah i think um so the the thing that i said the most that people disagreed with me on was that bitcoin is not the bitcoin miners do not

behave rationally oh interesting okay explain that more so essentially when miners they have a they have a critical they have a few critical decisions to make one of the decisions that they need to make is how many transactions to include in a block. And so the more transactions you include in a block, the longer that block takes to go out through the whole network. And the bigger the chance that someone else's block that gets produced at the same time gets adopted by the whole network and then you lose your block reward. And essentially, I found that even today, it's still problematic for miners

to actually include transactions in those blocks. And therefore, all the incentives behind Bitcoin are flawed. And miners put transactions in blocks for economic reasons that we can't explain. Interesting. I think that's pretty controversial. I was going to say, I think, well, definitely the bitcoin community probably definitely disagrees yeah um but i look you

clearly articulate why you believe it right so it's another i think i think that and this comes down to sort of where you get bashed as an economist is people say economists are not very good at predicting the future what do you think about uh noriel by the way you know i think that the the type the the sort of type of communication aside you know he raises he sometimes raises valid points i think that it comes down to my point which is economists look at things in static systems nuriel doesn't understand how the intellectual capital formation in these amazing companies with loads of capital can actually adapt and change their business models and adapt the technologies and really just continue to work on the problem, which is how should

we reimagine the financial system? That movement is something that economists can't understand. And he should admit that that's something that he doesn't understand. My theory is that he actually understands some of that, but it is more beneficial to him to not admit it. Right. Right, at least publicly. Okay.

What's the most important book you've ever read? I think the most important book I ever read, these are deep, deep questions. I'll tell you what I was reading last weekend. I've read a lot of, I mean, I've read, as an entrepreneur, I've read some important books. High Output Management by Andy Grove is a classic. all-time classic amazing book uh i i tend to as an entrepreneur i try and improve skills in

different domains over time and so what i'm trying to do best at the moment is write better write more clearly so last weekend i was reading on writing well um which is great book for writing non-fiction essentially i feel that when you get to a certain stage in a company i can't speak to everyone every day but if i can write super clearly and i can explain ideas to the team now that's a place that i can get more leverage and so uh trying to improve my writing skills have been working on my communication skills as well uh hope you notice that yeah you're doing fantastic you're better than i am just keep going it's interesting though because uh i've seen those researches and i apologize to somebody's gonna listen to this and tell me that i messed up the

name because I don't remember who it is. But somebody on Twitter was recently saying that, you know, everyone always, the intellectual Olympics of Twitter is like, oh, let's go all read the same books or let's all go read the same blog posts or whatever. And they said, look, one of the best sources of information that I've ever had was reading memos. So reading and writing these memos, which are, if you think in kind of the finance community, right, the, you know, Howard Marks kind of periodic memos, you know, outlook on a market, some, maybe some performance stuff how they're thinking about um you know what may happen or a certain decision or something it's actually pretty informative and what they were making the argument for was rather than

write tweets blog posts emails if more people sat down and wrote memos which are usually you know kind of three to ten page type stuff it's longer than a traditional blog post or email but it's shorter than a book or anything like that it's a really interesting way to communicate especially inside of a company or an asset management firm right where you're able to lay out here's an idea here's my rationale behind why i believe this right here's maybe some risks that are associated with it and here's an action driven plan as to what we need to go do because i believe this yeah and you see this with um i think i recently saw uh i don't know if it was a leak or they published it or whatever but like mark zuckerberg right and it was hey here's his thoughts on ar and

vr and you read through this and like it's a pretty lengthy thing it's basically a memo um and just the clarity right and and he's sharing it not with the whole company but maybe you know 10 20 people uh in and around the executive team pretty effective way to make sure he's saying exactly what he wants to say right because he's not having a conversation and it's and it's a great commitment device so it allows you it allows me to you know synthesize my thoughts about you what is our go to market? How are we thinking about particular opportunities? I think, yeah, a lot of these companies, Jeff Bezos also does this. I think the benefit to the individual and the team is enormous. My personal preference actually also is something a little bit more

blog post in length. I think the blog post actually is a great medium that people can use to articulate these types of ideas. In fact, I'm sitting here working through our conversation thinking about what the blog post, thinking about the blog post that drops out of this. Very cool. So I usually ask one non-crypto question and then you get to end it by asking me a question.

Okay. But the non-crypto question is about aliens. Do you believe in aliens and do you think they exist? So I'm actually going to an alien party tomorrow. You're kidding me. So I'm going to say yes. okay well hold on what is the alien party i'm going to an alien party in new orleans and what what goes on at the alien party i have no idea oh it's just a alien themed party okay

all right i thought you're going to meet aliens or something and i was unaware of this opportunity so clearly you believe in aliens uh i think that there is an incredibly high probability that they exist uh and i even go as far as to say it wouldn't surprise me if we discovered them during my lifetime okay so let's say you know i got another 50 years on the planet hopefully in the next 50 years could we come across it probably and the big question then comes if you believe that aliens exist are they more human-like right as you and i think about communicating moving uh organizing intelligent well supposed to be intelligent right versus like there's some micro you know microorganism that we call alien life but it's not what you and i would think is

an alien right uh which one do you think is more probable i mean the microorganism is definitely going to be the more probable something i could probably get behind uh i'm probably i'm probably not i'm probably not much further along than you're not sold on like something maybe maybe something with like two cells or one cell that's that's where i'm at um so my my question would be where in the world do you think cryptocurrency is going to have its home have its home um where is the home today and where do you think the eventual home for cryptocurrency is going to be so i recently started talking about this more uh a number of people who um i trust very much uh we're like maybe we shouldn't uh let you

talk about this as much my partners are all on board with it which is great but uh some others thought that this was a little out there i think it's in the automated world so i've been saying this thing where the machines don't want your paper money right and if we're moving to an automated world with machine to machine transactions um and algorithms are going to govern and run things. You can't use analog or even electronic value, right? So I think analog is the physical and then electronic is just the digital representation of a physical ownership, you know, stock, whatever. You need digitally native assets. So every stock, bond, currency, commodity has to be digitally native in order for it to interface with that world. And so it's not

just the currencies right it's the stocks the bonds and the commodities uh but i think that that is something that hasn't been explored a lot by people who are way smarter than me right they i wish more people would talk about that think about that write about that so i could learn from them and the second piece of it is uh if that is true blockchain is like the accounting system for the automated world yeah right it's just if you think of kind of traditional accounting today say, you know, take Excel, for example, you kind of have like one input into each cell, right? And if you get really, really complex, you can kind of move different inputs on the sheet to do some computation, but it still has one output in the cell. With blockchain, what you get is it's almost

like a multi variable accounting system. So you get more complexity that can all go into one thing that happens faster. And it's just because the assets are treated differently, the people or the organizations interacting or interacting through machines and algorithms versus, you know, you and I, et cetera. And so that world feels like much more inevitable than the argument of like, Bitcoin's going to become the global reserve currency. Yeah. Right.

And no matter how much I believe that's going to happen or not with Bitcoin becoming a global reserve currency, what I've seen is just more people buy into automation's coming, right? Like you really stretched argue it's not coming in some form or fashion. The question then is, how big is it? do we actually need digital assets in that world, right? Can we have accounting systems that work there rather than using a blockchain? But I think that once you get people over the hump

and you say, look, we're talking about technology, right? You're talking about, with what your company does, analyzing transactions. Doesn't matter if it's you standing in a market and literally watching people pass paper money back and forth and writing it down on a piece of paper, or you're using the technology that you've built to look at stuff on a blockchain.

You're analyzing transactions. And so that, I think, demystifies a lot of this. and it's funny to hear you talk about fundraising in 2015 right because i think a lot of people who probably came in towards the tail end in 2017 feel like 2018 has similarities to 2015 it's just a different scale right in terms of there's way many more people many more people feel this is inevitable and so when you get into that world i think that the most like you know valuable or exciting part to me is watching people like switch their mindset and go bitcoins for bad people no way this is all garbage it's all a ponzi scheme and like price is all everyone cares about

there's just you know pump and dump that's actually a big percentage of the population believes that and as it gets demystified they switch over and they go wait we're talking about technology we're talking about automation we're talking about just analyzing transactions they're like oh this is not even as nearly as exciting as you guys are making it out to be the implications are exciting but the technology is pretty straightforward right right and i think that's part of like out of this conversation i take away that you know there's all kinds of narratives and things that people talk about you guys are analyzing transactions and you're giving the power to law enforcement exchanges you know financial institutions of do you want to know

what people are doing or not yeah it's as simple as that yeah right um listen thank you so much i appreciate it yeah um you were the only person who's ever come on and before the show on the live stream done uh spoken in afrikaans so you're uh you get some points for that too thanks so much uh we'll have to do it again all right thank you thanks i appreciate you guys listening to that great episode before we go remember to go visit zenledger.io off the chain Zenledger is the best crypto accounting software available. If you had investment losses in 2018, you may be able to save up to $3,000 on your income taxes using Zenledger.

Simply enter your transactions into their easy-to-use software, get completed tax forms ready to be imported into TurboTax and reviewed with your CPA and sent to the IRS. That's visit zenledger.io off the chain. No spaces or dashes, just straight zenledger.io off the chain and you get 20% off your tax forms for 2018. Thank me later. I'm sure a lot of you have used Kayak

to find the best flight. Total's kind of like Kayak, but it don't find you no flights. It helps you find liquidity on decentralized exchanges and it optimally routes your trades for execution. So Kayak, you find flights. Total, they help you find liquidity. We should get Kayak on it for this spot

that I'm providing them, but Total instead is our advertiser and you should go visit total.com slash pump. again that's total.com slash pomp and let them know that i sent you tell them you love their product take a screenshot tweet it at me i'll drop you some fire emojis and then we'll all be happy so total.com slash pomp hey everyone pop here if you like this episode of off the chain and want to help us take crypto to the top of the apple spotify and other podcast charts please do us a favor and rate review and subscribe to review simply go to the off the chain homepage scroll

down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off The Chain.