Crypto’s financial innovators rely on community

The first time Chainalysis CEO Michael Gronager saw a cryptocurrency, the price of bitcoin fell from $ 30 to $ 2.

The co-founder of the blockchain computer company has seen a lot of ups and downs in the industry as it grew from a few cryptocurrencies to 10,000 or more. But this time it is 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 is very different in the sense that the whole world is in the midst of a financial crisis,” he said. “We have not really seen it in the life of crypto.”

Beyond that, the difference this time also means that crypto matures, Gronager believes, when it begins to react to the same economic forces and price movements that drive traditional markets. That is not to say that he expected it.

Gronager said that when COVID-19 started, he was surprised when bitcoin collapsed with the stock market. There are a couple of reasons why this happened, he noted, starting with the reality that there was a lot of retail-level investment in crypto – this number grew from 16% of US consumers in 2021 to 23% in 2022, according to PYMNTS ‘US Crypto Consumer Study.

See also: Data point: 23% of US consumers owned cryptocurrency in 2021

Simply put, as the rest of the market fell – and many traditional stocks have outperformed bitcoin, he said – many buyers realized that crypto “is extremely liquid” and sold it to support other investments that are harder to relax.

In a longer time frame, Gronager said that he believes crypto will be more linked to innovation-focused investments such as technology or cloud computing.

“I am convinced that what we saw in the 90s, you will see the same thing in the crypto space going forward,” he said, noting that despite a major upheaval when the technology bubble burst, Internet companies grew out of the rest. of the market. “In the next 10 or 20 years, crypto [firms] will grow out of the rest. “

A bad rap

Stablecoins have been getting a bad rap lately, and at least on the surface, it’s hard to argue with that. After all, the Terra / LUNA stablecoin ecosystem collapsed within a week in May, taking investors’ money worth $ 48 billion.

And with Washington, DC, already in full cryptocurrency mode, it seems likely that tougher rules may be in the cards. In addition, concerns that stablecoins could take over the place of national fiat currencies as the most important payment currency are serious enough to be behind much of the pressure to launch central bank digital currencies (CBDCs) worldwide.

Read more: Push to regulate Stablecoins is gaining momentum like TerraUSD spirals

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.

First, it means educating legislators on why and how to revise these stable currencies, and creating industry-standard certifications that provide not only some security, but also some clarity to the dollar-denominated cryptocurrencies.

One key is to distinguish between the two main types of stack coins. There are fiat-backed versions like Circles USDC, and there are far less stable algorithmic stack coins like TerraUSD, which relied on some form of incentivized arbitrage to maintain the one-to-one stick.

“I think it’s important to distinguish between the two main types of stack coins,” he said. “Let’s take the USDC. Every dollar you deposit to get a stack coin in dollars that you can use on the blockchains, you deposit into a large bank account at the Bank of New York Mellon. Everything is super strong. I doubt anyone will believe that the money will disappear there. “

He also pointed to signs of strength in the stablecoin segment. While Tether’s USDT lost the link a bit in the wake of the collapse of TerraUSD stablecoins, it was something of a race on Tether. But it did not collapse.

“They managed to redeem $ 14 billion in one week, and hardly moved the price of stablecoin at all,” Gronager said. “I think it’s another example of the efficiency of that system – any bank today, where people withdraw $ 14 billion, would stop trading. So it shows that the efficiency of these systems is extremely good and extremely high.”

Pushing Education

From a regulatory perspective, he said, it would be an important step to demand regulatory audits that give confidence that the support reserves are what they claim they are. Doing so will probably also help to combat parts of the various bills that are policy-based, he added.

“I also feel that forcing the industry to create stablecoin certifications is another way they can do that” through 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 force people to invest elsewhere.

Another part of the fight, he said, would be to convince regulators and legislators that “crypto is far more transparent than traditional finance, and it’s actually very easy to investigate crime, to comply with crypto.”

Related: The US Treasury presents an international cooperation plan for emptying digital assets

Gronager added that another important part of this is to focus attention on what crypto does that is new.

“We are basically building an operating system for finance that has never existed before,” he said. “There will be so many new financial instruments, and more and more of traditional finance will migrate into the crypto space.”

While many things will get liquidity from it, Gronager said: “We will see more transparency.” It also means a growing need to analyze this data so that “regulators and investors can navigate it in a good way”.

Build communities

Gronager’s co-founder, Chainalysis Chief Strategy Officer Jonathan Levin, testified at Capitol Hill in March, said that a strength of crypto is that it helps people build new financial communities that can have a significant impact on both the economy and the world at large.

When asked, Gronager Webster gave several examples, starting with the way cryptocurrencies have been used to support Ukraine in the war with Russia. With Ukrainians struggling to access capital while the traditional financial system strains into a war zone, there is a need to buy things that range from basic necessities to medicines, Gronager said.

“The crypto industry was able to orchestrate and organize a huge effort to help and facilitate donations,” he said, adding that it worked “surprisingly well”, raising money faster and getting it to people on the ground faster.

“It had a real impact,” he said, adding that Ukraine has become “one of, if not, number one on our list of the highest users of cryptocurrencies in the world. It was a good example of a society that is mainly being built. overnight to help a country in need – to create a global community around it. “

See also: Fed Deputy Brainard: The crypto sector needs strong, rapid regulation

Although less important in the real world, Gronager also pointed to the growing use and acceptance of NFTs, the non-fungible tokens used to hold original artwork, collectibles 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 who said that Andy Warhol’s work was “reproductions … without 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 of digital artwork that is far easier to copy perfectly.

The NFT “ecosystem solved it in many ways,” Gronager said. “It’s an example of a society that had no economy attached to it – were basically hobbyists in the past – and has now completely changed and become something that has value and can increase in value over time.”

United Front

The same sense of community applies to chasing hackers, a core competency of Chainalysis, which has provided much training and tools to police and intelligence agencies looking to track cryptocurrency transactions to originators and recipients, as well as other government agencies, stock exchanges, financial institutions and insurance companies. and cyber security companies in more than 70 countries.

When it comes to dealing with 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 is actually very easy to “Investigate crime, to comply with crypto. It’s just education.”

Related: Like cryptocurrencies, experts argue for slower and more secure regulation

Tracking these hackers and thieves is another area where the crypto industry works well together, he said.

This is something Chainalysis is trying to do more effectively with the creation of a new Crypto Incident Response program. The program will provide rapid response investigative support for an industry where more than a few hacks – even large ones – have not been detected by the companies involved, but by security firms, researchers and even investors looking for large movements of funds. Often the first alert is launched via Twitter.

“Time is of the essence” when hackers move stolen or loose crypto, take them through mixing services to try to hide their money, he said.

“We follow the funds. Undoubtedly, they end up in exchange, and we can reach out and help seize the funds, and then work with the police to get them back. That ability is crucial, and tightening the network and that workflow is crucial for the industry. “

When hacks are reported, everyone jumps in, Gronager said. But it is still a very ad hoc process at a time when hacks are funding North Korean nuclear weapons research, and ransomware attacks could shut down large and vital parts of the national infrastructure – as the Keystone Pipeline incident showed.

Large 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 are given priority, in addition to assistance with long-term tracking of stolen funds and cooperation with law enforcement to obtain funds.

With a lot of experience, including solving some of the most difficult cases, Chainalysis has “hundreds of cases behind us and has been behind the seizure of billions of dollars in the crypto space.”

There’s a reason why, Gronager added, “It makes sense to say that everyone reached out to us anyway.”

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