Partner Spotlight: Chainalysis Q&A with economist Ethan McMahon

Chainalysis is a comprehensive data platform that helps organisations build out their crypto compliance strategies. Government agencies, exchanges, financial institutions, and insurance and cyber security companies in over 60 countries rely on the firm’s data for everything from fulfilling regulatory obligations to simply navigating the cryptocurrency ecosystem with more confidence.

We spoke to economist Ethan McMahon about the firm’s research and what he believes will be the most important issues for crypto in the coming years.

Chainalysis brands itself as “building trust in blockchains”, but I think a lot of people see trust as fundamental to blockchain. So what do you mean by that?

It’s actually pretty fascinating because one of the biggest misconceptions about cryptocurrency is that it's totally anonymous or untraceable. In fact, it’s actually quite the opposite. Cryptocurrency presents unprecedented transparency. It represents the first global payment solution outside of any one organisation’s control, and crypto blockchains create a permanent public record of transactions. The real challenge is that the public blockchain ledger is difficult to interpret, and that's where we come in.

At its core, Chainalysis is a data platform. Our data links cryptocurrency transactions with real-world services. As a result, our customers in both the public and private sectors can work from the same data set or the same source of truth to detect and investigate illicit activity and fulfil regulatory obligations. All of this together helps build trust in the overall industry so that cryptocurrency can fulfil its potential as a mainstream asset class.

What do you think are some of the industry's biggest blind spots? What sorts of things are being overlooked right now?

I’d say that crypto has experienced a tremendous amount of momentum and adoption recently. Before I get into what sorts of things are being overlooked, we’ve found that there's a lot of basic misconceptions. For example, as I just mentioned, a big misconception is that crypto is anonymous and untraceable. It’s just not true.

But people also often think that crypto is totally unregulated. While there are certainly aspects of crypto regulation that need to be clarified, anti-money laundering regulations for cryptocurrency are either already in place or in the process of rolling out in jurisdictions around the world.

I’d say another big misconception is that crypto is used primarily for illicit activity. In reality, what can be attributed to illicit activity in the entire cryptocurrency space is negligible—in 2020 it was less than 1%.

As for what’s being overlooked, scams are the biggest challenge in crypto. The industry in general needs to do more to educate the public on how to identify and avoid scams.

Conversely, which issues do you think are given too much oxygen?

Recently it feels like the news cycle tends to be dominated by the latest Elon Musk tweet or memecoin battle. But at Chainalysis, we recently put out a report on how cryptocurrency is actually being used by regular folk. We found that the real story is that crypto adoption is rising in both low and middle income countries. In Vietnam, for example, there's been a huge grassroots adoption of crypto. These are the sorts of stories that I want to hear more about.

Your organisation has published a ton of research. What have been some of the most striking findings for you personally?

We recently published our 2021 Global Crypto Adoption Index, which revealed a whopping 881% increase in adoption since 2020. Staggering as that is, however, the more interesting finding was that regardless of region, there was no single reason for cryptocurrency adoption: each country had its own nuance and reasons for embracing digital assets.

For instance, we heard from experts that there have been a couple of reasons people in Vietnam have been adopting crypto. The first is that there's a history of interest in gambling. The second is that young, tech savvy people with disposable income weren't able to invest in more traditional investments like ETFs.

On the other hand, a country like Nigeria has a huge commercial market for crypto and more and more commerce is being done there on the rails of cryptocurrency.

How have all these findings informed what sort of trends you'll be looking for in the future?

We're constantly building on top of what we already know. For example, our latest Cryptocurrency Crime Report led us to further investigate the DeFi space. And that led us to ask questions like, how is DeFi being used? Who is using it? Why are people using it? And this in turn led us to create an adoption index, which is coming out later this year.

It's very cyclical and exciting, because we're always discovering new insights that we hope will help drive businesses and regulators to take action.

The 2021 Global Crypto Adoption Index and 2021 Crypto Crime Report are both available for download.

For more Chainalysis market reports, click here.