Mt. Gox collapse saw birth of Chainalysis – Cointelegraph Magazine

It’s been more than a decade since 850,000 BTC went missing from Mt. Gox, yet the collapse of the former exchange remains one of the most infamous black swan events of the cryptocurrency ecosystem.

While creditors of the defunct exchange are edging closer to some form of restitution, Mt. Gox’s demise ended up playing an important role in the development of tools to identify, track and tackle the illicit movements of funds through the wider cryptocurrency industry.

The search for answers and funds played a key role in the birth of crypto’s best-known blockchain analytics and tracing firm, Chainalysis, explains co-founder Michael Gronager.

Close to a decade later, Chainalysis’ analytics tools are being used by myriad private and public enterprises and institutions. From data analytics to pure law enforcement use cases, the firm’s services continue to prove influential — and sometimes controversial — across the industry.

Kraken the Mt Gox case

Gronager is a crypto OG, having previously co-founded cryptocurrency exchange Kraken. He got involved in blockchain analysis after Kraken went looking for a steady banking partner and met a wall of wariness over the lack of visibility in the cryptocurrency ecosystem along with KYC and money laundering concerns.

“These conversations with the banks, they all end in the same way. How do you do transaction monitoring? How do you track the funds you receive from someone that you are onboarding online?” Gronager tells Magazine.

The collapse of Mt. Gox around the same time presented another unique challenge for Gronager, who was tasked with figuring out what happened to the funds that Kraken and some of its clients had in the defunct exchange.

As explored in the book Tracers in the Dark, Gronager developed the tools that would lay the foundation for Chainalysis, with the nascent firm eventually appointed as the investigative team by Mt. Gox’s bankruptcy trustee in 2014. From there, Gronager and his team wasted no time putting the proverbial bits together to trace the missing funds.

Jonathan Levin, the second of three Chainalysis co-founders, also spoke with Magazine at the company’s Links’ conference in the Netherlands earlier this year. The Oxford economics masters graduate highlights the investigation as the starting point of Chainalysis’ wider service.

“We were given the Mt. Gox investigation, which was the largest bankruptcy case in crypto history, and that really was about following the money. If it’s all on the blockchain, how is it that no one can find it? And so, you know, we worked it out and cracked that case.”

Two Russian nationals would eventually be indicted in June 2023 by the United States Justice Department for allegedly hacking and laundering some 647,000 BTC from Mt. Gox. The Internal Revenue Service Criminal Investigations unit, which makes use of Chainalysis’ tools, is assisting in ongoing investigations.

Helping trace the movements of Bitcoin held by Mt. Gox proved that Chainalyis had the tools to solve complex cryptocurrency movements. Gronager also realized this was a service the world’s top crime-fighting institutions were crying out for.

“I realized in conversation with other people from the industry that worked with law enforcement that they had no clue. They didn’t know how to solve these things.”

The customer base grew rapidly after onboarding both private and public sector users, including exchanges and law enforcement agencies. As of September 2023, Chainalysis has 1,200 customers from the private sector and over 250 from public sector institutions.

The go-to service for law enforcement 

Chainalysis has become the go-to tracing solution for some of the best-known law enforcement organizations worldwide and has helped the IRS seize an estimated $10 billion worth of cryptocurrency related to criminal investigations. IRS Criminal Investigations (IRS-CI) Chief Jim Lee says the tools it offers are invaluable to trace cryptocurrency and interrogate data in myriad settings, from blockchains to darknet marketplaces.

“Think about all the data that I have working for the IRS. It may not be the most, but it’s the richest. Now I can take all this other data we have and then match it up against the records that I have. I mean, it’s just incredibly powerful, but it takes time, energy and money.” 

Lee was also at the Links conference, participating in open and…