Crypto Investigative Tools in Japan — a Marketplace Analysis

With now 22 cryptocurrency exchanges licensed by the Financial Services Agency (FSA), and strict requirements for Anti-Money Laundering (AML), Counter Terrorism Financing (CTF) and Know Your Customer (KYC), Japan has for a long time be a prime target market for crypto analytics, traceability, compliance and investigative product offerings. The “Big Three” of Chainalysis, Elliptic and Bitfury all have Japanese investors, and over the past three months, have put Japanese executives in charge.

The increasing sophistication of these tools puts to bed the notion that cryptocurrency transactions are anonymous. In fact, given that all transactions are recorded on a public blockchain, any movement of coins is inherently traceable (ignoring privacy coins such as Monero and ZCash in this argument). It simply becomes a question of coverage for these products, however, one would be a fool to use the top cryptocurrencies like Bitcoin and Ethereum for illicit transactions these days. A noteworthy market reaction to this development is that newly minted Bitcoin (through mining rewards) that do not have a transaction history are allegedly commanding a premium in OTC transactions as they are provable “clean”.

There are a number of players present in the Japanese market, and not only have many created a Japanese corporate entity and hired Japanese industry veterans as country heads, there are also notable investments made by Japanese (corporate) venture capitalists. The frontrunner appears to be Chainalysis Team, one of the earliest companies in this space, so we will start here.

Chainalysis was founded in October 2014. It started off with headquarters in New York City and an additional office in Copenhagen in Denmark. By now, the company website also lists a presence in London and Washington, D.C., the latter surely a reflection of the government work Chainalysis is doing.

Chainalysis has appointed Kenji Sugawara as the Japan Country Head in October 2019. Sugawara-san is a veteran of the IT security industry, having previously held business development and account executive roles at Rapid7, Darktrace and nCipher Security.

In April 2019, Chainalysis increased its Series B funding round from USD 30m to 36m, and added MUFG Innovation Partners (MUIP) and Sozo Ventures to Accel and Benchmark, who were leading the round. As we heard from Nobutake Suzuki, President & CEO of MUIP, during a recent Tokyo FinTech Meetup, MUIP as the corporate venture capital arm of Mitsubishi UFJ Financial Group, generally invests in startups developing products with a clear path to adoption within the megabank. As a side note, the only joint investment in a startup between MUIP and Santander InnoVentures, whose Head of Investments Manual Silva Martinez, presented at the same meetup, is….you guessed it….Chainalysis.

Chainalysis offers three major product lines:

• Reactor — Investigating software for tracing the flow of funds across blockchains, Reactor is the investigation software that connects cryptocurrency transactions to real-world entities, enabling users to combat criminal activity on the blockchain
• KYT (Know Your Transaction)— Automated cryptocurrency transaction monitoring software, KYT detects many patterns of high risk activity, from OFAC sanctioned addresses and darknet markets, to scams and anomalous transactions; KYT is said to support 41 cryptocurrencies and stablecoins, including Bitcoin (BTC), Ether (ETH), Bitcoin Cash (BCH), Binance Coin (BNB), Basic Attention Token (BAT), OmiseGO (OMG), Dai (DAI), Maker (MKR), Ox (ZRX) as well as USDT, GUSD, USDC, PAX and TUSD.
• Kryptos — Vet new opportunities and navigate risks in cryptocurrency, Kryptos is the industry’s reference data standard. Analyze the top cryptocurrency exchanges and learn which ones are leading the way in compliance

In November 2019, Chainalysis underwent some corporate restructuring to focus on profitability, on the one hand bringing on a new Chief Revenue Officer and two Vice Presidents focused on industries/regions, on the other hand laying off 20% of its staff, resulting in a currently stable employee base of about 150.

Elliptic was founded in October 2013 in London. It now has also offices in New York City and Washington, D.C. (notice a pattern here?). Elliptic won the ISID Award at the prestigious Financial Innovation Business Conference (FIBC) in Tokyo in March 2019.

Elliptic has appointed Ken Yagami as the Japan Country Head in November 2019. After a long and successful trading career with Morgan Stanley, Deutsche Bank and Bank of America Merril Lynch, Ken is well known in the crypto community through his most recent leadership role as the CEO Japan and Head of Asia for SwissBorg (Cyborg @SwissBorg).

Leading up to Ken’s appointment, Elliptic has raised USD 23m in a Series B funding round led by SBI Holdings, a Japanese financial institution which has been trialing an XRP-powered store settlement payments app. The funding round also included Santander InnoVentures. The raise was explicitly done to facilitate Asia expansion, with a focus on opening new offices in Singapore and Tokyo.

Elliptic’s main product is Discovery — built on data, collected since its inception, Discovery offers a broad range of identifiers and risk indicators to allow banks to identify and assess the risk posed by their exposure to crypto-assets through exchanges. This includes information about these businesses’ corporate entities, jurisdiction, regulatory status, compliance policies as well as blockchain insights into the provenance of crypto-assets that they have handled.

A LinkedIn search shows approximately 90 employees globally.

Founded in 2011, The Bitfury Group is one of the leading security and infrastructure providers for the Bitcoin Blockchain. Incorporated in the Netherlands, Bitfury is well known for its mining operations in Georgia, Iceland, Norway and Canada, as well as a provider of specialized mining hardware.

In October 2019, Bitfury appointed Katsuya Konno as the Head of its Japan Operations. Having spent the early part of his career at Softbank with Investments & Finance, Konno-san is also well known in the crypto community through his most recent role as Chief Financial Officer, Representative Director in Japan, and Head of the CEO Office at Liquid, the unicorn cryptocurrency exchange.

Bitfury’s November 2018 USD 80m funding round included an investment from Japanese advertising giant Dentsu.

Bitfury features hardware and software business lines. On the software side, it offers its private blockchain framework, Exonum, its advanced analytics platform Crystal Blockchain, and its specialized engineering team for the open-source Lightning Network, LightningPeach. Crystal is a direct competitor to the Chainalysis and Elliptic offerings.

On the hardware side, Bitfury designs and produces hardware that keeps cryptocurrencies and blockchains secure, including custom semiconductor chips and mobile datacenters.

A LinkedIn search shows approximately 110 employees globally.

So that is it for the “Big Three” from a Japanese market perspective. In addition, we would like to introduce two “Challengers” that we have invited to present at the Tokyo FinTech Meetup.

Merkle Science is an early-stage startup out of Singapore, seed-funded by Digital Currency Group, Kenetic, LuneX Ventures (crypto-arm of Golden Gate Ventures), Entrepreneur First and SGInnovate. Merkle Science was selected to participate in Nikkei’s FIN/SUM startup competition in 2019, and at the time, Co-Founder & Chief Executive Officer Mriganka Pattnaik also presented to the Tokyo FinTech community. While the company appears to focus initially on the South East Asian markets, a Japan market entry does not seem too far-fetched, but obviously the “Big Three” have set the bar quite high in terms of organizational structure, local leadership and Japanese investor base.

Uppsala Security built a crowdsourced Threat Intelligence Platform known as the Sentinel Protocol (Sentinel Protocol Team, Sentinel Protocol Marketing Team), which is powered by blockchain technology. Sentinel raised approximately USD 28m in an ICO in May 2018, with the current market cap of the token hovering just below USD 3m. Uppsala provides tracking of suspicious coin movements, like from the recent Upbit Theft, which have been traced to ten different exchanges.

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