Binance DWF Gate: Employees Accuse of Being Fired Binance Criticizes Dark Internal Struggles of Market Makers

Author: WSJ

Translation: Cat Brother, Wu Shuo

Last year, the United States accused Binance of prioritizing profit maximization over protecting users, while Binance promised to "make unremitting efforts to provide a safe and trustworthy platform."

Shortly after, this commitment was put to the test when an internal investigation found that a top client — a cryptocurrency trader who loved Lamborghinis — operating a company was manipulating the market.

The result was that Binance retained this client and dismissed its investigators.

The investigators and their colleagues were recruited from the traditional financial world with the aim of cleaning up Binance's behavior. The world's largest cryptocurrency exchange, born in an unregulated, freewheeling crypto culture, has come under close scrutiny for allegedly failing to prevent manipulative trading practices that could land Wall Street traders in jail in traditional financial markets.

Some of the behaviors identified by the monitoring team included: so-called "VIP" clients — the largest clients on the exchange — participating in pump-and-dump schemes and wash trading, actions explicitly prohibited in Binance's own terms of use, according to former company insiders and company documents. Binance also maintained a secret internal team of trading accounts for trading large volumes of tokens of certain cryptocurrencies.

Exchanges like Binance are at the heart of the digital currency economy. Customers use them to exchange one cryptocurrency for another, with Binance listing around 400 different cryptocurrencies and allowing users to bet on price directions with derivative products. The company claims to have nearly 190 million users, and industry data shows that in March alone, it processed over $40 trillion worth of spot and derivative trades.

Former company insiders said the dismissal of investigators at the end of 2023 indicated that Binance (now a focus of the Securities and Exchange Commission) ignored evidence of market manipulation, prioritizing transaction fees from large clients over improving its practices. The new wave of cryptocurrency trading this year has created lucrative new trading opportunities for Binance and its high-volume clients.

A Binance spokesperson stated that the company rejects any claims of allowing market manipulation on the exchange and is prioritizing improving compliance functions. "We have a robust monitoring framework to identify and take action against market abuse," the spokesperson said. "We do not favor any user, no matter how large, over the platform's security."

The spokesperson stated that the decision to remove users is not made lightly and requires sufficient evidence of them violating the terms of use. A senior Binance executive said that after a subsequent internal investigation determined that the allegations against the client were not fully substantiated, the company dismissed the investigators.

In November last year, Binance admitted to violating U.S. anti-money laundering requirements and agreed to pay a $4.3 billion fine. Its founder, Changpeng Zhao, resigned and was sentenced to four months in prison last week on related charges.

The exchange also faces a civil lawsuit from the SEC. In a complaint filed in June last year, the SEC accused Binance of weaving a "deceptive web" in misleading U.S. investors about its risk controls to prevent manipulative trading. The SEC stated that Binance and its U.S. branch prioritized their financial interests over users.

The SEC declined to comment on this.

This article is based on interviews with former and current Binance employees, as well as other industry participants. The Wall Street Journal also reviewed key documents and emails.

Expanding Monitoring Scope

As early as 2022, Binance became aware of the SEC investigation and began assembling a market monitoring team. It hired over a dozen investigators from U.S. banks and hedge funds like Citadel.

The monitoring team developed new software tools to track market manipulation and detect wash trading, where traders act as both buyers and sellers in the same transaction to create a false impression of an active market.

This new technology made investigators aware of the potential scale of the problem, especially among the VIP clients that Binance's business relies on. Last year, the top traders with monthly volumes exceeding $100 million accounted for two-thirds of the platform's total trading volume.

Investigators recommended eliminating hundreds of users who violated the terms of use in the first half of 2023.

Their biggest action took place last summer when they delisted the Tron Foundation, a blockchain company established by crypto entrepreneur Justin Sun, a friend of Binance founder Changpeng Zhao. In March 2023, the SEC accused the Tron Foundation and Justin Sun of fraudulently manipulating the market for their own tokens through wash trading. Sun and the Tron Foundation sought to dismiss the case but did not respond to requests for comment.

Team members also observed Binance's own internal accounts trading certain cryptocurrencies. Former company insiders said that when they asked Binance internally for information on controlling these accounts, they did not receive a response. In a complaint filed by the U.S. Commodity Futures Trading Commission in March 2023, it warned that Binance did not disclose its proprietary trading to customers, stating that it was run by a "quant department" and kept strictly confidential.

A Binance spokesperson stated that the company does not engage in trading or market manipulation for profit under any circumstances and added that its operations are "closely monitored." The spokesperson said that over the past three years, Binance has delisted nearly 355,000 users with trading volumes exceeding $25 trillion for violations.

New VIP Trader

Binance has seen a notable new VIP trader.

DWF Labs, a trading and investment company, rose to the highest "VIP 9" level on Binance, meaning its monthly trading volume is at least $4 billion. Larger trading volumes on the exchange raise clients' VIP levels, providing them with discounted trading fees and services of a private relationship manager.

Andrei Grachev, the Russian managing partner of DWF, boasted his wealth on social media last October. "Come sit in DWF's Lambos," he tweeted in a photo of a Lamborghini with the DWF logo. The 36-year-old Grachev previously headed the Russian branch of the cryptocurrency exchange HTX. Company records show that he founded DWF in Singapore in 2022 and currently resides in Switzerland.

DWF's role is that of a market maker, an intermediary that buys and sells assets simultaneously, typically indifferent to asset price movements.

Market makers increase liquidity, making it easier for others to buy and sell assets. They profit by charging the spread between the buying and selling prices. In traditional finance, market makers must maintain this price neutrality under the rules of the exchange they operate on.

Binance does not require market makers to sign any specific agreements to regulate their trading behavior, allowing them to trade essentially as they please, according to individuals familiar with its operations. A Binance spokesperson stated that all platform users must adhere to its general terms of use, which prohibit market manipulation.

According to a proposal sent to potential clients in 2022, DWF did not maintain price neutrality but proposed using its active trading positions to boost token prices and create so-called "artificial trading volume" on exchanges, including Binance, to attract other traders.

In a report prepared for a client last year, DWF stated that it successfully generated artificial trading volume equivalent to two-thirds of the client's tokens and was working to establish a "credible trading pattern." Other client proposals from last year stated that working with DWF would bring a "bullish sentiment" to their tokens.

DWF and Grachev did not respond to requests for comment. Grachev stated in a cryptocurrency podcast last year that DWF did not manipulate the market and questioned whether any trader could do so. "Maybe it can happen once, right? But repeatedly, continuously, it's impossible," he said.

A Binance spokesperson stated they were unaware of these DWF documents. "If true, this would be very concerning for us and other participants," the spokesperson said.

DWF stated that a company it invested in is Yield Guild Games. The Swiss-registered crypto startup agreed to sell tokens worth $10 million to DWF, about a quarter of its then market value.

In August last year, after a high-leverage derivative contract related to YGG tokens was listed on Binance, its value surged fivefold. Grachev had previously promoted YGG on X, claiming that the listing would bring "sustainability and strength" to the token. However, its price quickly dropped thereafter.

The cryptocurrency industry took note of this volatility, and two other market-making companies privately expressed concerns about DWF to Binance.

One market maker complained to Binance's VIP client department about DWF's trading behavior, which then connected the company with the market monitoring team. Based on this referral, the team began investigating DWF in September.

Investigation and Dismissal

According to some former company insiders, Binance's investigators found that DWF manipulated the prices of YGG and at least six other tokens and conducted over $300 million in wash trades in 2023, concluding that these actions violated the terms of use.

They stated that after Grachev promoted YGG on Twitter, DWF sold nearly five million tokens in two batches near the peak, causing a price collapse. Gabby Dizon, co-founder of YGG, said he was unaware of the investigation results.

The monitoring team submitted a report recommending the removal of DWF in late September. Over the next few days, the head of Binance's VIP client department and its staff questioned the investigation results and complained to the company's leadership.

Another department at Binance responsible for assessing employee compliance launched its own investigation — this time focusing on the market monitoring team and the evidence compiled against DWF.

A new survey suggests that there is not enough evidence to prove that DWF is involved in market manipulation, according to a Binance executive. The monitoring team identified the wash trades as potentially accidental self-trades, which may not individually constitute manipulation.

The Binance executive also stated that they feel the head of the monitoring team has collaborated too closely with DWF's competitors mentioned in the original complaint.

The company leadership subsequently rejected the monitoring team's request for delisting.

A week after submitting the DWF report, they fired the head of the monitoring team. Binance then laid off several investigators in the following months, with one Binance executive attributing it to cost-saving measures. Others resigned voluntarily. The Binance executive mentioned that the team's size remains roughly the same today.

Response

Binance responded by stating that the competition among market makers is fierce, and the work of our investigation team is to remain neutral and examine the evidence without bias, including any potential biases from market makers towards their competitors. We have 190 million users. They can rest assured that we prioritize platform security and do not favor any individual, regardless of their size. In other words, these decisions are not made lightly by us. We will conduct thorough investigations using various tools, and only when there is sufficient evidence of users violating our terms of use will they be removed.

Binance co-founder He Yi stated that they have been closely monitoring market makers and are very strict; there is competition among market makers, with dark means such as purchasing PR attacks against each other; they will ensure their own fairness, not participate, but will truthfully report to the Monitor and other regulatory authorities.