In October 2023, Andrei Grachev, the Russian managing partner of DWF, posted a photo of a Lamborghini luxury car on social media with the text "DWF Lambo". This high-profile display of wealth quickly attracted widespread attention in the crypto industry. People speculated how the head of a seemingly small crypto institution could afford such an expensive luxury car.
Andrei Grachev, 36, has held senior positions at the Russian branch of the cryptocurrency exchange Huobi. According to information, he is one of the co-founders of DWF Labs, which is headquartered in Switzerland.
DWF Labs plays the role of a market maker (MM) in the crypto market, which is a company that intermediaries transactions between asset buyers and sellers and is usually not sensitive to asset price fluctuations. Their main responsibility is to increase market liquidity, making it easier for traders to buy and sell assets and earn profits through price differences. However, in the traditional financial field, market makers must abide by the price neutrality rules of their exchanges.
On the Binance exchange, DWF Labs is labeled "VIP 9," meaning the company has a minimum of $4 billion in monthly trading volume. At this level, Binance typically offers market makers discounted trading fees and access to a private account manager.
A person familiar with Binance's operations said that Binance does not require market makers to sign specific trading agreements, which means that to a large extent, Binance allows market makers to decide how to trade on their own. However, a Binance spokesman said that all users on the platform must abide by general terms of use that prohibit market manipulation.
However, according to the proposal documents sent to potential clients in 2022, DWF Labs did not adopt price neutrality rules, but used its active trading positions to push up token prices and create so-called "artificial trading volume" on exchanges including Binance to attract other traders. In a report prepared for a token project client, DWF even directly wrote that the agency had successfully generated artificial trading volume equivalent to two-thirds of the token, and was working to create a "credible trading model" to bring "bullish sentiment" to the project token.
YGG incident reveals DWF's market manipulation problem
In August 2023, Binance announced the listing of high-leverage derivatives contracts related to the YGG token. YGG is the native token issued by the blockchain game guild Yield Guild Games and a company invested by DWF Labs. The company had previously agreed to sell $10 million worth of tokens to DWF Labs, accounting for about a quarter of its market value at the time.
Andrei Grachev had touted YGG on social media, claiming that the listing would bring “sustainability and strength” to the token, but just after YGG derivatives contracts were launched on Binance, its price plummeted.
The cryptocurrency industry took notice of the volatility, and two other market-making firms privately expressed concerns about DWF Labs to Binance. One of the market makers complained about DWF Labs’ trading to the Binance department that handles VIP customers, which reported the matter to Binance’s market monitoring team, and soon, in September 2023, Binance’s market monitoring team began an investigation into DWF Labs.
Investigation and dismissal
According to insiders of Binance, its investigators found that DWF Labs was suspected of manipulating the prices of YGG and at least six other tokens, and conducted more than $300 million in wash sales in 2023. The final conclusion was that these actions violated Binance's terms of use.
Not only that, investigators are said to have discovered that similar wash sales have formed a certain scale on the Binance trading platform, especially among the VIP customers on which Binance's business relies. Last year, top trading customers (traders with monthly trading volume exceeding US$100 million) accounted for two-thirds of the total trading volume on the Binance platform. Therefore, investigators recommended closing hundreds of customers who violated the terms of use before the first half of 2023.
In the case of DWF Labs, the investigation found that after Andrei Grachev tweeted about YGG, DWF sold nearly 5 million tokens in two batches when the price of YGG was close to the market peak, causing the token price to plummet. YGG co-founder Gabby Dizon claimed that he was not aware of Binance's findings.
In late September 2023, the Binance market research team submitted a report that DWF Labs was suspected of
Due to market manipulation, it was suggested that Binance remove DWF Labs, but things seem to have changed again.
In the following days, the head of Binance's VIP customer department and its employees questioned the findings and complained to the company's leadership. As a result, Binance executives said that the market investigation team did not have enough evidence to show that DWF Labs was involved in market manipulation, and that the wash trades it found might be accidental so-called self-trading, which might not constitute manipulation. Binance also believed that the head of the market investigation team worked too closely with the competitor who initially filed the complaint against DWF Labs on the case. A week later, Binance claimed that it had fired several investigators involved in the matter in order to save costs.
Responses
There is no doubt that Binance plays a vital role in the current global digital currency economy. Currently, there are about 400 cryptocurrencies listed on the Binance platform, and derivatives products that allow users to bet on price direction are provided. The number of Binance users is as high as 190 million. Industry data shows that the value of spot and derivative transactions processed by it in March exceeded 4 trillion US dollars.
According to the Wall Street Journal, a former Binance insider said that Binance seemed to be "covering up" DWF Labs' market manipulation. Due to the huge trading volume of DWF Labs, Binance not only did not stop DWF Labs as recommended by the market research team, but instead fired the staff investigating the market maker. The purpose of doing so is most likely to earn high transaction fees from large customers.
In response, a Binance spokesperson said that it disagrees with any claims that it allows market manipulation, and that Binance is prioritizing improving its compliance functions. The spokesperson said: "We have a strong monitoring framework that can identify market abuse and take action. Binance will not favor any individual user, no matter how large, for the security of the platform."
At the same time, the spokesperson also pointed out that Binance will not make the decision to remove users lightly, and there must be sufficient evidence to prove that they have violated the terms of use. Under no circumstances will Binance trade for profit or manipulate the market, adding that its operations are "subject to strict scrutiny." The spokesperson disclosed data that Binance has closed nearly 355,000 user accounts for violations in the past three years, involving transactions of more than $2.5 trillion.
Just after the Wall Street Journal revealed that DWF Labs had wash trading and potential market manipulation issues on the Binance exchange, Binance responded on the social media platform on the evening of May 9 and wrote:
"Binance strongly refutes any suggestion that its market surveillance program allows for market manipulation on the platform. Binance has a robust market surveillance framework to identify and take action against market abuse. Any user violating our Terms of Use will be removed and market abuse will not be tolerated. Over the past three years, nearly 355,000 users have been removed for Terms of Use violations, with over $2.5T in trading volume. With 190 million users, Binance can be assured that we prioritize the security of our platform and will not favor any individual, no matter how large. In other words, these decisions are not made lightly. Binance conducts in-depth investigations using a variety of tools and will only remove users when there is sufficient evidence that they have violated our Terms of Use. Additionally, Inca Digital recently conducted an independent investigation into Binance's market surveillance practices, validating the effectiveness of the methodology and finding even the smallest traces of unusual trading activity."
DWF Labs, the party involved in this incident, also responded on social media and wrote:
“DWF Labs would like to clarify that many of the allegations reported in the recent media are baseless and misrepresent the facts.
Labs operates with the highest standards of integrity, transparency, and ethics and remains committed to supporting its more than 700 partners.”
Later, Binance co-founder and chief customer service officer He Yi interpreted Binance’s response, emphasizing that Binance has been doing MM (market maker) market monitoring, and it is very strict, but it does not target any fund. There is competition among market makers and the means are very shady. He implied that some market makers have PR behavior, but do not involve Binance. Binance will ensure its own fairness and will not participate, but will also report truthfully to the monitor and other regulatory authorities. He Yi also added:
“Everyone is influenced by their own culture, background and prejudice. I am very grateful to WSJ for its persistent and long-term investment in Binance, which has helped us increase exposure and save a lot of budget. However, I found an interesting phenomenon that some mainstream media articles have begun to output emotions and prejudices, and are no longer based on facts. For example, the complaints (opinions) of former employees can become articles; while Binance’s active investigation and reporting of the arrest of Zkasino, the main culprit, is not worth reporting.”
Judging from He Yi’s response, this incident seems to have been caused by a struggle between market makers. It is very likely that competitors released some negative news in the media for public relations purposes in order to attack market makers such as DWF Labs.
On the same day that the Wall Street Journal published the article, Binance announced the launch of a new round of new coin mining projects. At least for now, Binance has not been greatly affected by this incident.
