Author: WSJ

Compiled by: Maodi, 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 thereafter, this commitment was put to the test when an internal investigation found that a top client — a cryptocurrency trader who loved Lamborghinis — was manipulating the market.

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

These 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 behavior 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, which are 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 accounts for trading large volumes of certain cryptocurrencies.

Cryptocurrency exchanges like Binance are at the center of the digital currency economy. Customers use them to exchange one cryptocurrency for another, and Binance lists about 400 different cryptocurrencies and allows users to bet on the direction of prices with derivative products. The company claims to have nearly 190 million users, and industry data shows that in March alone, it processed over $4 trillion worth of spot and derivative trades.

Former company insiders said the dismissal of investigators at the end of 2023 indicated that Binance (which has become a focus of the Securities and Exchange Commission) ignored evidence of market manipulation and prioritized obtaining trading fees from large clients rather than improving its practices. The recent boom in 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 that it allows market manipulation on its exchange and that it is prioritizing improving compliance functions. "We have a robust monitoring framework that can 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 their violation of the terms of use. A senior Binance executive stated 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, Zhao Changpeng, 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 put their financial interests ahead of 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's investigation and began assembling a market monitoring team. It hired over a dozen investigators from U.S. banks and hedge fund Citadel, among other places.

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 trade to create the illusion of an active market.

This new technology made investigators aware of the potential scale of the problem, especially among the VIP clients on whom Binance's business relies. 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 move came last summer when they delisted the Tron Foundation, a blockchain company established by cryptocurrency entrepreneur Justin Sun, a friend of Binance founder Zhao Changpeng. 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 in March 2023, the U.S. Commodity Futures Trading Commission 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 trade or manipulate markets 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 violating regulations.

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 from private relationship managers.

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 was previously the head of the Russian branch of the cryptocurrency exchange HTX. Company records show that he established DWF in Singapore in 2022 and currently resides in Switzerland.

DWF's role is that of a market maker, an intermediary that simultaneously buys and sells assets and typically takes a neutral stance on 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 buy and sell prices. In traditional finance, market makers must maintain this 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 people familiar with its operations. A Binance spokesperson stated that all users on the platform 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 take a neutral stance and instead 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.

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

DWF and Grachev did not respond to requests for comment. Grachev said 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 that they were not aware 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.

Last August, the value of a high-leverage derivative contract related to the YGG token on Binance soared fivefold after its listing. Grachev had previously promoted YGG on X, claiming that the listing would bring "sustainability and strength" to the token. However, its price quickly fell afterward.

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

One of the market makers complained to Binance's department handling VIP clients about DWF's trading behavior, and the department then connected the company with the market monitoring team. Based on this recommendation, 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 tweeted about YGG, DWF sold nearly five million tokens in two batches near the peak, triggering a price collapse. Gabby Dizon, co-founder of YGG, stated that he was not aware of the investigation results.

The monitoring team submitted a recommendation to remove 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 targeting the market monitoring team and the evidence compiled against DWF.

The new investigation concluded that there was not enough evidence to prove that DWF was involved in market abuse, a Binance executive said. The wash trades identified by the monitoring team may have been accidental so-called self-trades, which may not individually constitute manipulative behavior.

Binance executives also stated that they felt the head of the monitoring team had worked too closely with DWF's competitors who made the original complaint.

The company's leadership subsequently rejected the monitoring team's request to delist DWF.

A week after submitting the DWF report, they dismissed the head of the monitoring team. Binance laid off several investigators in the following months, attributed by a Binance executive to cost-saving measures. Others resigned voluntarily. Binance's executives said the team's size is roughly the same today.

Response

Binance responded, stating that the competition between market makers is very fierce, and the work of our investigation team is to remain neutral and impartial in evaluating evidence, including potential biases from market makers against their competitors. We have 190 million users. They can rest assured that we prioritize the platform's security and do not favor any individual, regardless of their size. In other words, these decisions are not made lightly. We will conduct thorough investigations using multiple tools, and only when there is sufficient evidence of a user 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, and the methods are very dark, including purchasing PR attacks against each other; they will ensure their own fairness, not participate, but also truthfully report to the Monitor and other regulatory authorities.

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