Last year, the United States accused cryptocurrency exchange Binance of prioritizing profit over user protection. Binance, however, promised to “work tirelessly to provide a safe and trusted platform.” Shortly after, this promise was put to the test when an internal investigation uncovered market manipulation by a top client—a cryptocurrency trader who was a fan of Lamborghinis. The result? Binance retained the client and dismissed the investigator.
The investigator and their colleagues were recruited from the traditional financial industry with the aim of cleaning up Binance’s practices. As the world’s largest cryptocurrency exchange, Binance was born out of an unregulated and freewheeling crypto culture, and it has come under scrutiny for allegedly failing to prevent manipulative trading behavior that could land Wall Street traders in jail.
Some of the behaviors uncovered by the monitoring team included so-called “VIP” clients—those with the largest trading volumes on the exchange—participating in pump-and-dump schemes and wash trading, both of which are explicitly prohibited in Binance’s own terms of use, according to former employees and company documents. Binance also maintained a secret internal team of trading accounts for trading large volumes of certain cryptocurrencies.
Cryptocurrency exchanges like Binance sit at the heart of the digital currency economy. Customers use them to convert one cryptocurrency into another, and Binance lists around 400 different cryptocurrencies, as well as allowing users to speculate on price movements through 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.
According to former employees, the dismissal of the investigator at the end of 2023 indicated that Binance, which has become a focus of the Securities and Exchange Commission (SEC), 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 of allowing market manipulation on its exchange and that it is prioritizing improving compliance functions. “We have a robust surveillance framework in place to identify and take action against market abuse,” the spokesperson said. “We do not favor any user, regardless of their size, over the platform’s security.”
The spokesperson further stated that the decision to remove users is not taken lightly and requires sufficient evidence of a violation of the terms of use. A Binance executive stated that after an internal investigation determined that the allegations against the client were not sufficiently substantiated, the company dismissed the investigator.
In November of 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 is also facing a civil lawsuit from the SEC. In a complaint filed in June of last year, the SEC alleged that Binance wove 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 own financial interests over those of users.
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 Surveillance
As early as 2022, Binance became aware of the SEC’s investigation and began building a market surveillance team. It hired over a dozen investigators from institutions such as Bank of America and hedge fund Citadel.
The monitoring team developed new software tools to track market manipulation and detect wash trading, which is when traders act as both buyers and sellers in the same transaction to create the illusion of an active market.
This new technology made the investigators realize the potential scale of the problem, especially among Binance’s VIP clients, on which the exchange’s business relies. Last year, the top traders who transacted over $100 million per month accounted for two-thirds of the platform’s total trading volume.
The investigators recommended removing hundreds of users who violated the terms of use in the first half of 2023.
Their biggest action came in the summer of last year when they delisted the Tron Foundation, a blockchain company established by cryptocurrency 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. The Tron Foundation and Justin Sun have requested the dismissal of the case but have not responded to requests for comment.
The team also observed Binance’s own internal accounts trading certain cryptocurrencies. Former employees said that when they requested information on controlling these accounts from Binance internally, they received no response. The U.S. Commodity Futures Trading Commission warned in a complaint in March 2023 that Binance failed to disclose its proprietary trading to customers, describing it as being operated by a “quant department” and being highly secretive.
A Binance spokesperson stated that the company does not engage in trading or market manipulation for the sake of profit and that its operations are “closely monitored.” The spokesperson stated that in the past three years, Binance has delisted almost 355,000 users with trading volumes exceeding $2.5 trillion for violating regulations.
New VIP Trader
Binance has gained a notable new VIP trader.
DWF Labs, a trading and investment firm, rose to the highest “VIP 9” level on Binance, indicating a monthly trading volume of at least $4 billion. Larger trading volumes on the exchange increase a client’s VIP level, providing them with discounted trading fees and the services of a private relationship manager.
DWF’s Russian managing partner, Andrei Grachev, flaunted his wealth on social media in October last year. “Come ride in DWF’s Lamborghini,” he tweeted alongside a photo of a Lamborghini with the DWF logo. The 36-year-old Grachev was previously the head of the Russian branch of cryptocurrency exchange HTX. Company records show that he established DWF in Singapore in 2022 and stated that he currently resides in Switzerland.
DWF’s role is that of a market maker, an intermediary institution that simultaneously buys and sells assets and typically has 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 difference between the buy and sell prices. In traditional finance, market makers are required to maintain this neutrality under the rules of the exchanges they operate on.
Binance does not require market makers to sign any specific agreements to govern their trading behavior, allowing them to essentially trade as they wish, according to sources 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 adopt price neutrality but instead proposed using its active trading positions to push up 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 that 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 a “bullish sentiment” to their tokens.
DWF and Grachev did not respond to requests for comment. Grachev previously stated in a cryptocurrency podcast that DWF does not manipulate markets and questioned whether any trader could do so. “Maybe it can happen once, right? But time after time, 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 market participants,” the spokesperson said.
DWF stated that one of the companies it invested in is Yield Guild Games. The Switzerland-based crypto startup agreed to sell tokens worth $10 million to DWF, about a quarter of its then-market value.
After a high-leverage derivative contract related to YGG tokens was listed on Binance in August last year, the value of the tokens skyrocketed fivefold. Grachev had previously promoted YGG on X, claiming that the listing would bring “sustainability and power” to the token. However, its price quickly fell afterward.
The cryptocurrency industry took note of this volatility, and two other market-making firms privately expressed concerns to Binance about DWF.
One of the market makers lodged a complaint with Binance’s department handling VIP clients about DWF’s trading behavior, which then connected the department with the market surveillance team. Based on this referral, the team initiated an investigation into DWF in September.
Investigation and Dismissal
According to some former employees, Binance’s investigators found that DWF manipulated the prices of YGG and at least six other tokens and engaged in over $300 million worth of wash trading in 2023, concluding that these actions violated the terms of use.
They stated that after Grachev promoted YGG on Twitter, DWF sold nearly 5 million tokens in two batches near the peak, causing a price collapse. Gabby Dizon, co-founder of YGG, stated that he was not aware of the investigation’s findings.
The monitoring team submitted a report recommending the removal of DWF in the late stages of September. In the following days, the head of Binance’s VIP client department and its staff questioned the investigation’s findings and complained to the company’s leadership.
Another department at Binance responsible for evaluating employee compliance launched its own investigation, this time into the market surveillance team and the evidence compiled against DWF.
The new investigation concluded that there was not enough evidence to substantiate DWF’s involvement in market abuse, according to a Binance executive. The identified instances of wash trading by the monitoring team were deemed to be accidental self-trades, which may not individually constitute manipulation.
Binance’s executives also felt that the head of the monitoring team had collaborated too closely with DWF’s competitors in this case.
The leadership subsequently rejected the monitoring team’s recommendation to delist DWF.
A week after submitting the DWF report, they dismissed the head of the monitoring team. Binance then laid off several investigators over the next few months, attributing it to cost-saving measures, while others voluntarily left. Binance’s executives stated that the size of the team is roughly the same today.
Response
Binance responded by stating that competition among market makers is fierce, and the work of their investigation team is to maintain neutrality and impartially consider evidence, including potential biases from market makers against their competitors. “We have 190 million users. They can be 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 various tools, and users will only be removed if there is sufficient evidence of a violation of our terms of use.”
Binance co-founder He Yi stated that they have always monitored market makers and have been very strict. Market makers compete with each other using dark techniques, such as buying PR attacks against each other. Binance ensures its own fairness and does not engage in such practices, while also reporting truthfully to monitors and other regulatory bodies.
DWF responded by stating that many of the recent media reports and accusations are unfounded and distort the facts.