Is it actually over-the-counter trading disguised as investment? The Block exposes DWF Labs' "investment" actions again

Original compilation: Felix (PANews)

I. Overview

1) DWF Labs has developed from obscurity to become one of the most active investors in the crypto space this year.

2) However, behind the prosperity, some industry insiders see danger signals in its opaque investment structure and the habit of transferring token investments to exchanges.

3) DWF refuted this, claiming that there is nothing wrong with its practices.

DWF Labs has skyrocketed up the list of the most active investors in the crypto industry, drawing attention and dissatisfaction.

Institutional investment counts reported by crypto data platform RootData in Q1

In a tumultuous six months filled with scandals, bankruptcies, and crackdowns from U.S. regulators, DWF Labs has moved from obscurity into the spotlight. Trading data from Block Pro shows that the company invested $232 million across 25 funding rounds, with 18 rounds being solely by DWF, while the company itself claims to have invested at least $100 million into over 100 projects.

Concerns about its investments are not only due to DWF's spending but also because many venture capital transactions appear opaque and non-standard, drawing comparisons between DWF and the now-defunct Alameda Research. Alameda Research was a hedge fund and market maker founded by former FTX CEO SBF. In its defense, DWF responded to all questions raised against it.

Matt Walsh, founding partner of Castle Island Ventures, stated, "I've seen this script before, and the outcome is retail investors getting hurt, with the SEC taking enforcement action. This industry doesn't need Alameda 2.0."

DWF Labs was founded in 2018 by managing partner Andrei Grachev—who is the CEO of Huobi Russia and several crypto trading firms. DWF Labs claims online to be a leading "digital asset market maker and Web3 investment firm," with operations in Singapore, Switzerland, the United Arab Emirates, and the British Virgin Islands. It is a subsidiary of Digital Wave Finance, a company with little online presence, which DWF Labs describes as "one of the largest high-frequency cryptocurrency trading entities in the world, trading spot and derivatives markets on over 40 top exchanges."

II. Concerns about DWF Labs

The core concern regarding DWF is that trading agreements for startup tokens are sometimes reported as venture capital investments, and DWF has a habit of transferring these tokens to exchanges for sale.

Starting from the trading structure, many industry insiders expressed concerns to The Block, believing that DWF's multimillion-dollar investments in crypto startups are better described as over-the-counter (OTC) trades. These OTC trades allow startups to convert their tokens into stablecoins, rather than DWF injecting cash upfront, and then DWF transfers the tokens to exchanges.

"All these 'investments' you see are not actual investments," said a person with direct knowledge of DWF's business. "They are OTC trades. They are token purchases. They are OTC trades conducted over a period of time."

III. DWF Labs' "Commitment"

For example, in late February, crypto privacy startup Beldex announced a $25 million deal with DWF. In a blog post, Beldex stated that DWF Labs would "commit to investing $25 million for the development of the Beldex network and ecosystem." However, in some reports about this deal, the word "commitment" was omitted, instead describing it as a direct financing activity. A spokesperson for Beldex stated that the money had actually been committed two years ago.

This spokesperson indicated this week that DWF still participates in the project as its "marketing and partnership advisor," while also helping to introduce other industry players, including developers and researchers. DWF claimed that this arrangement is "extremely beneficial for Beldex."

Just this week, CryptoGPT announced it had secured $10 million in Series A funding from DWF Labs, with a token valuation of $250 million. However, CryptoGPT co-founder and CTO Dejan Erja stated that the total investment amount so far is only $420,000. Erja noted that DWF began investing last week, with the remaining amount to be in place within 285 days. As part of the deal, DWF Labs will also market make for CryptoGPT's GPT token.

IV. DWF's "Unwise" Trades

Bainy Zhang, founder of Fisher 8 Capital and eGirl Capital (who goes by the pseudonym Hedgedhog on Twitter), said, "The types and amounts of projects DWF Labs invests in really don't make sense to me." Both seem unwise. It is speculated that DWF's investment amounts represent a significant portion of the token supply for these projects. For example, assuming DWF pays at market price, Beldex's $25 million represents 5% of its fully diluted valuation.

Once public, such trades could have a massive impact on the price of project tokens. According to CoinGecko data, the price of BDX tokens rose by about 50% within days of announcing the agreement with Beldex, from $0.04 to $0.06. It is now around $0.057.

A project called Tomi aims to build a platform that can replace the internet, stating it raised $40 million from DWF Labs on March 22. In the short term, its token price soared from $1.3 to $4.3, then fell to around $2.58. After The Block reported that DWF Labs committed to purchase $10 million worth of tokens issued by the crypto infrastructure project Orbs, the price also saw an increase.

V. "I don't see anything wrong"

In an interview, when asked whether DWF Labs' investments are early-stage venture capital checks or OTC token trades, Grachev showed no signs of admitting fault.

"We allocate funds based on our risk management. Frankly, I don't think there's anything wrong with that." "I don't care what other market makers/investors are doing. Because our main goal is not to mimic the practices of other market participants. Our goal is to make our partners happy."

Continuing to discuss DWF's practice of transferring its token investments to centralized crypto exchanges, it is not difficult to find people citing on-chain data to emphasize this practice and wonder if it means DWF is selling tokens.

When asked about these movements, Grachev denied claims that the company sells for profit. Instead, he stated that DWF finds it safer to keep tokens on exchanges than to use on-chain wallets.

Grachev said in an interview, "We transfer tokens to exchanges, but we never sell." "Just because we send tokens to exchanges doesn't mean we will sell them immediately or in the near future. We have always transferred tokens to exchanges because, for us, storing tokens on exchanges is a more convenient inventory management method."

In another Twitter post this week, he added, "Crypto market makers must be prepared for emergencies and extreme volatility, and have available token and stablecoin inventories to meet liquidity needs around the clock."

VI. DWF's Funding Situation

DWF's large expenditures have also raised questions among some in the industry about where its funding comes from. Grachev stated that DWF Labs has no external investors, and since the company was founded in December 2018, its funding has come from trading activities. Some of it is also based on cryptocurrency loans.

In addition to running DWF Labs, Grachev's LinkedIn profile shows that he has held several other positions over the past five years—all related to trading and cryptocurrency.

From 2018 to June of last year, he served as CEO of a high-frequency trading company called VRM.Trade. From May 2018 to July of the following year, he was Vice President of Trading at a Moscow-based company called Racib. According to LinkedIn, prior to that, he operated another cryptocurrency company called Crypsis Blockchain Holding, which also worked in Moscow.

Starting in September 2018, Grachev also served as CEO of the Russian branch of a Chinese cryptocurrency exchange: Huobi Russia, for a year. Huobi Russia closed in 2020. A Huobi spokesperson stated, "The partnership was terminated by mutual agreement due to strategic adjustments within the Huobi Group."

Despite Grachev's enthusiasm in interviews with The Block and on social media to refute claims of misconduct, many in the crypto industry remain concerned.

Angel investor and former CMO Matthew Howells-Barby said, "While most VC firms are tightening their wallets, DWF is investing tens of millions of dollars in OTC token trades every week. It feels a bit off."

Disclaimer: Evgeny Gaevoy, founder and CEO of DWF Labs' competitor Wintermute, is a board member and shareholder of The Block.