Binance DWF Rohmer: Employees Accuse and Get Fired Instead, Binance Criticizes Dark Infighting Among Market Makers

Original Title: Binance Pledged to Thwart Suspicious Trading---Until It Involved a Lamborghini-Loving High Roller

Authors: Angus Berwick, Elaine Yu, The Wall Street Journal

Translation: Cat Brother, Wu Shuo

Last year, the U.S. accused Binance of prioritizing profit maximization over user protection, and Binance pledged to "work tirelessly to provide a safe and trustworthy platform."

Shortly thereafter, this promise was put to the test when an internal investigation found that a top client—an avid Lamborghini-loving cryptocurrency trader—was manipulating the market.

The result was that Binance retained this client and fired its investigator.

The investigator and his colleagues were recruited from traditional finance with the aim of cleaning up Binance's practices. The world's largest cryptocurrency exchange, born out of 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—engaging 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 trading account team to trade large amounts 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; Binance lists about 400 different cryptocurrencies and offers derivatives that allow users to bet on price directions. The company claims to have nearly 190 million users, and industry data shows that it processed over $40 trillion in spot and derivatives trading just in March.

Former company insiders say that the firing of the investigator at the end of 2023 indicates that Binance (which has become a focus of the Securities and Exchange Commission) ignored evidence of market manipulation, prioritizing transaction fees from large clients over improving its practices. This year's new wave of cryptocurrency trading has created lucrative new trading opportunities for Binance and its high-profile clients.

A Binance spokesperson stated that the company rejects any claims that it allows market manipulation on its exchange and that it is prioritizing improvements to its compliance functions. "We have a robust monitoring 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 security of the platform."

The spokesperson noted that the decision to remove a user is not made lightly and requires substantial evidence that they have violated the terms of use. A Binance executive stated that the company fired the investigator after a subsequent internal investigation determined that the allegations against the client were not sufficiently substantiated.

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 is also facing a civil lawsuit from the SEC. In a complaint last June, 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 placed their financial interests above those of users.

The SEC declined to comment.

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 a dozen investigators from places like Bank of America and hedge fund Citadel.

The monitoring team developed new software tools to track market manipulation and detect wash trading, which refers to traders acting as both buyers and sellers in the same transaction to create the illusion of an active market.

This new technology made investigators aware of the potential scale of the problem, particularly among the VIP clients on which Binance's business relies. Last year, top traders who traded over $100 million monthly 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 occurred last summer 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. 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 stated that when they requested information from Binance internally regarding the controls over these accounts, they received no response. The Commodity Futures Trading Commission warned in a March 2023 complaint that Binance had not disclosed its proprietary trading to customers, stating it was run by a "quantitative department" and kept strictly confidential.

A Binance spokesperson stated that the company would never trade or manipulate the market for profit under any circumstances, adding that its operations are "under strict monitoring." The spokesperson noted that in the past three years, Binance has delisted nearly 355,000 users whose trading volume exceeded $2.5 trillion for violations.

New VIP Traders

A new prominent VIP trader has emerged at Binance.

DWF Labs, a trading and investment firm, has ascended to Binance's highest "VIP 9" level, meaning its monthly trading volume is at least $4 billion. Greater trading volume on the exchange elevates clients' VIP status, providing them with discounted trading fees and private relationship manager services.

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

DWF's role is that of a market maker, an intermediary that simultaneously buys and sells assets, typically indifferent to whether asset prices rise or fall.

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 exchanges where they operate.

Binance does not require market makers to sign any specific agreements to regulate their trading behavior, allowing them to trade essentially at will, according to those familiar with its operations. A Binance spokesperson stated that all users on the platform must comply with its general terms of use, which prohibit market manipulation.

According to a proposal sent to potential clients in 2022, DWF did not take a price-neutral stance but instead proposed to use its active trading positions to drive up token prices and create so-called "artificial trading volume" on exchanges, including Binance, to attract other traders.

In a report prepared for a client that year, DWF wrote 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 indicated that working with DWF would bring "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 does not manipulate the market and questioned whether any trader could do so. "Maybe it could happen once, right? But again and again, continuously, that'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 one of its investments is Yield Guild Games. This Switzerland-registered crypto startup agreed to sell DWF tokens worth $10 million, approximately a quarter of its then-market value.

Last August, after Binance listed a highly leveraged derivative contract related to the YGG token, its value soared fivefold. 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 took note of this volatility, and two other market-making firms privately expressed concerns about DWF to Binance.

One of the market makers complained to Binance's VIP client handling department about DWF's trading behavior, which subsequently 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, conducting over $300 million in 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 five million tokens in two batches near the peak, triggering a price collapse. YGG co-founder Gabby Dizon stated that he was not aware of the investigation's findings.

The monitoring team submitted a recommendation report to remove DWF in late September. In the following days, the head of Binance's VIP client department and his staff questioned the investigation's findings 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 it compiled against DWF.

The new investigation concluded that there was insufficient evidence to prove that DWF was involved in market abuse, a Binance executive stated. The wash trading identified by the monitoring team could be accidental so-called self-trading, which may not individually constitute manipulative behavior.

Binance executives also indicated that they felt the head of the monitoring team had collaborated too closely with DWF's original complainants.

Company leadership subsequently dismissed the monitoring team's removal request.

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

Response

Binance responded that competition among market makers is intense, and our investigative team's job is to remain neutral and view evidence without any bias, including potential biases from market makers against their competitors. We have 190 million users. They can rest assured that we prioritize the security of the platform and do not favor any individual, regardless of their size. In other words, these decisions are not made lightly. We will use various tools for in-depth investigations and will only remove users when there is sufficient evidence that they have violated our terms of use.

Binance co-founder He Yi stated that they have been closely monitoring market makers and that the competition among them is fierce, with underhanded tactics and PR attacks against each other; they will ensure their own fairness and will not participate but will report truthfully to the Monitor and other regulatory bodies.