Washing, false advertising, market manipulation? DWF is in trouble again

Author: Tuo Luo Finance

In the consensus of the crypto circle, institutions do not always mean glamour and foresight; in fact, they may be the top seed players in harvesting retail investors.

This time, DWF seems to have gotten into trouble again, and the source of the issue once again points back to Binance.

On May 9, The Wall Street Journal published an in-depth report on Binance, conducting a related investigation through interviews with Binance employees, documents, emails, and other industry participants. The report pointed out that although Binance publicly expanded its market surveillance team and hired more than a dozen investigators from Bank of America and hedge fund Citadel to respond to the SEC's investigation in 2022, it secretly ignored improper trading once discovered, even dismissing the investigation team. In short, the problems were not resolved, but the people raising the issues were dealt with.

The improper trading mentioned in the article directly points to the market maker DWF. The investigation team found that VIP clients, those with monthly trading volumes exceeding $100 million on Binance, were participating in wash trading and pump-and-dump schemes, which are explicitly prohibited by Binance's terms and conditions. Data shows that DWF played a significant role, conducting $300 million in wash trading in 2023 and manipulating the prices of over six tokens, including YGG, CFX, MASK, ACH, and FET.

After discovering the issues, Binance's surveillance team submitted a report recommending the ban of DWF Labs in late September last year, but the final outcome was that Binance deemed the evidence of market manipulation insufficient. Just a week after the report was submitted, the head of the investigation team was dismissed.

Following the report, it quickly sparked widespread discussion in the market. DWF responded immediately, stating that "many of the allegations reported by the media recently are unfounded and distort the facts. DWF Labs adheres to the highest standards of integrity, transparency, and ethics, and we are always committed to supporting you and our more than 700 partners in the entire crypto ecosystem."

Binance co-founder He Yi also stated that Binance has always had a strict market supervision framework for market makers, which does not target any funds, directly pointing out that competition among market makers does not involve trading platforms, and relevant situations will be truthfully reported to regulatory authorities.

Binance clarification, He Yi's response, source: X platform

Regardless of the truth of this incident, when it comes to DWF, it can already be described as "notorious" in the hierarchy of disdain among market makers.

Compared to other long-established market makers, DWF has not been in the market for long. According to its official website, DWF Labs is a subsidiary of Digital Wave Finance, claiming to be a leading multi-stage Web3 investment firm and ecosystem partner, founded in 2018, primarily providing support for token launches, market making, and OTC trading solutions for the companies it invests in. However, detailed information shows that the DWF Labs domain was registered on May 30, 2022, and its true emergence was in 2023.

In 2023, DWF attracted attention with an average of five high-frequency investment operations per month during the bear market, and its founder frequently showcased supercars, shifting the industry's focus to this relatively small investment firm and market maker. Data indicates that DWF's territory has begun to take shape. According to the founder's disclosure, DWF Labs has invested in over 740 projects, with the number of investment projects significantly increasing since November 2023. The official website describes DWF as one of the largest high-frequency cryptocurrency trading entities globally, trading in spot and derivatives markets across more than 60 exchanges.

From a business model perspective, although it seems similar to other investment market makers, unlike others that focus solely on market making without participating in project investments, DWF has extended its business into investment activities. DWF Labs' executive founder Andrei Grachev has long acknowledged that DWF is also an investment company, stating, "We typically invest in the seed and pre-seed stages through SAFT. If the token is already listed and tradable, we will also invest based on the unlocking schedule and lock-up period or in batches. In addition to investment, we also provide additional support, such as public relations, marketing, and fundraising."

This undoubtedly sparked controversy.

The involvement of market makers in project investments inevitably raises concerns about trading manipulation, suggesting a conflict of interest where they act as both referee and player, and DWF's habit of transferring project tokens to exchanges for sale further confirms this.

In April last year, Twitter user Nay mentioned that through on-chain data analysis, DWF Labs' entry and exit amounts for tokens almost always matched the timing and dollar amounts, indicating that these were not loans and thus not standard market maker trades. DWF Labs' trading model involves either purchasing $50,000 to $100,000 worth of stablecoins approximately once a day or making large trades of up to $5 million, then depositing all (or almost all) funds into centralized exchanges.

These operations can directly impact the market to achieve effective cashing out. From a business model perspective, DWF's primary profit source comes from buying tokens at a discount and selling high or providing investment and market-making services to projects, which aligns with the three key business categories disclosed by DWF—liquid token investment, locked token investment, and market-making services. In this regard, some industry insiders believe that DWF's investments have fundamentally moved beyond the realm of investment and into the territory of over-the-counter trading.

This assertion is not without basis. Taking a well-known case involving DWF as an example, on August 6 last year, as an investor, DWF released favorable funding decisions regarding YGG, DODO, and C98, causing the prices of these tokens to rise rapidly, with YGG soaring by 50%. That evening, DWF transferred 3.649 million YGG (priced at $0.61 at the time) to Binance, securing over a million dollars in profit. After DWF completed its sell-off, the three tokens experienced significant declines, with YGG dropping by 70%. Overall, this represents a typical case of a market manipulator driving up prices.

All three tokens exhibited similar trends, source: public data

Such operations frequently occur among the tokens that DWF invests in and markets. In a report by The Block last year exposing DWF, it was described that DWF Labs employees used price increase charts of previously collaborated tokens as demonstrations during business pitches, and one of DWF Labs' founders, Andrei Grachev, even asked clients what price increase and price levels they hoped for in tokens. In some project investments, DWF's investment logic differs from that of typical investment institutions, focusing not on technology or team expertise but on projects that can rise based on information, such as DWF's $60 million investment in EOS Network last year, a project that had been struggling for years.

In addition to pump trading, DWF also seems to engage in false advertising regarding investment amounts. Nay pointed out that when DWF publicly announced investments exceeding $150 million, only $65 million could be traced on-chain, raising suspicions that DWF was using the names of project parties to sell at discounted prices and profiting through prepayment methods.

It is precisely due to these various dubious operations that DWF has faced resistance from almost all its peers.

At last year's Token2049 conference, DWF Labs, GSR, Wintermute, and OKX participated in a panel discussion, and in the event photos shared by GSR, DWF Labs co-founder Andrei Grachev's image was directly cropped out. GSR also publicly stated, "DWF Labs absolutely does not qualify to join the roundtable discussion, and sharing a space with DWF Labs is an insult to GSR, Wintermute, and OKX." In response to this statement, Wintermute CEO Evgeny Gaevoy expressed his stance by liking the post.

Industry peers clashing on-site, source: public data

In response to this incident, DWF's founder displayed considerable disdain, even mocking the other party on the X platform. "I never thought you would be so afraid of us. Yes, we are stronger than you in technology, trading, and business development. You actually started collaborating with competitors and complained like a child, slandering us."

In fact, if one delves into DWF's founding team, it is not difficult to find a history of issues.

Founder Andrei Grachev entered the crypto field in 2017 after being a founder in the logistics industry and later became the head of Huobi Russia in 2019. While serving as head, he was also suspected of participating in the $4 billion cryptocurrency Ponzi scheme OneCoin and made promises regarding OneCoin's listing at that time. Prior to this, Grachev led a project called Export.online, and according to LinkedIn information, Andrei Grachev was the CEO of that organization, while Vladimir Perov was the CTO. Investors have mentioned that Grachev misappropriated client assets amounting to $157,000 in that project.

Subsequently, Grachev left Huobi and co-founded DWF's predecessor VRM.trade with Vladimir Demin, claiming trading volumes could reach $1 billion to $20 billion, information that remains unverified. There are also rumors in the market that Huobi let him go due to distrust in Grachev's abilities and integrity.

In response to various external doubts, DWF has made multiple clarifications, stating that it never engages in market manipulation and that there are no manipulative behaviors, and it will sell appropriately during the unlocking period. Some of DWF's partners have also claimed that their cooperation with DWF has been pleasant, with no issues regarding token price increases. However, based on actual performance, the market still finds it hard to conceal its skepticism toward DWF.

Overall, if compared to the traditional world, the combination of market making and investment is clearly a false proposition, undoubtedly violating securities laws. However, in the crypto field, such behavior, aside from raising doubts, does not seem to cause significant upheaval. Ultimately, the crypto circle is driven by price increases, and manipulative behaviors are ubiquitous, with users sometimes even seeking a strong manipulator to maintain control. Even if there is price manipulation, from the project's perspective, it can clear out excess tokens and gain funds from price increases, clearly benefiting the vested interests. This scenario, where all three parties are involved and have their own agendas, has naturally persisted in this unique crypto domain.

In this context, it is not surprising that the SEC chairman mentioned in an interview that due to the lack of protection under securities laws, the crypto market is a hotspot for fraud, and investors have not received important information disclosures. On the other hand, if regulatory coverage is refined, whether ordinary investors gain more protection or lose more opportunities remains a difficult question to answer. In summary, being cautious, conducting thorough investigations, and maintaining vigilance against potential manipulators are qualities that investors should possess.

Returning to this incident, currently, neither Binance nor DWF has been affected by the information and both continue to operate normally. According to Rootdata, as of May 10, DWF Labs has participated in 33 investments in the past year, with six of those occurring just in April, investing in projects such as LazyBear, Klaytn, Scallop, Shiba Inu, Tevaera, and NuLink.