Inside Binance: Market Manipulation Allegations and Internal Struggles

When the U.S. accused Binance last year of prioritizing profits over user protection, the company vowed "unceasing efforts to deliver a safe and trusted platform."

by Faruk Imamovic
Inside Binance: Market Manipulation Allegations and Internal Struggles
© Getty Images/Justin Sullivan

When the U.S. accused Binance last year of prioritizing profits over user protection, the company vowed "unceasing efforts to deliver a safe and trusted platform." This pledge faced a critical test soon after when an internal investigation exposed a top client manipulating markets. Instead of addressing the issue, Binance chose to retain the client and dismissed its investigator.

Binance’s market-surveillance team, consisting of professionals recruited from traditional finance, had been tasked with cleaning up the exchange’s operations. Despite the team’s efforts, Binance’s adherence to a freewheeling crypto culture and accusations of failing to prevent manipulative trading placed it under intense scrutiny. Former insiders and company documents revealed that VIP clients engaged in prohibited practices, such as pump-and-dump schemes and wash trading, which violated Binance’s own terms of use. Additionally, Binance maintained secret internal trading accounts to trade large volumes of specific crypto tokens.

The Heart of the Crypto Economy

Crypto exchanges, like Binance, are pivotal in the digital currency economy. Customers rely on them to trade various cryptocurrencies, with Binance listing around 400 varieties and offering derivative products for speculative trading. With nearly 190 million users, Binance processed over $4 trillion in trades in March alone. Despite these impressive figures, the company's internal practices have raised significant concerns.

In late 2023, the dismissal of a key investigator underscored Binance's priorities. The investigator's departure highlighted the company's preference for trading fees from large clients over rectifying market manipulation issues. This came at a time when Binance was already under the watchful eye of the Securities and Exchange Commission (SEC).

A Binance spokesperson refuted claims of permitting market manipulation, emphasizing the company's robust surveillance framework designed to identify and counteract market abuse. The spokesperson insisted that decisions to remove users required substantial evidence of violations and stressed that no user, regardless of their size, was favored over platform safety.

Securities And Exchange Commission Sues Large Cryptocurrency Exchanges, Binance And Coinbase
Securities And Exchange Commission Sues Large Cryptocurrency Exchanges, Binance And Coinbase© Getty Images/Justin Sullivan

Legal Battles and Compliance Efforts

In November, Binance admitted to violating U.S. anti-money-laundering regulations and agreed to pay a hefty $4.3 billion fine. Its founder, Changpeng Zhao, subsequently stepped down and faced a four-month jail sentence. Meanwhile, the exchange continues to grapple with civil charges in an ongoing SEC lawsuit. The SEC’s complaint from last June accused Binance of misleading U.S. investors about its risk controls and prioritizing its financial interests over user protection.

Amid these internal conflicts, regulatory scrutiny on Binance continues to intensify globally. Authorities in Europe and Asia have initiated their investigations, concerned about potential violations of local financial regulations. In particular, the European Securities and Markets Authority (ESMA) has been examining Binance's compliance with its stringent market abuse and anti-money laundering directives. This expanding regulatory spotlight underscores the exchange's increasingly complex landscape, where compliance failures could have far-reaching repercussions beyond the U.S.

To bolster its market-surveillance capabilities, Binance expanded its team in 2022, recruiting investigators from prestigious institutions like Bank of America and Citadel. These efforts led to the development of new software tools to detect market manipulation and wash trading. The investigators soon realized the extent of the problem, particularly among VIP clients who accounted for a significant portion of Binance’s trading volume.

Changpeng Zhao
Changpeng Zhao© Getty Images/David Ryder

The VIP Dilemma and Internal Tensions

The surveillance team recommended the removal of several hundred users for violating terms of use in the first half of 2023. The most notable action involved off-boarding the Tron Foundation, a blockchain company founded by crypto entrepreneur Justin Sun, who was accused of market manipulation by the SEC.

Investigators also discovered that Binance’s internal accounts were trading specific cryptocurrencies. Despite requests for information about these accounts, they received no responses, raising further concerns about transparency. The Commodity Futures Trading Commission (CFTC) had previously warned that Binance’s undisclosed proprietary trading was problematic.

One new VIP trader, DWF Labs, quickly climbed to Binance’s top “VIP 9” status by trading at least $4 billion monthly. However, DWF’s practices raised alarms. The firm’s managing partner, Andrei Grachev, publicly flaunted his wealth and boasted about driving up token prices and creating “artificial volume” on exchanges like Binance.

The Fallout and Future Challenges

Binance’s internal investigators found substantial evidence that DWF manipulated the price of several tokens and engaged in significant wash trading. Following these findings, the surveillance team recommended DWF’s removal. However, the recommendation faced resistance from Binance’s VIP client department and led to an internal investigation into the surveillance team itself.

The new inquiry concluded that there was insufficient evidence of DWF’s market abuse. Binance executives suggested that the wash trades could have been accidental and accused the surveillance team of collaborating too closely with a DWF competitor. Consequently, the company’s leaders rejected the removal request and fired the head of the surveillance team.

Despite these setbacks, Binance insists that it does not manipulate the market and operates under strict scrutiny. Over the past three years, the company claims to have off-boarded nearly 355,000 users for violations. However, the recent internal strife and external pressures underscore the challenges Binance faces as it strives to balance profitability, compliance, and market integrity.