The U.K. financial services regulator issued the payments provider a s166 notice late last year. The inquiry is now closed.
BCB Group, a payments processor that links cryptocurrency firms to the banking system, was the subject of a now-closed investigation by the U.K. financial services regulator, according to two people with knowledge of the matter.
The Financial Conduct Authority, or FCA, gave BCB a so-called s166 notice late last year, the people said, who spoke on condition of anonymity as the matter is private. The investigation has since been concluded in a way a source close to BCB deemed positive for the company. BCB is in constructive talks with the regulator about expanding its licence, a third person added.
“BCB Group has at all times operated a compliance first approach in its business activities and continues to do so,” said Oliver Tonkin, CEO of BCB, in emailed comments. “We have regular open and transparent dialogue with all our regulators across our licenced businesses and from our perspective we are in good standing with them all. Our engagement with the FCA continues to be positive and we have recently been given the green light to expand our regulatory footprint in the UK should we wish to do so,” he added.
The FCA declined to comment.
Payments companies like BCB are important intermediaries in the digital assets ecosystem, moreso following the collapse of a number of crypto-friendly banks in the U.S. last year. They provide banking rails to some of the biggest institutions in the digital-asset sector, including exchanges such as Bitstamp, Crypto.com, Gemini and Kraken.
It’s not clear what sort of inquiry BCB faced. A s166 review can be triggered by the FCA for a number of reasons. There may be concerns about a company’s regulatory requirements, and whether it is complying with specific rules. The regulator could be worried about potential misconduct issues. The supervisory body may also have concerns about a firm’s risk management processes and its financial stability. If the FCA suspects market abuse or misconduct, it can also launch an investigation.
BCB is not a unique case, as the FCA issues about 50 of these notices to companies in the U.K. every year.
Natasha Powell, the former chief compliance officer at BCB, recently resigned from the business, as reported by CoinDesk. She will be joining crypto exchange Kraken as head of U.K. compliance in November.
Powell will still retain links with BCB, and will continue to support the group as a non-executive director of BCB Payments Ltd., its U.K.-regulated payments business.
The payments processor recently received a takeover approach from an unidentified investor, CoinDesk revealed last month. The buyout interest was initiated by the potential acquirer while BCB was exploring a Series B funding round, according to people familiar with the matter.
Obtained by CoinDesk under a Freedom of Information Law request, the documents offer a rare but limited window into the reserves behind USDT, the crypto market’s largest stablecoin.
CoinDesk tarafından elde edilen belgelere göre, Stablecoin ihraççısı Tether, fonlarını Mart 2021’de dört banka, iki yatırım yönetimi firması, iki altın deposu ve bir altın komisyoncusu ve kendi kardeş şirketi Bitfinex’te tuttu.
Ayrıca, Qatar National Bank QPSC, Barclays Bank PLC, Deutsche Bank AG, Emirates NBD Bank PJSC ve Natwest Group PLC dahil olmak üzere çeşitli kuruluşlar tarafından ihraç edilen ticari kağıtlarda fonları vardı. Ve ihraççılarının büyük bir yüzdesi çeşitli Çin bankaları ve finans kurumlarıydı.
Tether’in geçmişte ticari kağıtlara olan güveni haber değil. Piyasa değerine göre dünyanın en büyük stablecoin’ini çıkaran ve elinde bulunduran şirket, 2021’de ticari senete fon koyduğunu kabul etti. Ancak şirketin bu tür varlıklara ne ölçüde güvendiği daha önce bilinmiyordu.
Ziraat Bankası Çin Ltd, Bank of China Hong Kong, Bank of Communications Co Ltd, Industrial and Commercial Bank of China, China Merchants Bank, China Construction Bank, China Everbright Bank Co ve daha fazlası, Tether’in kullandığı ticari kağıt çıkardı. jeton.
Editörün notu: Bu makale, New York Başsavcılığı’na Bilgi Edinme Özgürlüğü Yasası talebiyle alınan belgelere dayanmaktadır. CoinDesk, kısmen hiç kimsenin özel bilgilerinin yanlışlıkla paylaşılmadığından emin olmak için belgeleri inceliyor ve tam olarak yayınlamadan önce uygun olduğunda düzeltiyor.
Belgelere göre 31 Mart 2021’de Tether, bu kurumlarda 35,5 milyar dolardan fazla ABD doları eşdeğeri olduğunu iddia etti. Haziran 2021’de yapılan bir eyalet Bilgi Edinme Özgürlüğü Kanunu (FOIL) talebine cevaben New York Başsavcılığı (NYAG) tarafından CoinDesk ile paylaşıldılar. Belgelerin 4 Ağustos 2021’de oluşturulmuş olduğu görülüyor ve Tether’in o günkü operasyonlarının anlık görüntüsü. 5,1 milyar dolar daha, “USDT kredileri” ve diğer varlıklar altında detaylandırıldı ve toplam 40,6 milyar dolarlık bir varlık için, kabaca o sırada dolaşımdaki 40,8 milyar USDT’ye denk geldi.
Bu nedenle, belgeler, kripto endüstrisinde uzun süredir tartışma ve varsayım konusu olan Tether’in finansmanına nadir ancak sınırlı bir pencere sunuyor. Başsavcı Letitia James, Şubat 2021’de ofisinin Tether ile anlaşmaya vardığını açıkladığında, 2017 ve 2018’de Tether’in stablecoin’i USDT’nin tam olarak desteklenmediği zamanlar olduğunu söyledi. NYAG’ın soruşturmasının sonuçlanmasından altı ay sonra oluşturulan yeni belgeler, bu iddiayı ne kanıtlıyor ne de çürütüyor.
Bununla birlikte, Tether’in belirteci destekleyen varlıkları depoladığı bulmacaya bir parça daha eklerler. Yıllar boyunca, şirketin bankacılık ilişkileri hakkındaki bilgiler yalnızca damla damla ortaya çıktı.
Tether (USDT), sayısız borsada kripto alım satımı için karşı taraf varlığı olarak önemli bir role sahip, dünyanın en büyük stablecoin’idir. Tether, dolaşımdaki her bir USDT tokeni için en az bir dolar değerinde varlık rezervi tuttuğunu iddia ederek, değerini ABD dolarına karşı tutacak şekilde tasarlanmıştır. Şirket uzun süredir USDT’nin tam olarak desteklenmediğine dair endişelerle boğuşuyor, New York Eyalet Başsavcılığı’nın Nisan 2019’da Tether’in kurumsal hisselerini paylaştığı bir borsa olan Bitfinex’e yaklaşık 850 milyon dolar borç verdiğini açıkladığında haklı çıktığı endişeleri. memurlar ve ebeveynlik ile. Bitfinex, ödeme işlemcisi yetkililer tarafından ele geçirildiğinde, kendi fonlarının bu miktarına erişimini kaybetti.
CoinDesk, FOIL talebinde, Tether’in rezervlerinin nelerden oluştuğunu ortaya koyan ilk kamuya açık belgesini yayınlamasının ardından USDT stablecoin’in desteğini detaylandıran belgeler istedi. O zamanlar, neredeyse yarısı belirtilmemiş ticari kağıttaydı.
Tether, 2021’de NYAG’ın ofisi ile anlaşmasını duyururken, NYAG ile paylaştığı bilgilerin aynısını rezervleri hakkında en az iki yıl boyunca yayınlayacağını iddia etti. Mayıs 2021’deki ilk halka açık sürümü, bir çift pasta grafik ve kısa bir açıklamaydı.
Yayınlanan belgelerdeki 7 Nisan 2021 tarihli bir portföy raporu, benzer pasta grafikler içeriyor ancak çok daha fazla bilgi içeriyor ve Tether’in rezervleri için belirli ABD doları miktarları sağlıyor. Gerçek sabit vadeli mevduatlara ilişkin bilgiler yeniden düzenlendi, ancak Tether’in mevduat sertifikalarında, tahvillerde ve özellikle ticari senetlerde milyonlarca rezerv tuttuğunu gösteriyor.
4 Haziran 2021 tarihli bir mektuba göre Tether, Ansbacher (Bahamas) Limited’de (bu yılın Şubat ayındaki Forbes raporunu onaylıyor) ve Bahamalar’daki Capital Union Bank’ta (ikinci ilişki daha önce Financial Times tarafından rapor edilmişti) ve Far’da fon bulunduruyordu. Tayvan’daki Eastern International Bank (Tether’in Tayvan bankalarını kullandığı daha önce Bloomberg tarafından rapor edilmişti, ancak isim verilmemişti). Bununla birlikte, varlıklarının büyük çoğunluğu Bahamalar merkezli Deltec Bank and Trust’taydı – o yılın Mart ayı itibariyle 26 milyar dolardan fazla. (Deltec ilişkisi, Kasım 2018’de Tether’in bankanın antetli kağıdında imzası olan ve çalışanın adını içermeyen bir mektup yayınladığından beri halka açık. Deltec’in başkanı daha sonra belgenin gerçek olduğunu CoinDesk’e doğruladı.)
CoinGecko’ya göre, 31 Mart 2021 22:30 ET itibariyle dolaşımda 40,8 milyar dolar değerinde USDT vardı.
Aynı belge, Tether’in önemli miktarda ticari senet rezervine sahip olduğunu doğrulayarak, ilgili kurumun elindeki her bir varlıkta hangi varlıkların bulunduğunu ayrıntılarıyla açıklayarak devam ediyor.
Ansbacher tarafından yayınlanan başka bir portföy raporu, Tether’in finans kuruluşundaki varlıklarının yaklaşık %85’inin ticari senet olduğunu göstererek bu ayrıntıları daha da detaylandırıyor. Tether’in varlıklarının %13,7’sinin bu şekilde olmasıyla şirket tahvilleri geri kalanının büyük bölümünü oluşturuyordu. Geri kalanı yüksek getirili tahviller, değişken faizli senetler ve kredi hesapları oluşturuyordu.
Belge imzalanmadı.
Benzer şekilde, Capital Union Bank, Tether’in varlıklarının yaklaşık %88’inin “likit varlıklar” olduğunu söyleyen bir rapor sunsa da, daha fazla bir döküm sağlamadı.
Bu belgelerin birçoğu, Tether hukuk ekibinin, düzenleyicinin Tether ile ilgili uzun süredir devam eden soruşturmasını sonuçlandırmasının hemen ardından NYAG’ın ofisi ile iletişimini detaylandırıyor.
Bu iletişimlerden birine göre, NYAG ofisinin anlaşmadan sonra Tether’in elindeki ticari kağıtlar hakkında soruları vardı.
“Tether’in ticari senet varlıklarını satın almasıyla ilgili olarak Tether, önceki mektubumuzda belirtildiği gibi farklı bankalarda hesaplar tutmaktadır. Tether, ticari kağıt teklifleri için teklifleri talep eden bankalardan, bunları doğrudan ticari kağıt ihraç etmek için ihraççılarla ilgilenen veya ticari kağıt satın almak için ikincil piyasalarda işlem yapan aracılardan ve diğer karşı taraflardan talep eder. Tether’in 25 Haziran 2021’de gönderilen dış danışmanından.
CoinDesk, Tether’in NYAG’ın belgeleri serbest bırakmasını engellemek için başvurmasının ardından yaklaşık iki yıllık bir hukuk mücadelesinin ardından belgeleri aldı. Klaris Law, CoinDesk’i mahkemede temsil ederek Şubat ayında bir zafer kazandı.
Bu makalenin yayınlanmasından önce Tether, şirketin belgelerin paylaşılmasını emreden bir mahkeme kararına itiraz etmek için gerekli adımları atmaması üzerine NYAG FOIL görevlisinin belgeleri serbest bıraktığını kabul eden bir bildiri yayınladı. Cuma günü yayınlanan ikinci bir bildiride, belgelerde nelerin yer aldığının ayrıntıları verildiği iddia ediliyor.
İlk açıklamada, “Tether, gizli müşteri verilerinin kamuya yayılmasını önlemek ve potansiyel olarak kötü niyetli kişiler tarafından istismar edilebilecek hassas ticari bilgilerin kullanılmasını önlemek için bu işlemleri ilk etapta başlattı” denildi. “Ancak, şeffaflığa olan devam eden ve kanıtlanabilir taahhüdümüz, dikkati toplumumuzun karşı karşıya olduğu gerçek sorunlardan uzaklaştıran daha fazla zaman alan ve verimsiz Amerikan davaları yerine açıklığa öncelik vermemiz gerektiği anlamına geliyor.”
Tether, bazı belgelerle ilgili ayrıntılı bir soru listesine hemen yanıt vermedi.
Tether ayrıca yaptığı açıklamada, New York hükümetinin belgeleri CoinDesk ile paylaştığı “aynı gün” merkezi olmayan finans havuzlarında milyonlarca dolar değerindeki milyonlarca doların satılmasının ardından USDT’nin depeg edilmesini “şüpheli bulduğunu” söyledi.
Aslında, stablecoin, NYAG FOIL görevlisinin belgeleri CoinDesk’in avukatlarıyla paylaşmasından en az beş saat önce, 15 Haziran’da 07:00 UTC’den (3:00 am ET) önce kısa bir süre için mandalını kaybetti.
CoinDesk Genel Yayın Yönetmeni Marc Hochstein, “CoinDesk, 12 Haziran’da avukatlarımızdan, Tether’in belgelerin ifşasını engellemeye çalıştığı uzun bir mahkeme anlaşmazlığının ardından belgeleri nihayet alacağımızı öğrendi” dedi. “Kazanma haberimizi, 15 Haziran sabahı New York’ta USDT’nin çıpasını kaybetmesinden saatler sonra belgeleri alana kadar yazı işleri kadromuz dışında kimseyle paylaşmadık. CoinDesk, raporlamamızın bütünlüğünün yanındadır.”
CoinDCX, CoinSwitch, WazirX and other Indian firms CoinDesk spoke to think they’ll survive the ongoing bear market – here’s how.
Indian crypto exchanges are in survival mode, cutting costs wherever possible, re-negotiating partner contracts, suspending employee pay-hikes, conducting lay-offs, exploring new revenue models and rebranding themselves, all in an effort to extend their financial runways – when they run out of money.
CoinDesk spoke to employees and senior executives at six prominent Indian crypto platforms – CoinDCX, CoinSwitch, WazirX, BuyUCoin, ZebPay and Giottus. Several of these exchanges said their runways range from 21 months to four years, which can, if true, likely take them into the next bull market. CoinSwitch and ZebPay did not share their financial runway timelines.
The survival of India’s crypto exchanges has been a concern since Feb. 1, 2022, when the nation announced stiff taxes – a 30% tax on crypto profits and the more controversial 1% tax deducted at source (TDS) on all transactions. At the time, local industry leaders said they had entered a “period of pain” but that “ultimately, technology always emerges, it always wins.”
Signs of a crypto “brain drain” emerged within weeks. Ten days after the taxes were implemented, crypto trading volumes plummeted, in some cases more than 70%. India’s government then imposed a “shadow ban,” which saw local payment processors cut off banking access to crypto exchanges.
Four months into the imposition of the 30% tax, the industry’s advocacy body was disbanded and enforcement agencies were investigating at least 10 crypto exchanges for allegedly assisting foreign firms launder money via crypto. Soon, the world took note and global industry leaders such as Binance CEO Changpeng ‘CZ’ Zhao claimed India’s taxes would probably “kill the industry” in the country.
By 2023, data revealed crypto traffic in the nation continued its nosedive and that Indians had moved more than $3.8 billion in trading volume from local to international crypto exchanges.
India, as president of the Group of 20 (G-20) in 2023, has prioritized framing globally coordinated rules for the crypto sector. As a result, experts say, it needed to align with the guidelines of the global standard setter, the Financial Action Task Force (FATF) on virtual assets by including Indian crypto business under anti-money laundering rules.
This move, which adds some legitimacy to the sector by way of setting up regulatory oversight, has fueled a little optimism among Indian exchanges on the local industry’s longevity, even if the nation doesn’t change its tax regime, according to several industry officials. But they don’t have an answer to what happens if the tax regime stays the same – and are taking various steps to guard against such a scenario.
CoinDCX
Indian crypto exchange CoinDCX is weathering the storm by diversifying and banking on its recent series D funding of $135 million.
“We have a runway of four years,” under present conditions, said Neeraj Khandelwal, co-founder of CoinDCX and Okto. “Our biggest bet is on our Okto Wallet. We believe DeFi [decentralized finance] will offer 10X value eventually as only 6.5 million DeFi customers exist, while there are 400 million crypto investors.”
CoinDCX has been leading engagement with lawmakers through the industry’s policy advocacy body, Khandelwal said, exemplified by a recent event, and has emerged as a major player in the Indian crypto industry after recent setbacks faced by WazirX, who ostensibly led the industry in policy engagement before CoinDCX.
Its strategy, Khandelwal says, is “investing heavily in innovation and technology,” including hiring in the space “even now” as we “never overhired.”
WazirX
WazirX, India’s biggest exchange by trading volume until recently, continues to survive despite a tumultuous year.
The exchange’s future seemed uncertain when its founder Nischal Shetty moved from India to Dubai to focus on a new project late last year. Later, Indian agencies that were investigating local crypto exchanges raided properties tied to a director of WazirX. Shortly after, Binance CEO Zhao and Shetty were involved in a public spat over who truly controls the exchange – a quarrel that continues to this day.
The events have seen the exchange lay off 40% of its staff. Yet, the exchange has a 21-month runway, said an employee who was not authorized to speak publicly about the company. “But employees who deserve pay hikes won’t be getting them,” he said.
WazirX’s survival strategy is to renegotiate contracts with partners including software vendors, the person said. Unlike some other exchanges, WazirX will not be diversifying. It will stay focused on crypto.
“That’s what the founders enshrined into us,” the person said. “The idea is to survive because [the] Bitcoin halving is going to happen in May 2024 when, we hope, a bull run will come. By then, if things don’t break, we should be around to see it.” The Bitcoin halving is when the total number of bitcoin that miners can potentially win is halved. This happens roughly every four years.
WazirX also plans to “keep chipping away at costs constantly to extend the runway” and capitalize on its 15 million registered users to attract lucrative partnerships, like a recent one with tax solutions provider TaxNodes.
CoinSwitch
CoinSwitch shed “Kuber” from its previous name, CoinSwitch Kuber, and pivoted from being a crypto exchange to a crypto investment platform.
This occurred as India’s taxes, the crypto winter and the ire of Indian agencies all hit the platform hard. CoinSwitch properties were raided by Indian agencies in August 2022.
“CoinSwitch has always been conscious of its expenses,” said Ashish Singhal, the company’s co-founder and CEO. “Today, we are proudly serving more than 19 million registered users, and are excited to grow and evolve with them by providing them with a diverse range of investment options, including fixed deposits (FD), mutual funds, Indian stocks, and more.”
Without giving a timeline on its runway, Singhal said “our healthy runway gives us enough ammunition to invest in our long-term vision – to be a one-stop wealth-tech destination for Indians.”
Singhal also said his company has “strengthened its leadership team by hiring industry experts,” presumably to navigate regulators, even if he added that the recent step to bring crypto businesses under anti-money laundering rules was a “significant positive advancement.”
ZebPay
One of India’s first crypto exchanges, ZebPay, also refused to share a timeline on its runway. But Chief Revenue Officer Nirmal Ranga said it had support from an unnamed subsidiary in Singapore, in the event it loses customers, the bear market extends or things generally go from bad to worse.
“Our internal revenue strategy is to increase the lending value of our customers and concentrate on user growth,” Ranga said. “We are also trying to create interest for institutional investment.”
Given ZebPay’s team has seen crypto’s early up and down cycles, it follows two ways to survive – “use profits made during previous bull runs or use funds from marketing partnerships or investors,” Ranga said. Like WazirX, ZebPay also has a partnership with TaxNodes.
BuyUCoin
Another early player in the Indian crypto space, BuyUCoin, said its runway extends until early 2025.
“By the end of 2024, we will see a good bull run,” said Atulya Bhatt, its co-founder. “Crypto is a seasonal market and every four years bitcoin goes up and down. It will take 10 years for crypto to become completely sustainable.”
Nevertheless, BuyUCoin had to lay off 10% of its 100 people workforce, Bhatt said. At the same time, BuyUCoin has set up sister companies in Estonia and Singapore as part of a global expansion plan.
“Since we have never raised funds, we can now, given interest from partners across the globe,” he said.
Giottus
After FTX’s implosion, crypto entities scrambled to publish proof of reserves. Giottus, a lesser-known Indian exchange recognized for its staking service and multilingual options in the country, said it would provide customers with proof of reserves, while rivals remained silent.
“We have a two-year runway under the current conditions,” said Vikram Subburaj, Giottus’ co-founder and CEO. “Our focus is completely on bringing in operational excellence, building your products right, drastically cutting marketing and acquisition expenses, and reducing perceived risks associated with exchanges.”
In terms of employees, Subburaj said Giottus had a compact marketing team even during bull runs and like others, it partnered with TaxNodes to improve operational support.
DWF Labs made headlines with more than $200 million of investments in crypto projects such as CryptoGPT or Synthetix. A closer examination reveals that many of their deals aren’t typical venture capital investments, but packaged with market making services, pledges to boost trading volume or even selling tokens directly for a project’s treasury. Industry experts claim red flags and conflict of interest, but the firm says it’s all a misunderstanding.
The giants of crypto venture capital are mostly a well-known group of firms that’ve been around for years, companies like A16Z, Paradigm, Pantera Capital and Digital Currency Group (CoinDesk’s parent).
So the quick and loud emergence of a firm called DWF Labs as a seemingly large player in the space over the past few months caught many by surprise. They announced through press releases and media organizations like CoinDesk and The Block a slew of investments in projects including $40 million for internet alternative provider Tomi, $40 million for artificial intelligence-related token Fetch.AI and $10 million in AI-focused crypto data project CryptoGPT.
But a closer examination reveals DWF, whose founders made their money as crypto high-frequency traders, isn’t exactly a venture capital firm – not always, at least.
While the recent slew of headlines refer to DWF’s partnerships with crypto projects as ‘investments,’ DWF Labs actually functions more similarly to an over-the-counter (OTC) trading desk. The company typically approaches a crypto project with a token, and offers to buy millions worth of the token at a discount to market value, according to conversations with several crypto projects that have worked with DWF.
But DWF Labs says it’s all a misunderstanding. “There might be some questions on the use of the word investment,” said DWF Labs Partner Stefano Virgilli. “When we use the word ‘investment’ – to us the most important thing is that if we’re purchasing the tokens and they’re using the funds to further develop, that’s an investment,” he added.
The controversy
Investments in crypto projects typically follow a venture capital model. Projects tap venture firms for capital via funding rounds (i.e. pre-seed, seed, Series A, etc.) and, in turn, the investors receive a portion of the project’s equity. In most cases, particularly in early stage investments where a project has not yet launched a token, investors will receive a Simple Agreement for Future Tokens (SAFT), a contract that outlines the tokens allocated to the investor if the project launches a token in the future.
DWF Labs’ investments are more ad hoc in nature and the company primarily selects for projects that have already launched a token.
While DWF Labs refers to itself as “a global web3 venture capital and market maker” or “multi-stage web3 investment firm” in press releases, the deals are often presented as “strategic partnerships” that can include token acquisitions, market making services, pledges to boost a token’s liquidity and trading volume, and additional support with marketing and media presence.
Even helping projects’ treasuries to sell their token holdings, according to the press release the firm distributed about its launch in September.
In the post, the firm said that “DWF Labs invests in digital asset companies and supports existing markets, enabling digital asset companies to sell their tokens for up-front capital without adverse price impact,” adding that “DWF Labs buys tokens with its own funds, allowing its corporate customers to sell tokens quickly.”
It is quite common in the crypto industry for market making firms to have venture capital arms. Jump Crypto and Wintermute, two heavyweights in the crypto market-making sector, both began as trading firms. But both have since expanded into cutting venture checks for projects, and even building their own pieces of core infrastructure (Jump has backed the Wormhole cross-chain bridge and Wintermute has launched its own decentralized exchange).
However, the industry standard is that these contracts should be separated. Even though the lines between the two divisions can be blurred sometimes by the market makers, some industry observers have grown concerned about DWF’s recent activity and seemingly packaging different services under partnerships.
“It’s a massive conflict of interest,” Walter Teng, research firm Fundstrat’s vice president of digital assets, told CoinDesk. “If you invest, you want the token’s price to go up. If you market make, you can manipulate the price to go up by spoofing.”
“All of their ‘investments’ are poorly disguised agency OTC (over-the-counter) trades,” a market making firm’s executive told CoinDesk, who asked not to be named due to company policy. “They make a big announcement about ‘partnerships, investments’ or some other nonsense, but in reality it is a way for token projects to sell their treasury without announcing that they are selling their treasury.”
DWF’s managing partner Andrei Grachev defended the firm’s token maneuvers in a recent tweet, calling it “dumb” if a market maker (MM) leaves all the acquired or borrowed assets in a wallet, because an “MM should create markets, provide depth, improve order execution instead of doing nothing and waiting when the market is skyrocketing to execute its call options.”
DWF Labs’ strategy
DWF Labs launched in September, as an investment-focused arm of Digital Wave Finance, a top high-frequency trading firm that trades spot and derivatives on over 40 exchanges, according to the firm’s press release.
Grachev told CoinDesk that DWF Labs’ funding comes from the money earned from profits of the high-frequency trading business. Grachev denied that the firm has received any funding from Russia, a rumor circling within the crypto industry.
Grachev said that the firm has multiple types of investments, some with token lock-ups, others without vesting period, and focuses on projects with tokens. “We prefer to have tokens but we also have several equity deals,” said. “But frankly with equity…it is not our strong side,” he said.
While he said that DWF Labs “usually do not include market making deals in our venture side,” later, he admitted that “we have pure investments without market making, we have market making [agreements] without investment, and we have [them] combined.”
“As a market maker, of course we support our portfolio. If we invest, we will provide much more liquidity to the project compared to if we don’t invest,” Grachev said.
When asked about DWF’s investment strategy and due diligence, Grachev talked about focusing on five sectors – TradFi, DeFi, GameFi, CEXs and artificial intelligence – and aiming to “have stakes in all major chains (…) in order to have access to their ecosystems.” The firm looks for projects with “life and traction,” he said, checking social media posts and what exchanges their token is listed on.
“If a project is listed on BitFinex, Coinbase or Binance, then the project is proven and good because these exchanges have very strict due diligence and very strict policies of listing,” he added.
Grachev also said DWF doesn’t usually participate in specific venture rounds. “We just approach them,” he says.
CoinDesk viewed a series of messages between DWF Labs and a crypto project that showed a member of the DWF Labs team offering to invest in the project and provide free market-making services. DWF told the project it could invest via a direct OTC purchase of liquid tokens from the project’s treasury, or with a lock-up period and market-making services.
Messages from the market maker to another project showed that DWF offered to buy tokens in daily tranches without any lock-up period at a discount or in one installment with a one-year lock-up at a steeper discount. According to the message, DWF promised to help list the token on Korean exchanges including Binance Korea which the firm has “good relationship” with, create options trading and “build narrative” leveraging DWF’s team and media presence.
There were several past announcements when DWF mashed investments and market-making deals.
One instance was its strategic partnership announcement with derivatives trading platform Synthetix. According to a press release on March 16, the firm said it acquired $15 million of the project’s native token SNX “aimed at boosting liquidity and market making,” adding a quote from Grachev that “we are thrilled to invest in Synthetix.”
Blockchain data shows that DFW’s wallet – labeled by crypto intelligence firm Nansen – received 5.3 millions of SNX directly from Synthetix’s treasury wallet between March 14 and March 16. Then, the firm transferred all tokens to Binance in multiple transactions between March 16 and 20.
Transactions between DWF Labs and Synthetix treasury. (Nansen)
In November, DWF announced a $10 million investment in the TON ecosystem. The firm’s press release said that the “strategic partnership” with the project extends to “an investment, token development, market creation and exchange listing.” The partnership also includes “50 seed investments scheduled over the next 12 months,” doubling the TON token’s trading volume in the first three months of the partnership, and developing an OTC market “to let buyers and sellers complete large transactions.”
Another case is the firm’s investment into web3 influencer platform So-Col. According to a story by crypto-focused publication The Block and cited on DWF’s website, DWF invested $1.5 million in “a round” by purchasing So-Col’s native token SIMP in February. Irene Zhao, So-Col’s founder, said that the tokens have a one-year vesting period ending in February 2024. The post does not mention other services besides investing.
However, Nansen’s blockchain data on the Ethereum blockchain shows that DWF’s crypto wallet received 3.3 million SIMP tokens between March 6 and March 24. Within the same period, DWF sent some 2.6 million tokens to KuCoin exchange, then transferred the rest to an unknown wallet on March 30. After the announcement on March 28, SIMP almost doubled from around 1.7 cents in a week, then started to plummet on April 4 towards 1 cent, per CoinGecko data.
CoinDesk reviewed Telegram messages of a So-Col representative saying that they decided to work with DWF Labs because besides serving as a market maker DWF also invested in the project directly helping to extend the startup’s runway.
Sending tokens to exchanges
Grachev said that DWF Labs keeps most of its funds and investments on centralized exchanges (CEXs) and transferring tokens to an exchange does not indicate the company will sell.
“We keep all of our inventory, almost all of our inventory, not only our investments but our own funds on exchanges,” he said.
However, keeping supposedly long-term investments on exchanges is a worrying sign for some industry experts, hidden from savvy blockchain analysts and traders whether DWF sells tokens or uses them for market making purposes.
“It’s a red flag,” a founder, who asked to remain anonymous, of a crypto analytics firm with former market making experience told CoinDesk. “They [DWF Labs] market them as an investment, and then claim to do ‘market making’ so they can keep funds on exchanges and just dump.”
It’s hard to opine on where a firm like DWF should draw the line between VC and market making. Perhaps, a page from the TradFi banking playbook could work. In that realm, investment banking and trading/research is separated by a so-called Chinese wall. Where that line might need to be drawn for crypto investment firms is unclear.
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In the interview, Grachev admits his “biggest mistake” was not properly explaining his firm’s operating philosophy and investment process. “We need to be more open. I want [the community] to know how we work and then let people decide who is right and who is not right,” he said.
