Transparency in Crypto Liquidations: Unmasking Systemic Risks and CEX Accountability

The crypto market's rapid evolution has brought unprecedented innovation, but it has also exposed critical vulnerabilities in transparency mechanisms-particularly in liquidation reporting. Centralized exchanges (CEXs), which dominate trading activity, have been accused of underreporting liquidation data by as much as 19 times compared to actual market conditionsIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1]. This opacity not only misleads individual traders but also obscures systemic risks that could destabilize broader financial markets. As regulators and market participants grapple with the implications, the need for accountability and standardized reporting has never been more urgent.

The CEX Transparency Problem

Centralized exchanges like Binance and Coinbase have long been criticized for their lack of granular liquidation data. According to a report by The Blockbeats, major CEXs often limit liquidation updates to one per second, creating a lag that masks real-time market stressIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1]. This delay can distort perceptions of liquidity and risk, as seen during the 2022 Terra/Luna collapse and the 2023 USDC depeg event. In contrast, platforms like Hyperliquid and Bybit have adopted on-chain transparency, publishing real-time liquidation figures and enabling more accurate risk assessmentsHyperliquid Founder Criticizes Underreporting of Liquidations by Major Centralized Exchanges^[3].

Hyperliquid's founder has been vocal about the issue, arguing that underreported liquidations create a "black box" effect, where cascading defaults go unnoticed until they trigger broader market panicHyperliquid Founder Criticizes Underreporting of Liquidations by Major Centralized Exchanges^[3]. For instance, during the 2024 Bitcoin price crash, CEX-reported liquidations suggested a relatively orderly unwind of positions. However, on-chain data revealed a 19x higher volume of forced exits, indicating severe hidden stressIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1]. Such discrepancies highlight the fragility of relying on CEX-reported metrics for systemic risk monitoring.

Systemic Risks and Academic Insights

Recent academic research underscores the dangers of opaque liquidation reporting. A June 2025 study titled Mapping Systemic Tail Risk in Crypto Markets: DeFi, ... found that assets like ETH, LINK, and UNI act as key transmitters of losses during market downturnsIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1]. These assets, often leveraged heavily in DeFi protocols, can amplify cascading liquidations when prices drop. Meanwhile, stablecoins like DAI serve as buffers, absorbing some stress but not eliminating the risk entirely.

Another study from October 2024, Cryptocurrencies and Systemic Risk. The Spillover Effects ..., used a VAR for VaR model to analyze cross-market correlationsCryptocurrencies and Systemic Risk. The Spillover Effects ...^[2]. The findings revealed that crypto-Traditional Finance (TradFi) linkages vary by region and market conditions, complicating risk management strategies. For example, during periods of high volatility, crypto assets exhibited stronger correlations with equity markets in Asia than in Europe, suggesting geographically uneven spillover effectsCryptocurrencies and Systemic Risk. The Spillover Effects ...^[2].

Regulatory Responses and the Path Forward

Global regulators are beginning to address these risks. The Financial Action Task Force's (FATF) "Travel Rule" has been strengthened to enhance transparency in digital asset transactionsIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1]. In the U.S., the SEC's approval of Bitcoin and Ethereum ETFs has spurred liquidity but also raised questions about the adequacy of existing oversight. The newly enacted Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 (GENIUS Act) aims to integrate stablecoins into the traditional financial system while imposing stricter consumer protectionsIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1].

However, gaps remain. A 2025 PwC report noted that while AML requirements are tightening, many CEXs still lack standardized protocols for reporting liquidation dataIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1]. This inconsistency leaves regulators and investors in the dark about true market conditions. The solution, as argued by researchers, lies in adopting tail-sensitive network diagnostics-real-time tools that track asymmetric spillover risks in DeFi and CEX ecosystemsIs the Discrepancy in CEX Liquidity Data Signaling a Larger Issue?^[1].

Conclusion: Implications for Investors

For investors, the stakes are clear. Underreported liquidations create a false sense of stability, masking the true scale of leverage and counterparty risk. Those who rely on CEX data may be blindsided by sudden liquidity shocks, as seen in 2022 and 2023. To mitigate these risks, investors should prioritize platforms with on-chain transparency and advocate for regulatory frameworks that mandate real-time reporting.

As the crypto market matures, transparency will be its greatest asset-or its most dangerous blind spot. The choice between accountability and opacity will define the next chapter of digital finance.