No Safeguards, No Recourse: Why CeFi Still Fails in 2025

Centralized exchanges are still the primary entry point into crypto for both institutions and retail. Yet despite handling the bulk of global crypto volume, these platforms still lack the controls expected of serious financial infrastructure. Due diligence is inconsistent, and listing rules are opaque. And when crises hit, exchanges act like media managers, not system operators.

But the problem goes deeper than broken standards or missing red flags. In 2025, retail investors face structural asymmetry: the legal frameworks behind most CeFi platforms systematically favor the exchange. Updated Terms of Service across major venues now require users to waive class-action rights and resolve disputes through private arbitration. That means when billions are lost, retail has no accessible or collective path to recourse.

Moreover, most compensation plans remain discretionary and not guaranteed. And because exchanges control the rules, the process, and the messaging, users often have no meaningful way to challenge decisions or recover losses, even in clear-cut cases of negligence.

This report examines that mismatch: how the platforms that dominate crypto’s public face continue to lack the controls, incentives, and obligations expected of serious infrastructure. Along the way, the paper dissects high-profile failures, shows how user protections break down in practice, and proposes enforceable standards to confirm that trust isn’t just implied, but structured.

Unvetted Listings, Unearned Trust

Most exchanges claim to be selective, but in reality, few apply formal listing standards. There’s no baseline requirement for third-party audits, verified tokenomics, or transparency around insider holdings. Retail users often treat exchange listings as validation, assuming the platform has done its homework. But listings are often marketing tools, not vetting checkpoints. That disconnect exposes users to manipulation disguised as access.

The scale matters: without a common, enforceable baseline, every additional listing compounds systemic risk for users and institutions alike.

Data Point: CeFi Reproduces DEX-Level Risk

A 2025 study published in ScienceDirect found that ~98% of newly launched tokens on Uniswap V2 exhibited at least one fraud characteristic (e.g., honeypots, stealth taxes, fake liquidity).

While CeFi claims to insulate users from such risks, many listed assets still carry analogous red flags (anonymous teams, opaque mechanics, misaligned incentives) — but benefit from the perceived legitimacy of a centralized listing.

Unlike DEXs, CeFi doesn’t offer an open contract to inspect, warnings from on-chain scanners, or norms of buyer beware. Instead, trust is implied and misplaced.

But even when the token itself is legitimate, exchange-side risk controls can still fail catastrophically. The Mantra (OM) collapse shows how weak surveillance, liquidation policies, and disclosure practices on CeFi venues can erase billions — even without evidence of insider misconduct.

Exchange-Side Risk Controls Failure (Mantra OM × OKX): $6B Market Value Wipeout

On April 13-14, 2025, Mantra’s OM token, listed on OKX since 2020, plunged by nearly 90%, erasing roughly $6 billion in market value. On-chain data flagged 43.6 million OM (approximately $227 million) moving from 17 wallets into multiple exchanges, including OKX; two of those wallets were misidentified by third-party dashboards as investor-linked, and that attribution was later disputed. No public evidence links the team or major investors to the selling.

Crucially, no causal link has been established between these transfers and the crash, which was driven by large-scale selling and forced liquidations in a thin market, with working hypotheses centered on manipulation, negligence, or fraud on the exchange side.

At the time, OKX’s token page offered only basic supply and allocation figures and did not reference any independent audits or detailed vesting schedules. While these wallet flows were technically visible on-chain, most retail users rely on exchange dashboards for risk signals. OKX added a “high-volatility” warning only after the crash, leaving retail users blind to developing risk until it was too late.

While fuller tokenomics transparency and real-time supply/whale-movement dashboards could have improved user awareness, disclosures alone were unlikely to prevent a collapse of this scale. A more realistic approach is ongoing surveillance and automated, user-facing alerts tied to concentration/transfer thresholds, plus pre-committed incident-response playbooks.

Financial Entanglement and Risk Theater

Centralized exchanges often brand themselves as neutral infrastructure. But behind the scenes, many hold direct financial stakes in the tokens they list — via early allocations, venture arms, or undisclosed partnerships. KuCoin isn’t alone, but its July 2025 token sale offers a particularly clear example of how this model works in practice.

For retail users, this dynamic is largely invisible — until liquidity disappears, token unlocks accelerate, or concentrated holders dump on the market with no prior warning.

KuCoin Spotlight: When Exchanges Underwrite Their Own Risk

In July 2025, KuCoin ran the token sale for PUMP through its in-house Spotlight platform. A total of 150 billion PUMP (15% of the 1 trillion supply) was offered at a fixed price of $0.004, hitting a $600 million hard cap within 12 minutes and valuing the project at $4 billion fully diluted. But while the sale mechanics were simple, the underlying structure was more complex: KuCoin simultaneously served as the launchpad, primary listing venue, and promotional engine. 

Despite marketing the sale as “rigorously vetted,” KuCoin’s Spotlight page offered only basic supply and pricing details. No independent audit was published, and there were no disclosures on vesting schedules or insider wallet activity. Participants had to rely on third-party on-chain trackers to assess real distribution risk. Within days, data compiled by BitMEX showed that approximately 60% of presale wallets had already offloaded or moved their tokens. By July 22, PUMP was trading about 30-35% below its peak, with large holder sales cited as the primary driver.

The incident highlights how vertically integrated token launches, where an exchange wears the hats of underwriter, market-maker, and marketer, create inherent conflicts of interest. With financial incentives aligned with insiders rather than users, disclosures become selective, and protections become optional.

Retail Has No Recourse: How CeFi Legally Disempowers Users

Centralized exchanges don’t just control which tokens get listed. They also determine how disputes are resolved and who holds the right to challenge them. In 2025, platforms like OKX and Binance have embedded legal architectures that systematically strip retail users of meaningful recourse, even in instances of demonstrable losses or negligence

In OKX’s Terms of Service (last updated May 12, 2025), Section 15.6 explicitly requires arbitration on an individual basis, and it bans class-action or representative litigation. Likewise, Binance has attempted to enforce arbitration clauses and class-action waivers against retail users in a U.S. court. In a May 2025 filing in federal court, the company argued that its 2019 Terms of Use included binding arbitration and a clause prohibiting users from launching collective lawsuits. While a federal judge initially denied Binance’s motion to compel arbitration for users active before 2019, the company continues to assert that post-2019 user claims fall under these waiver clauses.

Even when exchanges pledge to make users whole after major incidents, those responses remain discretionary. There are no binding obligations, transparent claims frameworks, or independent appeal processes. Retail users depend entirely on the platform’s internal decision-making — often communicated through social media posts or executive livestreams rather than structured recovery mechanisms.

After suffering a $1.5 billion exploit in February 2025, Bybit restored liquidity within 72 hours through emergency loans from partners like Galaxy Digital and FalconX. The exchange publicly committed to covering all losses and launched the Lazarus Bounty Program to help recover stolen funds. But no formal user claims portal, eligibility criteria, or audit trail were provided. Users were not given a legal pathway to file for restitution, only reassurances.

In October 2024, a flash crash of BGB (Bitget’s native token) triggered a 56% intraday drop. The platform pledged full compensation, via its $300 million Protection Fund, framing it as a user safeguard, but it operates on a fully discretionary basis. Compensation decisions are made privately, without published standards, independent review, or guaranteed access for affected users. In practice, these “protection” mechanisms function more like reputational hedges than user rights.

What emerges is a legal and procedural asymmetry: exchanges control the terms, the triggers, and the responses, while users hold no guaranteed rights, even in extreme scenarios.

Binance’s Risk Tags: Discretion Over Discipline

Binance is one of the few exchanges that introduced formal risk tags, such as Seed Tags and Monitoring Zones, intended to flag high-risk or speculative tokens. But these warnings are not governed by a publicly documented methodology and can be removed at the platform’s discretion.

In July 2025, Binance removed the Seed Tag from tokens like PEPE, BONK, and PENGU, eliminating prior restrictions and deactivating its risk quiz, without publishing objective criteria for that change. That is, risk management was subordinated to optics. 

Also, retail recourse is structurally inaccessible. When balances disappear or trades are disputed, retail users are funneled into individual arbitration that can cost orders of magnitude more than the claim itself. With class actions barred and no low-cost collective redress, most users simply cannot pursue recovery — discretion becomes the only real “policy.”

So, when financial upside, promotional power, and gatekeeping authority converge within a single platform, risk becomes a secondary concern, and trust becomes performative, not structural.

Crisis Response: Still Lacking Industry Standards

In reality, institutional infrastructure is about what happens when things go wrong. In traditional finance, post-incident protocols are baked into regulation. In centralized crypto, they remain largely discretionary. To this day, the CeFi sector has not adopted any shared, mandatory framework for crisis response. There is no industry-wide baseline for:

• Timely post-incident disclosures;

• Standardized user notification and claims;

• Predefined reserve mechanisms;

• Corrective action documentation;

• Third-party review or regulatory reporting.

Most centralized exchanges, especially offshore or non-regulated ones, retain full control over whether, when, and how to respond to crises. Even after billion-dollar hacks or token collapses, recovery is treated as goodwill, not an obligation. Disclosures, when they happen, are curated for optics.

In the EU, MiCA and DORA introduce binding obligations for user complaint handling, incident disclosures, and client notifications. Recently, ESMA finalized MiCA technical standards that set binding timelines for incident reporting, user complaint handling, and regulatory record-keeping — but only for EU-licensed platforms. In the U.S., public companies like Coinbase face market and compliance pressure to disclose material incidents and provide restitution. But these are regional advances.

Still, even among regulated actors, there is no unified, transparent, cross-exchange playbook for recovery — no standardized criteria for compensation eligibility, no shared audit format, and no codified post-mortem norms.

Until that exists, post-incident responses in CeFi will remain fragmented, reputation-driven, and structurally unreliable.

Governance as Optics

Many centralized exchanges now use governance reform as a branding tool — announcing legal hires, compliance restructurings, and public commitments to “security” as signals of maturity. But these moves often lack follow-through.

OKX Governance Shuffle, No Follow-Up

In mid-2025, OKX replaced both its Global General Counsel and Head of Compliance following a DOJ settlement and the OM token crash. The company framed the changes as part of a broader compliance overhaul. However, no new public standards for listing, surveillance, or auditing were introduced. The “How to Get Listed” guide on OKX’s website still reflects 2023 content, with no substantive revisions since.

Instead of introducing structural safeguards, OKX updated its global Terms of Service in May 2025 to enforce individual arbitration and prohibit class-action claims — a legal posture that prioritizes liability insulation over user protection.

In the absence of any new published rules or user-facing protections, these governance changes appear cosmetic — serving reputation and legal positioning, not structural reform.

Rebuilding Trust: An Institutional-Grade Framework for Crypto Exchanges

The problem is systemic. Thousands of tokens trade on centralized exchanges without mandatory, uniform standards. This fragmented exposure remains one of the primary risks blocking institutional trust. To evolve from speculative access to credible financial rails, CeFi must be treated as critical infrastructure — governed by enforceable, transparent rules. Otherwise, each incident resets adoption and weakens long-term confidence.

Recommendations:

• Mandate public listing standards
  Require independent audits, full vesting/lockup maps, circulating supply oracles, and disclosures of the exchange’s own financial exposure to each asset. Update monthly and within 24 hours of material changes.
  
  

• Standardize incident response
  Make post-mortems, user notifications, and compensation frameworks mandatory — not discretionary — across all platforms.
  
  

• Establish accountability by design
  Create independent listing and risk committees with public charters, named decision-makers, and clawback clauses tied to process failures. Terms of Service updates affecting user rights must include pre-notice and opt-out options.
  
  

• Create independent token integrity scoring
  A non-exchange entity should score assets based on tokenomics, holder concentration, governance transparency, exchange conflicts, red-flag surveillance triggers, and incident readiness — with monthly refreshes.
  
  

• Separate marketing from listing
  Impose a hard separation between promotion, listings, and affiliated market makers. No shared KPIs or data access. Require documented recusals and cool-off periods.
  
  

• Enable collective, low-cost redress for retail users
  Mandate time-bound dispute resolution with capped costs, public disclosure of outcomes, and carve-outs to allow class actions in platform-wide failures or systemic losses.

Conclusion

Right now, crypto still runs on assumptions: that listings are vetted, that risks are flagged, that someone is accountable when things go wrong. But none of that is guaranteed, because nothing enforces it.

Centralized exchanges control the flow of capital, yet operate without the obligations that come with that power. They promise safety but offer discretion. For retail users, that means exposure without protection. For institutions, it means infrastructure without guarantees.

Until listing is tied to liability, visibility to verification, and promotion to oversight, crypto will keep recycling the same failures.

And the cost isn’t just reputational. Without enforceable rules, platforms will continue to enable preventable losses, erode user trust, and invite systemic shocks. These failures undermine the credibility of the entire market.

In the end, this is a system design failure. And fixing it starts with codified responsibilities. Crypto doesn’t need better messaging. It needs mandatory standards, real recourse, and structural accountability.