Even in the midst of a tumultuous week for all things crypto, Coinbase has managed to stand out. Its shares have tanked 35 per cent in May, taking its decline this year to 77 per cent.

Post-close earnings on Tuesday appeared to bear out fears about the company. First quarter results missed forecasts, the company flagged up “weaker crypto market conditions” and it reported a net quarter loss of $430m. But there are a couple of lines in its latest 10-Q filing about its responsibilities to safeguard customer assets that really caught our eye.

Coinbase held $256bn in custodial fiat currencies and cryptocurrencies on behalf of customers at the end of the first quarter, according to the filing. And as it further pointed out, crypto assets are not insured or guaranteed by any government or government agency.

Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.

In other words, should Coinbase go bankrupt then customers may lose their money they’d entrusted to the exchange for safekeeping.

Casual observers may have been forgiven for thinking “if you even have to mention it …” The sentiment has sliced another 25 per cent off Coinbase’s market value at pixel time. Even before the market opened, Coinbase chief executive Brian Armstrong was preemptively using Twitter to spread the message that there is nothing to see here.

1/ There is some noise about a disclosure we made in our 10Q today about how we hold crypto assets. Tl;dr: Your funds are safe at Coinbase, just as they’ve always been.

— Brian Armstrong – barmstrong.eth (@brian_armstrong) May 11, 2022

The reason for the disclosure, according to Armstrong, was a new SEC requirement on disclosures for public companies that hold crypto assets for third parties. He stressed that customers had strong legal protections — albeit ones that haven’t actually been tested in a court — but apologised to retail customers for not updating their terms to reflect the changes.

Still, the disclosure stirs memories of MF Global’s failure just over a decade ago. The futures broker became what was then the eighth largest bankruptcy in US history when a $6.3bn bet on European sovereign debt prices went spectacularly wrong. It then emerged that MF Global had jumbled up customer funds with the corporate account. More than $1.6bn of customers’ money was missing, having been wired to various counterparties to meet the firm’s own margin calls.

In the trading industry some lines are more sacrosanct than others. But breaching walls set up around customer money is one of the biggest sins. The stain of MF Global remained for years. Mentioning it to the derivatives industry was like punching a bruise.

That backstory makes the new SEC requirements more urgent than a reminiscence. MF Global’s regulator at the time of its collapse was the Commodity Futures Trading Commission. Former CFTC boss Gary Gensler is now head of the SEC, the agency demanding the new transparency on co-mingled assets.

Gensler recused himself from the CFTC investigation into MF Global, citing his links with Jon Corzine, MF’s chief executive and a fellow former Goldman Sachs partner.

But the recusal was sharply criticised, and not only by an industry that accused him of being too tough on them. An internal CFTC watchdog questioned Gensler’s decision ,and one senator openly asked if Gensler “was concerned with protecting customers’ accounts or protecting himself from accountability”.

Clearly, some lessons run deep. Gensler and the SEC look like they’re trying to head off a similar problem in crypto before it emerges. Perhaps it is more a case of it being as much as they can do, given that spot crypto assets aren’t regulated. But Gensler still isn’t giving up the fight.

As he told Bloomberg News overnight, Gensler is worried about the lack of strong walls between various lines of business, from custody to market making and the central order book of the exchange. Here’s the money quote from Gensler:

Crypto’s got a lot of those challenges — of platforms trading ahead of their customers. In fact, they’re trading against their customers often because they’re market-marking against their customers.

It highlights once again — if it ever needed spelling out — that it’s only partially accurate to call these businesses “exchanges”.

Boring old securities and derivatives exchanges don’t come with market-making desks or venture capital arms. They don’t take on risk like a bank or broker does. They just match buyers and sellers (and flog the resulting data).

Coinbase’s Armstrong was at pains to point out a Coinbase bankruptcy was a “black swan” event. In fact he said plainly that “we have no risk of bankruptcy”. The thing is, black swans do appear in the wild from time to time. Here’s one we saw at the weekend.

Black Swan event on the Thames pic.twitter.com/MlvihSVG6u

— Philip Stafford (@staffordphilip) May 8, 2022

More pertinently, Coinbase’s shares have shed over four-fifths of their value since its IPO last year, and its June 2026 bonds are trading at around 68.5 cents, indicating serious market concerns (fair or not) about a financial mishap.

MF Global’s money was eventually traced and customers, in a roundabout way, largely made whole. But it took years, involved a lot of time-consuming litigation, and consumer protection regulation kicked in.

Should the unthinkable happen to a big crypto exchange, it’s hard to see a similar outcome.