Crypto dip follows political pushback against Facebook’s Libra

Facebook’s announcement of the Libra project has pushed cryptocurrency to the forefront of the political agenda. Many US politicians have voiced their concerns over the Libra, with some lawmakers circulating a new draft bill that aims to prevent technology companies from becoming financial institutions. And for the first time, a sitting US President has directly commented on cryptocurrency.

Trump is not a fan of Bitcoin or Libra

On July 11, President Trump used Twitter to voice his opinion on Bitcoin, Libra, and cryptocurrencies. Trump stated that he is “not a fan of Bitcoin and other cryptocurrencies” because they are “based on thin air.” He added, “If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks.”

Trump’s statements were received positively by the crypto community, which rejoiced at the prospect of a US president finally acknowledging Bitcoin. Sentiment soon shifted, however, and a swift sell-off saw BTC drop from $13,000 to $11,000 within 12 hours.

David Marcus takes the stand

David Marcus, head of Calibra, was grilled at a two-hour Senate Banking Committee hearing yesterday, where he told lawmakers that he was willing to receive 100% of his salary in Libra. This surprising answer came after Marcus was repeatedly pushed by Sen. Sherrod Brown (Dem/Ohio). Brown stated, “You really think people will trust you with their hard-earned money, I think it’s delusional.” Brown then asked, “Will you accept all of your compensation in that new currency?”

Marcus attempted to evade the question, but Brown continued to push for an answer, and Marus eventually relented, stating, “I would, yes, because it is backed 1-for-1 with a reserve.”

The majority of the hearing focused on Libra, Facebook, and the perceived failure of the platform to respect user data and privacy. Bitcoin was only briefly mentioned. The full hearing can be watched here.

The Keep Big Tech Out of Finance Act

Further cause for concern to both the crypto markets and the Libra, comes from a new draft discussion bill, the Keep Big Tech Out of Finance Act.

The aim of the draft bill, which was circulated by the House Financial Services Committee, is to prohibit technology companies from becoming de facto financial institutions. The authors of the bill worry that this could undermine the financial stability of the United States.

Specifically, the draft bill proposes: “A large platform utility may not establish, maintain, or operate a digital asset that is intended to be widely used as medium of exchange, unit of account, store of value, or any other similar function, as defined by the Board of Governors of the Federal Reserve System.”

The bill is an attempt to prevent Facebook from issuing a blockchain-based digital currency that might compete with the US dollar, and some in the crypto community worry that a harmful precedent may be set.

Roneil Rumburg, CEO and Co-Founder of Audius, a blockchain-based streaming music service, is wary of a kneejerk response from regulators. "If this were not Facebook, would regulators still care?” asked Rumberg. “Facebook is today’s convenient punching bag and gives politicians a straightforward opportunity to raise their profile. The crypto community will likely end up being collateral damage in their spat. The precedents that regulators set while attempting to be punitive to Facebook could be incredibly damaging to all of the innovation happening in crypto – and would exacerbate the trend of crypto innovation migrating out of the U.S. While some of us may or may not agree with Libra’s approach, we should all be able to agree that their right to experiment and innovate is worth defending."

Water’s Libra Hearing and Mnuchin’s national security concerns

Shortly after Facebook first announced the launch of Libra, Congresswoman, and chair of the House Financial Services Committee, Maxine Waters, asked Facebook to temporarily halt the development of the digital currency.

“Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action,” Waters said in a statement on June 18.

U.S. Treasury Secretary Steven Mnuchin added his views in a press conference on July 15. He said that he considers cryptocurrencies a potential national security risk.

“Cryptocurrencies such as Bitcoin have been exploited to support billions of dollars of illicit activity like cybercrime, tax evasion, extortion, ransomware, illicit drugs, and human trafficking." He added that Facebook’s new digital currency "could be misused by money launderers and terrorist financiers."

While Mnuchin’s words about cryptocurrencies were harsh, and not necessarily supported by the facts (only 1% of Bitcoin transactions are used for illegal activity), his focus was on the illegal use of digital currency and not cryptocurrencies overall. Therefore, many in the industry considered his statements as a more positive than negative sign for the crypto asset industry, which needs regulation to ensure that it can integrate with existing financial systems.

What does all of this mean for Crypto?

The market experienced a severe dump this week against the current backdrop of political pushback. Analyst Alex Kruger pointed out that Bitcoin has now reversed the gains it made in the bullish run following the original Libra announcement. With BTC now at $9,500 and ETH at $200, buyers will need to step in soon if investors are to have faith in a continuance of this year’s ‘crypto spring’ rally.

While Facebook will likely face an uphill battle to receive regulatory approval for its new digital currency in the US and in other jurisdictions, “real” cryptocurrencies like Bitcoin – that operate on a decentralized peer-to-peer network – will likely remain unaffected by any government attempt to curtail the issuance of company-run digital currencies thanks to their decentralized nature.

In light of how much the Bitcoin economy has grown and how many financial institutions are now actively involved in the development of crypto asset-based financial products and trading services, it is hard to envision a scenario where the US government would attempt to ban the use of bitcoin or other crypto assets. Nor would it be in the interest of the US government to do so as these technologies have the ability to help the country’s economy in the long run.

Alex Frenkel, General Manager of The Kin Ecosystem, said, “I believe having a public conversation around crypto-related issues is very important. The more questions asked the better. It won’t just be beneficial for Libra, but for our entire industry. And these conversations and questions shouldn’t just be limited to regulators; the more other projects and the crypto community, companies from other industries, and the public at large are involved in these discussions, the better it will be for all.”