Calls for stricter rules on political memecoins after $4B Libra collapse

Industry voices warned that politically endorsed cryptocurrencies must adopt stronger investor protections and liquidity safeguards to prevent another major market collapse.

Investor sentiment remains shaken after the Libra (LIBRA) token, which was endorsed by Argentine President Javier Milei, suffered a $4 billion market cap wipeout due to insider cash-outs.

According to blockchain analytics firm DWF Labs, at least eight insider wallets withdrew $107 million in liquidity, triggering the massive collapse.

To avoid a similar meltdown, tokens with presidential endorsements will need more robust safety and economic mechanisms, such as liquidity locking or making the tokens in the liquidity pool non-sellable for a predetermined period, DWF Labs wrote in a report shared with Cointelegraph.

The report stated that tokens from high-profile leaders would also need launch restrictions to limit participation from crypto-sniping bots and large holders or whales.

“Limiting bot and whale activity is essential in limiting the impact of individuals acting on insider information to corner a large percentage of the token supply,” according to Andrei Grachev, managing partner at DWF Labs:

“Projects must strive to deliver as fair a launch as possible so that all participants have an equal opportunity to secure an allocation and aren’t disadvantaged by a handful of well-funded or well-informed players claiming the lion’s share of the supply.”

The Libra scandal resulted in 74,698 traders losing a cumulative $286 million worth of capital, according to DWF Labs’ report.

The token’s quick meltdown further illustrated the need for liquidity locking, which “ensures that there is sufficient liquidity for users to buy and sell into without high slippage,” Grachev said, adding:

“This is particularly valuable during the launch phase of a token when there is high volatility, ensuring there is sufficient liquidity to satisfy large trades without major price impact.”

DWF Labs’ report comes a week after New York lawmakers introduced legislation aimed at protecting crypto investors from rug pulls and insider fraud, amid the latest wave of memecoin scams.

More transparency needed for token launches

The Libra token’s meltdown illustrates the necessity for more transparent token launch mechanisms, explained DWF Labs’ Grachev, adding:

“These include pre-launch wallet transparency and launchpads conducting and better due diligence on projects.”

“There’s always a degree of risk when launching any token, something which can’t easily be fully mitigated,” he said.

“Nevertheless, by carefully scrutinizing the projects they partner with and taking full advantage of the transparency that is one of blockchain’s core features, launchpads can empower users to make more informed decisions,” he added.

Some troubling developments have emerged since the meltdown of the memecoin endorsed by the Argentine president, including that Libra was an “open secret” in some memecoin circles, which were aware of the token’s launch up to two weeks ahead.

Milei has requested the Anti-Corruption Office to investigate all government members, including the president, for potential misconduct, according to a Feb. 16 X statement issued by Argentina’s presidential office, Oficina del Presidente.

Milei faces impeachment calls from his political opponents after endorsing the cryptocurrency that turned into a $100 million rug pull.