Aave To Freeze BUSD Reserves On Ethereum

Summary:

• Aave community member Marc Zeller proposed halting the BUSD lending market on Ethereum.
• Zeller argued that the Paxos-issued stablecoin was bound to decline in supply and inability to mint new tokens would affect peg arbitrage opportunities.
• The proposal was submitted shortly after U.S. regulators ordered Paxos to halt minting new BUSD coins and teased a lawsuit against the regulated crypto trust company.

An Aave governance proposal from community member Marc Zeller suggested freezing BUSD reserves on the Ethereum blockchain. The freeze would affect Aave V2 on Ethereum’s marketplace, per the proposal. 

Aave functions as a decentralized finance (DeFi) lending protocol that runs atop the Ethereum blockchain. Users can leverage the protocol to access crypto liquidity by posting collateral and borrowing assets like Ether (ETH), Binance USD (BUSD), and other supported digital currencies. 

Also, users can provide liquidity as lenders and stake cryptocurrencies via the protocol’s smart contracts. 

Motivation To Freeze BUSD On Aave V2

Zeller noted that BUSD’s circulating supply was bound to decline since Paxos can no longer legally issue or mint new tokens. Indeed the New York Department of Financial Services (NYDFS) directed Paxos to cease minting new BUSD coins. 

The proposal said that while the Paxos debacle poses no immediate risk for Aave, a lack of BUSD minting ability could harm asset peg and peg arbitrage. Zeller proposed that the protocol freeze its BUSD pool and advise users to leverage other stablecoins instead. 

As there’s no real prospect of growth and the inability to mint new BUSD might hurt peg arbitrage opportunity and asset peg. It seems that the most reasonable path for Aave is to freeze this reserve and invite users to switch to another stablecoin among the diversity present in Aave.

Regulators Come Crypto Companies

The “cease mint” order issued to crypto trust company Paxos comes amid a raft of regulatory enforcement actions from U.S. watchdogs. According to reports on the matter, the move was a joint effort coordinated between the NYDFS, the Securities and Exchange Commission (SEC), and other regulators in America. 

Gary Gensler’s SEC also launched efforts against crypto staking in the U.S. Crypto exchange Kraken was fined $30 million and made to shut down all its digital asset staking services for U.S. retail customers. 

Some crypto proponents theorized that an increased clampdown from the SEC was on the horizon since 2022. In May, the commission nearly doubled its Crypto Assets and Cyber Enforcement units.