Aave Considers Freezing BUSD Following NYDFS Enforcement

Members of the Aave community – a widely used decentralized lending protocol – are mulling a freeze on BUSD after a wave of regulatory pressure against its issuer, Paxos, on Monday.

A newly tabled governance proposal would freeze Aave’s BUSD reserve on its Ethereum market beginning in April, only allowing users to burn BUSD tokens for their underlying value. 

Abandoning BUSD

The proposal in question was tabled by Marc Zeller – an Aave community member and founder of the Aavechan protocol delegate – on Monday. He argued that BUSD has “no real prospect of growth,” and that without the opportunity to mint new tokens, continuing to use it “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,” he suggested. 

BUSD is a stablecoin issued by Paxos that is backed 1:1 by U.S. dollars. Stablecoins are blockchain-based tokens price-pegged to traditionally price-stable assets, such as fiat currencies, to circumvent the volatility typical of other cryptocurrencies. They have a critical presence in the decentralized finance ecosystem, acting as a backbone for lending and trading markets. 

On Monday, Paxos announced that it would stop minting new units of BUSD starting February 23, following orders from the New York Department of Financial Services (NYDFS). The day prior, reports circulated suggesting that the Securities and Exchange Commission (SEC) was preparing a lawsuit against Paxos for issuing BUSD as an unregistered security. 

Without newly minted units, the circulating supply of BUSD is destined to trend toward $0 over time. Paxos said it would give customers until at least February 2024 to redeem their BUSD for either dollars or Pax Dollar (USDP) – another stablecoin issued by the company that is not under regulatory scrutiny. 

Zeller did not suggest passing his proposal through a fast-track process, as there is still no “immediate risk” to Aave’s protocol. 

Another Stablecoin Down

BUSD is currently the third-largest stablecoin by market cap, and seventh largest cryptocurrency overall. Outstanding units of the coin plummeted following an influx of redemptions on Monday, from $16.15 billion to $15.86 billion. 

The former third largest stablecoin – TerraUSD – collapsed in May of last year due to design flaws with how it maintained its peg. Despite its catastrophic failure, some still believe that an algorithmic/ decentralized stablecoin solution is much needed for the industry – a sentiment with which Binance CEO Changpeng Zhao agrees.