Aave’s Proposal to Freeze BUSD Poised to Pass

Following Paxos’s run-in with the SEC over its BUSD stablecoin, decentralized protocol Aave is poised to pass a proposal to freeze BUSD on its platform.

The proposal suggests Aave switch to a different stablecoin. 

The SEC issued a Wells notice, which typically precedes enforcement actions, to Paxos, according to recent reports. The regulator alleges BUSD is an unregistered security. 

“The inability to mint new BUSD might hurt peg arbitrage opportunity and asset peg,” the Aave proposal reads. “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.”

The proposal, introduced Monday, was written by two delegates: the Aave-Chan initiative and Marc Zeller of Aave DAO.

“On a more general level, BUSD is one of the smallest Aave stablecoin reserves,” Zeller told Blockworks. “So the impact on overall Aave liquidity is minimal.”

Zeller’s efforts come as regulation continues to heat up in the US. After a slew of enforcement actions and settlements in recent weeks, the industry is left wondering what is next for stablecoins and staking products.

The proposal says “there’s no real prospect of growth” for BUSD, adding that the stablecoin’s circulating supply will “eventually go toward zero.”  

Exchange Kraken settled for $30 million with the SEC over its staking product, a development Ledger’s global head of policy Seth Hertlein says should not be mistaken for any sort of precedent. Had the case gone to trial, there may have been the opportunity to establish a standard going forward, Hertlein added. 

A Paxos spokesperson told Blockworks in a statement that the company “categorically disagrees” with the SEC, adding that BUSD is not a security under the federal securities laws. Aside from BUSD, there are no other allegations against Paxos, the spokesperson added. 

The Aave proposal currently has received 99.97% of votes, and voting closes on Sunday, Feb. 19. A representative from Aave declined to comment on the proposal.

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