Marc Zeller, an Aave community member, recommended suspending the BUSD loan market on Ethereum.
Zeller suggested that the quantity of the Paxos-issued stablecoin was destined to decrease and that the inability to mint additional tokens would have an impact on peg arbitrage chances.
The request was presented soon after U.S. authorities ordered Paxos to stop minting new BUSD coins and threatened to sue the regulated cryptocurrency trust firm.
Community member Marc Zeller proposed locking BUSD reserves on the Ethereum network in an Aave governance proposal. According to the plan, the freeze would harm Aave V2 on Ethereum’s marketplace.
Aave operates as a protocol for decentralized finance (DeFi) lending on the Ethereum blockchain. Users may use the protocol to get access to crypto liquidity by posting collateral and borrowing assets such as Ether (ETH), Binance USD (BUSD), and other supported cryptocurrencies.
In addition, users may supply liquidity as lenders and stake cryptocurrencies using the smart contracts of the system.
Zeller said that the circulating quantity of BUSD will inevitably decrease given that Paxos can no longer lawfully issue or mint new tokens. In fact, Paxos was ordered by the New York Department of Financial Services (NYDFS) to halt minting new BUSD coins.
According to the plan, although the Paxos scandal offers no immediate threat to Aave, the inability to manufacture BUSD might damage asset peg and peg arbitrage. Zeller advocated that the protocol freeze its BUSD pool and urge users to instead use other stablecoins.
As there is no real growth possibility and the inability to coin more BUSD, peg arbitrage and asset peg may suffer. It seems that the most likely path for Aave would be to freeze this reserve and encourage consumers to convert to another stablecoin from the variety offered by Aave.
The “stop minting” order given to Paxos comes amid a number of regulatory enforcement measures by U.S. watchdogs. According to news accounts, the action was a concerted effort involving the NYDFS, the Securities and Exchange Commission (SEC), and other American officials.
Gary Gensler’s SEC also took action against crypto staking in the United States. Crypto exchange Kraken was fined $30 million and ordered to cease all digital asset staking services for retail clients in the United States.
Since 2022, several proponents of cryptocurrencies hypothesized that a tighter SEC crackdown was imminent. In May, the commission increased its Crypto Assets and Cyber Enforcement units by roughly a factor of two.
Also Read: Paxos Was Apparently Directed To Cease Issuing Binance USD
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