Update: I threw down the gauntlet. I told him the answer was no, end of story, and if he wanted to have sex with her then he could take his things and go.
I wanted to try to work on my hang-up about this because I don't like to hate things. I don't like to have such negative emotions about things because I don't like negativity in any form. I thought this would be something him and I could work on together but his enthusiasm kinda killed it for me.
He said he loves me and all the things he is curious about, he wants to experience them with me or they're not worth it. It's not happening. He hasn't brought it up since last night when we talked and today has been a good day. He also gave me more of an answer on why he wants to do it. It is curiosity but he figured since it was someone we both knew and got along with, it would be easier for me to be comfortable in the situation. So yeah, crisis adverted.