the ability or inability to sustain a quality erection with a partner is not what defines someone as heterosexual, homosexual, bi, asexual, etc... so you cannot label him simply by performance issues.
young men who have ED often have mental blocks... stress and anxiety can decrease your ability to perform... is he having problems because he really doesn't want to do this but feels obligated, as he claims? Is he actually interested and is using this friend as an excuse to explore but he is having performance anxiety? Is he interested but feels guilty? Is it the drugs he is using? Nobody here can give you the real answer.
his willingness to accept this situation (drugs and gifts in exchange for sex) means at the very least he is easily manipulated and/or values tangible things so much that he's willing to drop his pants for them and he shows no self control and no respect for your relationship and your wishes. That's the best case scenario.
ick to that.
what's his background? Does he need the money? Was he ever without money? Do you like the money enough to look the other way? Did he do drugs before this guy? Do you do drugs? Does this guy also do drugs or just provide them? What drugs are we talking about? Not to grill you, but more details might be helpful.
you get to choose what you are willing to put up with and what you won't put up with... and then you live with that choice.
personally, if we ignore the cash for a$s, the drugs, the sexual orientation issues... and boy, its hard to ignore that... but if we could just push that aside for a moment, he is actively trying to have sex with another person. If you are having sex with him, you are at risk.
condoms don't stop all STD's. Males can often be asymptomatic for STD's. Some STD's can be transmitted orally. Soooo... he could get, say, herpes through oral or anal sex and then transmit it to you orally or through intercourse... *poof* now you have vaginal herpes. Or HIV. Or... or... or... ad nauseum.
so what if he is "straight" but allowing himself to be pressured? What does that mean to you? Is it ok-ish enough to stay?