Erebor Bank’s Free Stablecoin Plan Failed After Traders Found The Loophole

What Happened

Erebor eventually told firms including Wintermute to stop. The bank then removed free conversions for customers without sizable deposits and introduced volume-based fees and limits.

Its business is built around sectors traditional banks have often struggled to serve. The FDIC approved Erebor to work with technology, payments, investment and defense companies, including crypto firms. Its model explicitly supports stablecoin deposits and withdrawals while holding customer deposits in dollars.

Market Context

Erebor Bank tried to attract crypto firms by letting clients turn USDC and USDT into dollars at face value for free. Within months, professional trading firms including Wintermute and Galaxy Digital reportedly found a way to profit from the offer, leaving the bank to absorb the cost.

Erebor was offering customers $1 in cash for each token without charging that fee. That meant a trading firm could buy USDT below $1, send it to Erebor, collect the full dollar and keep the difference.

It also created a price professional traders could attack. In crypto markets, even a fraction of a cent can become a business model once enough money starts moving through it.

Why It Matters

Erebor quickly became one of Silicon Valley’s most talked-about new banks. Backed by Anduril co-founder Palmer Luckey and reportedly heading toward an $8 billion valuation, it wants to become the bank of choice for crypto, AI and defense-tech companies.

How Traders Turned Erebor’s Freebie Into Easy Money

Details

The trade was simple. Stablecoins such as USDT can sometimes change hands for slightly less than $1. Normally, turning them back into actual dollars carries costs. Tether, for example, charges the greater of $1,000 or 0.1% for direct redemptions.

Those fractions of a cent matter when the trades run into millions.

According to The Information, Wintermute did exactly that with millions of dollars worth of USDT. Galaxy Digital also carried out stablecoin redemption trades with Erebor, according to people familiar with the matter.

A Wintermute representative said the firm “continues to do business with Erebor, and we value our relationship,” as per reports from The Information

Erebor is Learning the Hard Part of Crypto Banking

The episode comes as one of America’s newest banks prepares to close a $1.5 billion fundraising at an $8 billion pre-money valuation, according to The Information. Erebor is backed by Anduril co-founder Palmer Luckey.

That made free conversion a useful selling point.

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