Erebor Bank's Stablecoin Offer Backfired When Traders Found a Loophole

Erebor Bank aimed to draw in crypto companies by offering to convert USDC and USDT into dollars at face value without any fees. Within months, professional trading outfits like Wintermute and Galaxy Digital reportedly discovered a way to exploit the deal, forcing the bank to bear the resulting losses.

Erebor rapidly emerged as one of Silicon Valley's most buzzed-about new financial institutions. With backing from Anduril co-founder Palmer Luckey and reportedly on track for an $8 billion valuation, it aims to become the go-to bank for crypto, AI, and defense-tech ventures.

The Trick That Turned Erebor's Perk Into Profit

The strategy was straightforward. Stablecoins such as USDT can occasionally trade for slightly under $1. Normally, converting them back into fiat dollars incurs costs—Tether, for instance, charges the higher of $1,000 or 0.1% for direct redemptions.

Erebor offered customers $1 in cash per token without levying that fee. This allowed a trading firm to acquire USDT below $1, transfer it to Erebor, receive the full dollar, and pocket the difference.

Those tiny fractions of a cent add up when transactions scale into the millions.

According to The Information, Wintermute executed precisely this maneuver with millions of dollars' worth of USDT. Galaxy Digital also engaged in stablecoin redemption trades with Erebor, sources familiar with the matter told the outlet.

🆕 new 🆕

Just how crypto-friendly should a crypto-friendly bank be? For Erebor, the new bank launched by Palmer Luckey, the sweetener it was offering new customers in the crypto industry was maybe slightly too friendly… https://t.co/Jla42SNTHP

— Michael Roddan (@MichaelRoddan) September 15, 2026

Erebor eventually instructed firms, including Wintermute, to cease the practice. The bank then scrapped free conversions for clients without substantial deposits and introduced volume-based fees and limits.

A Wintermute spokesperson said the firm “continues to do business with Erebor, and we value our relationship,” as reported by The Information.

Erebor Discovers the Tough Side of Crypto Banking

This incident arrives as one of America's newest banks prepares to finalize a $1.5 billion fundraising round at an $8 billion pre-money valuation, per The Information. Erebor is backed by Anduril co-founder Palmer Luckey.

Its business model focuses on sectors that traditional banks have often found hard to serve. The FDIC approved Erebor to operate with technology, payments, investment, and defense companies, including crypto firms. Its model explicitly supports stablecoin deposits and withdrawals while keeping customer deposits in dollars.

That made free conversion a compelling selling point.

It also created a vulnerability that professional traders could exploit. In crypto markets, even a fraction of a cent can become a profitable business once sufficient volume flows through.