Erebor Bank has pulled back a no-fee stablecoin conversion offer after professional trading firms reportedly used it to profit from small price differences in USDT and other dollar-pegged tokens. The bank had let clients convert USDC and USDT into dollars at face value without a charge, a feature meant to attract crypto companies.

According to The Information, firms including Wintermute and Galaxy Digital used the setup to buy stablecoins below $1 in the market and redeem them through Erebor for a full dollar. Erebor later told some firms to stop, then changed the policy by removing free conversions for customers without sizable deposits and adding volume-based fees and limits.

How the trade worked

The opportunity came from a common feature of stablecoin markets: tokens such as USDT can trade slightly below their intended $1 peg. In normal circumstances, converting those tokens back into dollars involves costs that reduce or eliminate that discount-based profit.

Erebor’s offer changed that math. By accepting USDC and USDT at face value and not charging a conversion fee, the bank effectively gave traders a way to lock in the spread between a discounted market purchase and a $1 redemption. Even a fraction of a cent per token can become meaningful when transactions are done at scale.

Reported use by major trading firms

The Information reported that Wintermute carried out the strategy with millions of dollars worth of USDT, leaving Erebor to absorb the cost of the difference. Galaxy Digital also conducted stablecoin redemption trades with Erebor, according to people familiar with the matter cited in the report.

A Wintermute representative said the firm continues to do business with Erebor and values the relationship. The source article did not say how much Galaxy traded or quantify the total cost to the bank.

Policy changes at Erebor

After the activity became apparent, Erebor reportedly told firms including Wintermute to stop using the conversion route in that way. The bank then revised the feature instead of keeping the original terms in place.

Under the new approach, free conversions are no longer available to customers without sizable deposits. Erebor also introduced volume-based fees and transaction limits, narrowing the opening that had allowed traders to monetize small deviations in stablecoin pricing.

What the episode shows about Erebor’s strategy

The incident comes as Erebor has been drawing attention in Silicon Valley and positioning itself as a bank for crypto, AI and defense-tech companies. The bank is backed by Anduril co-founder Palmer Luckey and, according to The Information, is preparing to close a $1.5 billion fundraising at an $8 billion pre-money valuation.

The FDIC approved Erebor to work with technology, payments, investment and defense companies, including crypto firms, according to the source article. Its model supports stablecoin deposits and withdrawals while holding customer deposits in dollars. That made free conversion an appealing client incentive, but it also created a fixed price that specialized trading firms could reportedly exploit.

Next confirmed step

The confirmed change so far is operational rather than legal or regulatory: Erebor has already tightened access to free stablecoin conversions and added fee and volume controls. Whether the new terms fully eliminate the arbitrage opportunity was not stated in the source report.

What is clear from the episode is that Erebor is still adjusting how it serves crypto firms while trying to expand. The immediate next step is the bank’s revised conversion regime, which now limits who can use the feature at no cost and under what volume conditions.

Source: beincrypto.com