Erebor Bank’s free stablecoin conversion became an arbitrage subsidy for professional traders

Erebor Bank tried to attract crypto clients by converting USDC and USDT into dollars at face value without charge. The offer sounded like a simple service benefit. In practice, it transferred the cost of stablecoin redemption from sophisticated trading firms to the bank.

USDT often trades fractionally below one dollar, while direct redemption through Tether costs the greater of $1,000 or 0.1%. Firms including Wintermute and Galaxy Digital could therefore buy discounted USDT, send millions of dollars’ worth to Erebor, receive full dollars and keep the spread. Each trade produced a small gain, but repetition at institutional scale made the subsidy material. The Information reports that Erebor eventually told the firms to stop and ended free conversion for customers without substantial deposits, adding fees or volume limits.

Wintermute says its wider relationship with Erebor continues. The episode is not evidence that the stablecoins broke their pegs or that the traders violated a rule described in the reporting. It is a pricing failure: Erebor offered a wholesale financial operation as a free retail amenity without sufficiently restricting who could use it or how often.

The mistake is revealing because Erebor is pitching itself as a bank built for the crypto economy. It reportedly has $4.6bn in deposits and about $100mn in annual recurring revenue, and is seeking a large new valuation. Serving crypto firms profitably requires understanding precisely the kinds of basis-point incentives those firms are engineered to exploit.