Erebor halts free stablecoin redemptions after arbitrage

Erebor Bank stopped offering free conversions of USDC and USDT into U.S. dollars after trading firms bought USDT for slightly less than $1, sent the tokens to the bank and received $1 in cash, collecting the difference. The bank then introduced fees, redemption limits and minimum deposit requirements.

The original offer let customers convert stablecoins at face value without the usual redemption charges. Traders could buy USDT on open markets below $1, transfer the tokens to Erebor and redeem them for a full dollar. Small price gaps became profitable when trades were executed at large volumes.

Professional trading firms executed these redemption trades with millions of dollars in tokens. People familiar with the matter identified Galaxy Digital among firms that used the pathway; Wintermute also carried out trades of this type. Erebor asked firms engaged in the strategy to stop and revised the conversion program. People familiar with the situation said the bank absorbed losses while the trades continued.

Wintermute provided a statement that it “continues to do business with Erebor, and we value our relationship.”

The mechanics matter because direct redemptions with some stablecoin issuers can be expensive. For example, Tether charges the greater of $1,000 or 0.1% for direct redemptions, making a no-fee conversion attractive for anyone able to buy tokens below par.

Erebor launched with the aim of serving technology, payments, investment and defense companies and sought to be crypto-friendly. The bank is backed by Palmer Luckey and is reportedly preparing to close a $1.5 billion fundraising round at an $8 billion pre-money valuation. The free-conversion feature was offered as an incentive to attract customers in that market niche.

After the change, free conversions became available only to customers with sizable deposits. The bank added fees tied to redemption volume and set limits on the amount of stablecoins that could be redeemed, as well as deposit-size requirements for fee waivers.