Crypto-Friendly Bank Erebor Bites Off More Than It Can Chew

Erebor Bank, backed by Anduril co-founder Palmer Luckey and valued at $8 billion, aimed to become the go-to bank for crypto firms. To attract these clients, Erebor offered a sweetener: free conversions of USDC and USDT into dollars at face value.

The plan backfired when professional trading firms like Wintermute and Galaxy Digital discovered they could exploit this offer to make a profit. The trade involved buying USDT below $1, sending it to Erebor for the full dollar, and keeping the difference.

This may seem like a minor detail, but even fractions of a cent can add up when dealing with millions of dollars' worth of trades. Wintermute reportedly carried out this strategy with millions of dollars' worth of USDT, while Galaxy Digital also took advantage of Erebor's offer.

Erebor eventually told the firms to stop and introduced volume-based fees and limits for customers without sizable deposits. This move came as the bank prepares to close a $1.5 billion fundraising at an $8 billion pre-money valuation.