Peter Thiel has thrown his support behind Erebor, a new digital bank founded by Palmer Luckey to serve tech startups, venture capitalists and cryptocurrency companies. Luckey, a guy with hair like Patrick Swazey who sports a goatee and dresses like a retiree on vacation in a hot climate, wants to be crypto’s banker, filling the vacuum left by Silicon Valley Bank (SVB), which failed in 2023.
Luckey, best known for founding Oculus VR and military contractor Anduril, continues his and Thiel’s tradition of naming companies after J.R.R. Tolkien creations.
In this case, Erebor is another name for the Lonely Mountain, which housed untold treasure jealously guarded over by an evil dragon Smaug in The Hobbit, the author’s celebrated prelude to The Lord of The Rings. Erebor, the bank, will be guarded by a host of tech’s heavy hitters and protected, at least partially, by the Federal Deposit Insurance Corporation (FDIC). It will also be backed by 8VC, the venture capital firm co-founded by Palantir’s Joe Lonsdale.
Freedom vs. Democracy?
Publicity-shy billionaire investor Thiel is known for his visionary business acumen and future-focused platforms that have reshaped the tech landscape. He is not a fan of democracy when it gets in the way of freedom, and his opinion matters because his fingers are deeply entrenched in the industries of tomorrow.
Thiel’s involvement presents a subtle irony, as his venture capital firm, Founders Fund, some have argued, exacerbated the conditions that led to SVB’s bank run, when it abruptly withdrew all of its cash from the struggling bank.
However, Thiel is only one player among many in the creation of Erebor. The new bank will be headquartered in Columbus, Ohio, due to favorable laws and regulations in the Buckeye State. The bank will be led by co-CEOs Owen Rapaport and Jacob Hirshman, formerly of Circle. SVB was the go-to bank for high-risk startups and crypto firms—an underserved niche that now has gale force winds at its back in the era of Trump 2.0.
Stablecoins: Crypto’s Next Boom—or Bust?
One key component that separates Erebor from SVB will be Erebor’s embrace of stablecoins. According to the bank’s charter application, Erebor aims to become “the most regulated entity conducting and facilitating stablecoin transactions.”
The timing is not accidental. In the wake of the Senate’s passing of the GENIUS Act, which was recently followed by approval of the House, regulation is coming to stablecoins. With that regulatory clarity will come widespread industry adoption within a broader atmosphere of deregulation in the banking sector.
In that light, stablecoin giant Circle announced earlier in the month its intention to start its own bank. While Circle plans to hold digital assets for institutional affiliates, it will begin by housing $62 billion in treasuries and cash.
JP Morgan has recently filed several trademarks for potential bank-issued stablecoins, while launching a “deposit token” called JPMD, which operates similarly to a stablecoin.
PayPal offers its own stablecoin called PYUSD. Cross-border payments via stablecoins are being beta-tested by Visa and Mastercard. Ripple is working with more than a hundred banks to provide remittances via stablecoin.
These are the big names embracing stablecoins. There are and will be hundreds of startups within the space that will likely look to Erebor for financing.
Banking’s SVB Ghosts Return
Erebor is financed by venture capitalists who typically fund tech startups looking to disrupt the market. Luckey went from designing VR headsets to making killer drones and surveillance AI at the border in the span of five years.
The speed is impressive, but not necessarily right for running a bank that doesn’t operate on near bottomless Facebook or U.S. government funding. Mark Zuckerberg’s tech motto “move fast and break things” doesn’t work for banking.
But bear in mind that Thiel, like all account holders at SVB with deposits exceeding the $250,000 insurable limit, got his money back after the government stepped in with “extraordinary measures” to ensure all depositors would be made whole.
The lifeline Thiel and others benefited from was described at the time as a “systemic risk exception,” which has only been used five times in the last 34 years. The money came from the Deposit Insurance Fund (DIF), costing it a cool $16 billion.
Perhaps that’s what gives Erebor the confidence to go down the same dark alley as SVB did.
Fears of Risk Contagion
The security vulnerabilities of crypto firms are consistently documented by Disruption Banking and other crypto news outlets. Fortunately, the legacy banking system, aka TradFi, is more reliable than crypto exchanges. If TradFi instituitions are integrated with crypto firms without patching the latter’s security vulnerabilities, it follows that counterparty risk will be transferred.
Mitchell Amador, CEO of Immunefi, a Web3 security firm, told CCN, “When you build your entire banking infrastructure on stablecoins, you’re inheriting all the risks of those underlying protocols. If there’s a smart contract vulnerability or an issue with the underlying bridge for a major stablecoin, it could compromise your entire bank.”
Amador referred to the example of Terra-Luna, the $40 billion dollar crash, which Disruption Banking investigated last year in April and June, as a cautionary tale.
Bad Bromance: Banking Conflicts and Crypto Chaos
It remains to be seen whether the Office of the Comptroller of the Currency (OCC) will accept Erebor’s application. One of the questions the OCC will have to ascertain is whether sufficient controls are in place between the interests of Erebor and its influential capital backers.
Lonsdale and Luckey were both big donors to President Donald Trump, although they are reportedly not expected to be heavily involved in the day-to-day management of the bank. In any case, any denial by the OCC would surely be met with threatening outbursts from the US President, so Erebor’s application will likely be approved.
A recent editorial by Fintech Nexus warned: “If it sails through [the OCC] without stringent scrutiny or stipulations, it suggests the ongoing independence of banking regulators may be eroded, not just reasonably reconfigured to bring fintech and other technology ventures into the bank-reg fold.”
Taking approval as a given is troubling in a wider sense, when one considers the implications of giving such free rein to the companies backing Erebor. Not least the synergies that could be achieved between those companies and how much power that would confer on their founders, some of whom long ago attained supervillain status in the minds of their critics.
Dark Lords of Finance?
In a darker twist on the Tolkien theme, Fintech Nexus conjured up a vision of potentially “Palantir-esque tech for underwriting.” The metaphor will not be lost on keen observers: in the original stories, the Palantir were used by unscrupulous wizards like Saruman to scry things from afar, a power that eventually corrupted his mind.
In a similar vein, a Bloomberg opinion piece by Paul Davies headlined with “Crypto, Startups, and Banking Make A Scary Mix.” Davies noted that SVB was largely financed by tech startups but “when rising interest rates hit valuations and froze venture capital fundraising, the bank’s funds began to shrink too.” Davies believes this was caused by lack of diversification: so when an exogenous shock hit those industries, it hit the bank that much harder.
Davies added: “These banks were focused on economically sensitive industries that are highly correlated to each other, and they lacked diversification of funding. That’s a bad business model and it is much more significant in explaining the 2023 failures than depositor fears about unrealized losses on bonds, or the role of social media in transmitting panic.”
Watching Erebor barrel down the same road as SVB, critics wonder if anyone learned anything—or if history is doomed to rhyme.
#Crypto #Blockchain #DigitalAssets #DeFi
Author: Laird Dilorenzo
Laird Dilorenzo is a hatchet thrower and wordsmith.
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
