A Manhattan federal judge cleared Arbitrum DAO to shift $71 million in frozen Ether to Aave, narrowing the legal obstacle blocking recovery efforts after last month’s North Korea-linked exploit. Judge Margaret Garnett modified the restraining notice on Friday, permitting an onchain governance vote to move the funds whilst preserving the underlying terrorism victims’ claim.
The Arbitrum DAO transfer can now proceed through binding onchain governance. Delegates backed the move through an off-chain Snapshot vote earlier this week. The modification explicitly shields anyone executing the transfer from contempt charges. What it does not do is hand the funds to Aave outright. The legal claim remains. If the terrorism victims prevail in court, Aave would be compelled to surrender the assets.
Arbitrum DAO Transfer Clears Legal Hurdle
The restraining notice had locked the assets inside the Arbitrium DAO treasury since the Kelp DAO exploit in April. Gerstein Harrow LLP, acting for families holding $877 million in unpaid judgments against North Korea, served the notice. The firm argued the funds belong to its clients because North Korean hackers stole them. Aave filed an emergency motion last week to vacate the notice, calling the attribution speculative and warning that upholding the freeze would deter future DeFi recovery efforts.
Judge Garnett sided with Aave on the procedural point. The funds can move. The claim does not evaporate.
| Metric | Amount |
|---|---|
| Frozen ETH (Arbitrum) | 30,765 ETH |
| Value at current prices | $71 million |
| rsETH shortfall | 76,127 rsETH |
| Shortfall value | $174.5 million |
The Kelp Exploit Left a $174 Million Hole
The April hack released 116,500 rsETH on Ethereum without burning the corresponding tokens on the source side. That left 40,373 rsETH in the adapter contract against confirmed backing for 152,577. The gap runs to roughly 76,127 rsETH, worth $174.5 million at current prices. The 30,765 ETH frozen in Arbitrum represents a partial fix. Not a full one.
The Arbitrum DAO transfer would close part of that shortfall. Proponents argued that even partial restoration of rsETH backing would stabilise conditions for users across Arbitrum and the wider DeFi stack. Aave has been pushing for the release as part of a broader recovery plan. The legal tangle complicated that.
Terrorism Victims’ Claim Still Stands
Gerstein Harrow has been pursuing North Korea-linked crypto assets for some time. In January, the firm sued Railgun DAO, alleging the privacy protocol laundered proceeds from prior hacks, including the $1.5 billion Bybit exploit. The logic in both cases is the same. Hackers attributed to North Korea stole the funds. The terrorism victims hold unpaid judgments against North Korea. Therefore the assets belong to the victims.
Aave pushed back hard, arguing a thief does not gain lawful ownership of stolen property and that attributing the hack to North Korea relies on little more than internet speculation. The court did not settle that question. It simply allowed the Arbitrum DAO transfer to proceed whilst the underlying claim remains alive. If the victims prevail, Aave hands the funds over. If they do not, Aave keeps them.
DeFi Recovery Efforts in Legal Limbo
Aave warned that upholding the restraining notice would give bad actors a roadmap to exploit legal uncertainty following hacks. The argument is that if a freeze can be imposed this easily, recovery efforts become legally toxic. No DAO wants to touch assets that might trigger contempt proceedings. The judge appears to have taken that point on board. The Arbitrum DAO transfer can happen. The governance process can run. The legal claim does not block the mechanics.
What it does is create a contingent liability. Aave now holds $71 million in ETH that it may or may not get to keep. That is a different problem from being unable to access the funds at all. The rsETH shortfall remains. The Arbitrum DAO transfer is a step. Not the end.
Next gate is the onchain vote. If it passes, the funds move. Then the legal claim plays out. The timeline on that is anyone’s guess.
This article is for information purposes only and does not constitute investment advice. Readers should not act on any information contained here without first consulting an authorised financial adviser. Past performance is not a reliable indicator of future results.
