A US District Court in New York has issued a restraining order blocking the transfer of 30,766 ETH, valued between $71 million and $73 million, tied to the $292 million Kelp DAO exploit. The assets were previously frozen by the Arbitrum Security Council following the April 18 breach, but the court's action introduces a competing legal claim that could delay recovery efforts for affected users. The court also approved three writs of execution, which legally prevent the Arbitrum DAO from moving the funds under threat of contempt. This decision came after Gerstein Harrow LLP, a US based law firm, filed a claim asserting rights over the frozen Ethereum, arguing that stolen assets qualify as property linked to North Korea. The restraining notice is valid for one year unless vacated or satisfied, creating a significant timeline for users waiting on restitution.
Lawyer Charlie Gerstein stated that the court order prohibits any transfer of the assets, arguing that the stolen Ethereum qualifies as property linked to North Korea. The legal claim relies on three separate US court judgments issued in 2010, 2015, and 2016, which awarded over $877 million in damages to families affected by acts attributed to North Korea. Among the plaintiffs are families of victims of terrorism, including individuals such as Han Kim and Yong Seok Kim, who secured significant compensation in earlier rulings. Their lawyers argue that the frozen ETH can be treated as DPRK property under US law, using legal frameworks like the Foreign Sovereign Immunities Act and the Terrorism Risk Insurance Act. However, Aave strongly disagrees with this approach, stating that the assets belong to innocent third parties—specifically Aave Protocol users—who are completely unrelated to any alleged wrongdoing and have no known ties to North Korea.
Aave has filed a court challenge arguing that the freeze is not only legally questionable but actively hindering recovery efforts. The company's CEO Stani Kulechov stated that "A thief does not own what he steals" and compared the situation to a thief stealing diamonds, noting that "These funds belong to the affected users they were stolen from—end of story." The filing challenges the plaintiffs' claim that the Restraining Notice was intended to assist in recovering funds for Aave Protocol victims, arguing it served the opposite purpose. Aave refused to be an official entity subject to the plaintiffs' method of service, creating potential legal hurdles. The company argues that the funds were seized directly from Aave users, casting doubt on whether the Arbitrum DAO qualifies as a legal entity. This legal challenge could significantly impact the recovery process and set a precedent for how DeFi assets are treated in future legal disputes.
The Arbitrum DAO had already initiated a vote to release the frozen funds, with plans to send the Ether to DeFi United, a recovery fund linked to Aave. 16.9 million ARB votes backed the move within hours, but the court order stopped the process before it could move forward. As a result, the decision has shifted away from on-chain governance to US court proceedings. A DAO member warned that "blocking the return of stolen funds to their actual owners shifts the cost," while critics argue the legal approach risks redirecting losses to a different group of victims. On-chain investigator ZachXBT described the strategy as "pure evil." The situation underscores a growing clash between decentralized governance and traditional legal systems, with the DeFi United recovery initiative now facing significant delays despite strong community support.
The legal freeze has sparked renewed market attention, with ARB mentions spiking as traders and DeFi participants returned to the story. Santiment Intelligence data shows activity rising in two distinct waves tied to key events, with the first spike coming on April 30 after the restraining order, followed by another rise on May 4. The DeFi United recovery initiative, involving Aave Labs, Kelp DAO, and LayerZero, had gathered more than $311 million in pledged support before the legal freeze, with teams working tirelessly to restore stability and security within the Aave Protocol and other DeFi ecosystems. The final outcome will likely depend on an upcoming divestiture hearing, which will determine whether the funds go to hack victims or to creditors pursuing claims against North Korea. Recent developments suggest that lawmakers are closer than ever to resolving disputes, with a bipartisan breakthrough on stablecoin yield restrictions removing one of the biggest obstacles to progress.
