A federal judge in Manhattan has threaded a legal needle that seemed impossible just weeks ago: letting Aave move forward with its DeFi recovery effort while keeping terrorism victims’ $877 million claim alive against the same frozen Ethereum funds.
Judge Margaret Garnett’s two-page order, published late Friday U.S. time, modifies a restraining notice previously served on Arbitrum DAO. The modification allows an onchain governance vote to transfer 30,765 ETH (worth approximately $71 million) to a wallet controlled by Aave LLC. Perhaps more importantly for the DeFi community, the order shields anyone who initiates, votes on, or participates in that transfer from legal liability under the freeze.
The ruling doesn’t end the legal fight over these funds. It just allows them to move while that fight continues. The terrorism creditors, represented by attorney Charles Gerstein, still have a live claim. The freeze follows the assets to their new home.
The Exploit That Started Everything
Last month’s rsETH exploit drained funds that have been widely attributed to North Korea’s Lazarus Group. The state-sponsored hacking collective has been on a tear through DeFi infrastructure in 2026, with our prior coverage documenting over $500 million in losses across Drift and Kelp protocols in a matter of weeks.
When the rsETH attack hit, something unusual happened. The exploited funds ended up immobilized on Arbitrum, the Layer 2 network. This created an opportunity for Aave’s recovery team to potentially retrieve the assets, but it also caught the attention of Gerstein’s clients.
These clients are families holding roughly $877 million in unpaid terrorism judgments against North Korea. They’ve been trying to collect on these judgments for years, and Lazarus Group’s crypto exploits represent one of the few places where North Korean assets actually exist in a form that might be seizable. When they learned stolen ETH was sitting frozen on Arbitrum, they served a restraining notice arguing the funds should be theirs.
The legal theory isn’t crazy. If North Korea (through Lazarus Group) controls assets, and U.S. courts have ordered North Korea to pay hundreds of millions in terrorism damages, why shouldn’t those assets go to the judgment creditors? The wrinkle, of course, is that the funds were stolen from DeFi users who also have a claim.
Aave’s Recovery Plan Gets a Green Light
The DeFi community’s coordinated response to this spring’s Lazarus attacks has been one of the more impressive examples of decentralized governance working under pressure. The DeFi United Fund raised over $303 million to cover losses from the Kelp DAO exploit, with Aave leading the effort alongside Consensys, Lido, and others.
Recovering the $71 million frozen on Arbitrum was always part of that broader plan. An off-chain Snapshot temperature check showed Arbitrum delegates overwhelmingly supported transferring the frozen ETH back to Aave as part of the recovery. But the restraining notice threw a wrench into things.
DAO participants faced a genuine dilemma. If they voted to move funds that were under a legal freeze, could they be held personally liable? The restraining notice appeared to apply to anyone who helped transfer the assets. For many token holders, the safest move was simply not to participate.
Judge Garnett’s order resolves this problem directly. By explicitly stating that participants in the governance vote won’t violate the freeze, she’s removed the personal liability risk that was chilling DAO governance. The vote can proceed. If it passes (the temperature check suggests it will), the ETH moves to Aave’s custody.
What makes this order interesting from a legal structure perspective is how it handles the competing interests. The terrorism creditors wanted the funds frozen entirely, available only to satisfy their judgments. Aave and its users wanted the funds recovered to make victims of the exploit whole. The judge essentially said: the funds can move, but the legal claim moves with them.
This isn’t a victory for either side so much as a procedural accommodation. The terrorism families haven’t lost their chance to seize the ETH. They just can’t block Aave’s recovery process while they litigate that chance. The substantive fight over who gets the money continues.
The Broader Legal Campaign Against DeFi
Gerstein’s restraining notice against Arbitrum fits into a much larger litigation strategy. His clients aren’t just going after one batch of frozen funds. They’re systematically targeting DeFi infrastructure that they believe has touched North Korean assets.
In January, many of the same terrorism judgment creditors sued Railgun DAO. Their complaint alleged the privacy protocol allowed North Korean actors to move funds that should have been frozen and made available to creditors. The plaintiffs claimed Lazarus Group used Railgun to launder proceeds from prior cyberattacks, including the massive $1.5 billion Bybit exploit.
The Railgun case is particularly aggressive. In March, the plaintiffs asked a Washington federal court clerk to enter default against Railgun DAO after alleging the protocol failed to respond to the complaint despite being served. Getting default judgment against a DAO raises all sorts of questions about what that even means (who pays? How do you enforce it?), but the plaintiffs seem intent on testing those limits.
Maybe the most audacious move in the Railgun complaint is naming Digital Currency Group as a defendant. The allegation: DCG’s $10 million purchase of Railgun governance tokens in 2022 made it a participant in the DAO’s governance and economics. If that theory holds up, any institutional investor who buys governance tokens could potentially be on the hook for whatever the protocol does.
Think about what that means for DeFi venture capital. Funds that have backed privacy protocols, cross-chain bridges, or any infrastructure that might someday touch sanctioned funds would have to reconsider their exposure. Whether or not the theory succeeds in court, the litigation risk alone could chill investment.
The plaintiffs haven’t stopped there. In February, they moved to secure USDT that the U.S. government had sought to seize through a forfeiture motion. They’re essentially racing the government to claim North Korea-linked crypto assets wherever they surface.
What This Means for DAOs
Judge Garnett’s order offers some reassurance to DAO participants, but it’s narrow reassurance. She protected Arbitrum voters from liability in this specific situation, where the court was already involved and could craft a modification that preserved competing interests. That’s different from saying DAO voters are generally immune from restraining orders.
The more troubling precedent, from a DeFi governance perspective, is that the restraining notice worked at all. Gerstein served Arbitrum DAO with a legal notice, and the effect was to freeze governance. Token holders didn’t want to vote because they weren’t sure whether voting would expose them to liability. For several weeks, a traditional legal instrument paralyzed decentralized infrastructure.
This suggests a playbook that other litigants might follow. If you want to freeze assets on a DeFi protocol, serve a restraining notice and let uncertainty do the work. Even if the notice doesn’t actually create liability for voters, the fear of liability might be enough to prevent governance from functioning.
The counterargument is that Judge Garnett’s order shows courts will step in to protect governance when asked. Aave presumably petitioned for the modification that shields voters. Other DAOs facing similar situations could seek the same relief. But that requires hiring lawyers, filing motions, and waiting for judicial decisions. It turns permissionless governance into something that needs periodic court approval to function.
For protocols that handle significant value and might touch sanctioned funds (which, given the opacity of blockchain pseudonymity, is potentially a lot of protocols), this creates a new category of legal risk to model. The terrorism judgment creditors have demonstrated they’re willing to pursue aggressive theories. DCG, a major institutional player, is named in an active lawsuit over a four-year-old token purchase.
The Money Still Has to Go Somewhere
Assuming Arbitrum’s onchain vote passes and the 30,765 ETH moves to Aave’s custody, what happens next? The funds become part of Aave’s broader recovery effort. Our tracking of how the $160 million bailout fund approached its target shows the community has been working to make exploit victims whole, with contributions from Mantle, Aave DAO, and others.
But the terrorism creditors’ legal claim follows the assets. At some point, a court will have to decide whether these families, who suffered genuine horrors at the hands of a regime that funded the hackers, have a superior claim to DeFi users who lost money in the exploit.
That’s not an easy question. The DeFi users didn’t do anything wrong. They deposited funds into a protocol that got hacked by a state-sponsored adversary. The terrorism families also didn’t do anything wrong. They suffered attacks sponsored by that same state and have court judgments saying they’re owed compensation.
The uncomfortable reality is that Lazarus Group’s exploits create a situation where multiple innocent parties have claims to the same stolen money. If the $71 million goes to make exploit victims whole, the terrorism families don’t get paid. If it goes to satisfy terrorism judgments, the DeFi users eat the loss.
There’s no clean answer here. Judge Garnett’s order punts on the substantive question, which is appropriate at this procedural stage. But someone, eventually, will have to decide.
For now, Aave can proceed with its recovery plan. Arbitrum voters can participate without worrying about personal liability. The funds can move. But the legal cloud over this $71 million hasn’t lifted. It’s just moved to a new address.
The bigger picture is that DeFi protocols are increasingly finding themselves caught between North Korean hackers on one side and American lawyers on the other. The hackers are sophisticated enough to exploit complex cross-chain infrastructure. The lawyers are sophisticated enough to trace those exploits through governance tokens to institutional investors. And the protocols, which were designed to be permissionless and decentralized, keep discovering that those properties don’t insulate them from the legal systems that govern the fiat on-ramps and off-ramps their users ultimately need.
Whether this particular batch of ETH ends up with Aave’s exploit victims or North Korean terrorism victims won’t be decided for months or years. But the fact that both groups have colorable claims to the same funds tells you something about where DeFi sits in 2026. The technology is sophisticated. The legal frameworks are catching up. And the outcomes depend as much on which lawyer files first as on which smart contract executes.
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Reader note: this article is journalism, not a recommendation to buy, sell, or hold any asset. Do your own research before acting on any of it.
