Arbitrum DAO Encounters U.S. Court Freeze on $71 Million in ETH

A U.S. court order has imposed legal restrictions on Arbitrum DAO’s proposed utilization of frozen funds linked to a hack.

According to submissions authorized by the U.S. District Court for the Southern District of New York, plaintiffs issued a restraining notice on May 1 via Arbitrum’s governance forum, prohibiting any transfer of 30,766 ETH, worth approximately $71.1 million, which had been frozen by the Arbitrum Security Council following the Kelp DAO exploit.

Legal representatives for the plaintiffs, identified as victims with outstanding terrorism-related judgments against North Korea, argue that the seized ether represents property in which the DPRK has an interest. Their assertion is based on claims that the funds were pilfered by the Lazarus Group for Pyongyang, a connection previously identified by LayerZero in its investigation into the breach.

Arbitrum’s involvement dates back to April 20, when its Security Council transferred the assets to a controlled wallet after pinpointing addresses linked to the attacker. In an update on April 21, the network indicated that the freeze followed guidance from law enforcement concerning the identity of the exploiter, clarifying that the action did not impede user activity or applications.

Gerstein Harrow LLP initiated the legal action on behalf of Han Kim and Yong Seok Kim, whose case originates from the murder of Reverend Kim Dong-shik by North Korean agents. A U.S. court awarded about $330 million in damages in that case, and the most recent filing combines that judgment with two others, Kaplan v. DPRK and Calderon-Cardona v. DPRK, elevating total claims to over $877 million, excluding interest.

Arguments put forth by the plaintiffs reference the Foreign Sovereign Immunities Act and the Terrorism Risk Insurance Act, which empower creditors to claim assets associated with state sponsors of terrorism. The filing identifies both Lazarus Group and APT-38 as agencies of the DPRK.

Governance vote conflicting with legal claim

Arbitrum DAO had launched a Snapshot vote on April 30 to determine whether the frozen ETH should be allocated to a recovery initiative established post-exploit. The proposal, crafted by Aave Labs with input from Kelp DAO, LayerZero, EtherFi, and Compound, aims to direct the funds into a multi-signature wallet overseen by ecosystem participants and security firm Certora.

Voting data indicates overwhelming support of over 99% for the proposal as of the time of publication, with a deadline for the temperature check set for May 7. The design restricts the wallet’s functionality to receiving recovered assets and utilizing them to restore backing for rsETH.

Aave Labs has incorporated an indemnification clause in the proposal, offering to protect the Arbitrum Foundation, Offchain Labs, and Security Council members against claims connected to the freeze or release of funds. The applicability of such protections amid an active court-ordered restraint remains unsettled.

The conflict emerges against the backdrop of a $292 million exploit that siphoned 116,500 rsETH from Kelp DAO’s LayerZero-based bridge on April 18. LayerZero’s investigation indicated that a compromise of RPC nodes and a 1-of-1 verifier setup permitted a falsified cross-chain message to gain validation, while Kelp DAO has insisted that the configuration conformed to default deployment parameters.

On-chain analytics referenced in later reports indicated the attacker relocating funds through Arbitrum and converting assets into Tron-based USDT, a strategy analysts suggest was designed to obfuscate the transaction trail. Estimates cited by Yahoo Finance indicated that North Korean-related crypto thefts reached nearly $600 million in the first quarter, with the Kelp DAO incident contributing a significant portion.

While Arbitrum’s freeze was initially viewed as a measure toward recovery, the court-backed claim has now introduced conflicting demands over the same pool of assets, placing the DAO’s subsequent actions under legal constraint.