Judge Clears Path for Frozen Aave Funds Linked to North Korea Hack

A federal judge on May 9 cleared $71 million in frozen Ethereum (ETH) to move from Arbitrum to Aave (AAVE), ruling that the funds can be repositioned while the legal freeze travels with the assets. Judge Margaret Garnett of the Southern District of New York issued the order, allowing the DeFi protocol to manage the collateral without extinguishing the terrorism plaintiffs’ ongoing legal claim over the proceeds.

What the Ruling Covers

The $71 million in question consists of Ethereum (ETH) frozen on the Arbitrum Layer-2 network after being linked to a North Korea-connected exploit.

Arbitrum is a Layer-2 network built on top of Ethereum, meaning it processes transactions off the main chain to reduce fees and increase speed, while settling final state back to the Ethereum base layer. Aave is a decentralized lending protocol that allows users to borrow and supply cryptocurrency assets against posted collateral, operating without a central intermediary.

The court did not lift the underlying legal freeze.

Garnett’s order permits Aave to move the ETH within its own protocol infrastructure, but the assets remain encumbered for the plaintiffs, who are suing on terrorism-related grounds tied to the hack’s alleged North Korean origin.

Background

The frozen funds trace back to the Kelp DAO exploit, in which attackers linked to North Korea’s Lazarus Group drained assets that subsequently flowed through Arbitrum addresses. Terrorism plaintiffs filed suit seeking to hold the frozen proceeds as potential damages, arguing the hack benefited a sanctioned state actor.

The case represents one of the most direct applications of U.S. counterterrorism statutes to on-chain cryptocurrency assets, a legal theory that courts have only recently begun to test in the DeFi context. Prior litigation involving Lazarus Group proceeds has resulted in civil asset freezes, but plaintiffs seeking terrorism-statute damages from decentralized protocol funds face novel jurisdictional questions that this case has not yet resolved.

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What Comes Next

The terrorism lawsuit continues in the Southern District of New York.

The court’s May 9 ruling narrows the dispute to whether plaintiffs can ultimately recover the encumbered ETH, not whether Aave can manage its own collateral in the meantime. Aave governance will need to decide how to handle the repositioned assets while the freeze remains active.

Any settlement or judgment that awards plaintiffs a share of the funds would require a secondary court order directing disbursement. The outcome could establish precedent for how U.S. courts treat frozen DeFi collateral in terrorism-related civil suits.

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