Arbitrum approves $71 Million ETH release despite U.S. seizure fight

Arbitrum delegates approved the release of $71 million in ether frozen after last month’s Lazarus-linked rsETH exploit, setting up a direct clash between decentralized governance and an active U.S. court fight over who owns the funds.

The on-chain vote, which closed Friday afternoon Hong Kong time with more than 90% support, authorizes the release of 30,765 ETH frozen by Arbitrum’s Security Council after the April 18 exploit, when attackers used unbacked rsETH tokens as collateral on Aave to borrow roughly $230 million in ETH from the protocol.

The funds are earmarked for a coordinated industry recovery effort led by Aave, KelpDAO, LayerZero, EtherFi and Compound, aimed at making affected users whole.

But the frozen ether is also at the center of an escalating legal dispute in Manhattan federal court.

Last week, attorney Charles Gerstein, representing families holding roughly $877 million in unpaid terrorism judgments against North Korea, served a restraining notice on Arbitrum DAO claiming the frozen ETH constitutes North Korean property because the exploit has been widely attributed to Pyongyang’s Lazarus Group.

That triggered an emergency legal fight.

Aave moved earlier this week to vacate the restraining notice, arguing the assets belong to innocent users, not North Korea, and warning that continued delays risk “cascading liquidations” and broader instability across decentralized finance markets.

Gerstein fired back Tuesday, arguing the exploit was not theft but fraud, meaning the attackers obtained legal title to the ETH by deceiving Aave’s lending markets with worthless collateral.

Friday’s governance vote does not mean the funds move immediately.

Because the measure was structured as a Constitutional AIP under Arbitrum’s governance framework, the transfer cannot be executed for at least eight days, giving the Manhattan court time to intervene before any ETH moves.

Arbitrum delegates were also not voting blindly to the legal risk. The proposal included indemnification protections for the Arbitrum Foundation, Offchain Labs, Security Council members, and governance delegates against certain claims arising from either freezing or releasing the ETH, underscoring how unusual the stakes around the vote had already become.

Speaking at Consensus Miami this week, Aave Labs Chief Legal and Policy Officer Linda Jeng said the exploit had already forced the protocol to rethink its risk framework, expanding collateral standards beyond financial metrics to include cybersecurity, interoperability, and technical architecture reviews.

Jeng, who worked as a regulator during the 2008 financial crisis, drew a contrast with traditional finance’s taxpayer-backed rescues.

“In the financial crisis, we had to bail out the banks,” she said. “Here, we came together as an ecosystem to bail ourselves out.”