Lawyers for victims of North Korean terrorism have intensified their legal fight to seize approximately $71 million in frozen cryptocurrency linked to the April 18 rsETH exploit on Aave. In a new court filing filed Tuesday, they argued that the incident was not a simple theft but a fraudulent loan transaction. This directly calls into question Aave’s attempt to block a restriction notice that prevents the release of assets.
The 30-page opposition brief, filed in the Southern District of New York, asserts that under longstanding U.S. law, a fraudster can obtain legal title to property acquired by deception. The attorney representing the victims wrote that “the law is crystal clear: a fraud victim passes title, not just possession, to a fraudster.” They compared the situation to that of Charles Ponzi obtaining irrevocable title to his victims’ money.
The context of the exploit
The dispute stems from a cross-chain bridge exploit last month that drained approximately $230 million from Aave, one of the largest decentralized lending protocols. Forensic companies like Chainalysis and TRM Labs largely attribute the attack to the North Korean group Lazarus. The attacker created uncollateralized rsETH tokens, used them as collateral on Aave’s lending markets, and borrowed real ether against these worthless deposits.
Developers linked to the Arbitrum blockchain then intercepted approximately $71 million before they could cash it out. This frozen amount is now at the center of the legal battle.
New legal argument under federal law
The filing also escalates the dispute beyond New York real estate law by invoking the Terrorism Risk Insurance Act (TRIA). This post-9/11 federal law allows people who obtain court judgments against state sponsors of terrorism to collect on U.S.-owned property belonging to that country. If the court accepts this theory, Aave’s prior arguments about New York real estate law may become less relevant.
The filing also questions whether Aave has the legal standing to challenge the freeze. He points to the company’s own terms of service, which state that Aave has no “possession, custody, or control” over user assets. This is an essential feature of decentralized finance.
Potential relief for affected users
Interestingly, lawyers noted that affected users might not actually need the frozen ether. DeFi United, an industry-led recovery fund of which Aave is a part, raised $327.95 million as of Tuesday morning. That’s more than four times the $71 million in dispute.
A hearing is scheduled for Wednesday, May 6 in federal court in Manhattan. The outcome could set an important precedent for how frozen crypto assets are treated in cases involving state-sponsored terrorism.
