Arbitration delegates approved the release of $71 million worth of ether frozen after the Lazarus-linked rsETH exploit last month, creating a direct conflict between decentralized governance and an active legal battle in the United States over who owns the funds.
The on-chain vote, which closed Friday afternoon Hong Kong time with over 90% support, authorizes the release of 30,765 ETH frozen by the Arbitrum Security Council following the April 18 exploit, when attackers used uncollateralized rsETH tokens as collateral on Aave to borrow approximately $230 million in ETH from the protocol.
The funds are intended for a coordinated industry recovery effort led by Aave, KelpDAO, LayerZero, EtherFi and Compound, aimed at restoring the integrity of affected users.
But frozen ether is also at the center of a growing legal dispute in Manhattan federal court.
Last week, attorney Charles Gerstein, representing families holding approximately $877 million in unpaid anti-terrorism judgments against North Korea, served a cease-and-desist notice on Arbitrum DAO, claiming that the frozen ETH constitutes North Korean property because the exploit was widely attributed to Pyongyang’s Lazarus Group.
This sparked an emergency legal battle.
Aave moved earlier this week to rescind the ban notice, arguing that the assets belong to innocent users, not North Korea, and warning that continued delays risk “cascading liquidation” and broader instability in decentralized financial markets.
Gerstein fired back on Tuesday, arguing that the exploit was not theft but fraud, meaning the attackers obtained legal title to ETH by tricking Aave’s lending markets with worthless collateral.
Friday’s governance vote does not mean funds will be transferred immediately.
Since the measure was structured as a constitutional AIP under the Arbitrum governance framework, the transfer cannot be executed for at least eight days, giving the Manhattan court time to intervene before any ETH decision.
Nor did arbitration delegates vote blindly on legal risk. The proposal included indemnification protections for the Arbitrum Foundation, Offchain Labs, Security Council members, and governance delegates against certain claims arising from the freezing or release of ETH, highlighting how unusual the stakes around the vote had already become.
Speaking at Consensus Miami this week, Linda Jeng, chief legal and policy officer at Aave Labs, said the exploit has 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 taxpayer-backed financial bailouts.
“During the financial crisis, we had to bail out the banks,” she said. “Here we came together as an ecosystem to bail ourselves out.”
