Aave asks US court to unblock $71M ETH frozen on Arbitrum in KelpDAO

Aave has filed an emergency motion in the U.S. District Court for the Southern District of New York asking the court to vacate a restraining notice that has frozen 30,766 ETH (about $71 million) held by Arbitrum. The filing argues the immobilized assets were intercepted to reimburse victims of the April 18 KelpDAO exploit and should be released to support coordinated recovery efforts.

The sequence began after the KelpDAO rsETH bridge exploit drained roughly $292 million across protocols on April 18. Arbitrum’s security mechanisms froze 30,766 ETH on April 20 and a governance proposal led by Aave Labs sought to transfer the funds into a multi-signature recovery fund (DeFi United) to restore rsETH backing and repay affected users. On May 1, law firm Gerstein Harrow served a restraining notice on Arbitrum through an alternative-service order approved by the court, claiming their clients hold unpaid terrorism judgments against the Democratic People’s Republic of Korea and that the frozen ETH is subject to those claims. Aave contests that characterization and seeks immediate relief.

While the freeze does not directly change spot ETH liquidity, it complicates protocol-level recovery plans and raises counterparty and collateral risks inside DeFi markets. The funds were earmarked to reduce Aave’s potential bad-debt exposure and re-back rsETH; keeping them immobilized may prolong uncertainty for affected borrowers and lenders, potentially increasing short-term market stress among leveraged participants and on-chain lending pools.

On a broader level, the dispute spotlights how U.S. courts interact with decentralized governance and recovered on-chain assets. Aave’s memorandum argues that a thief cannot obtain lawful title by stealing assets and that plaintiffs’ attribution evidence is speculative; it also challenges whether a DAO can be properly served as a garnishee. The court’s treatment of service, ownership and the restraining notice standard could set precedent for future cross-border asset recovery and creditor enforcement actions against crypto-held funds.

Market observers see three near-term outcomes: the court may vacate the notice and clear the way for the recovery plan; it may uphold the restraining notice but require plaintiffs to post a substantial bond (as Aave requests); or it may delay on jurisdictional grounds while probing the alternative-service process. The ruling will be watched closely by DeFi protocols and legal teams as it could materially affect how quickly recovered assets can be repatriated to victims after large-scale exploits.