North Korea terror victims escalate fight to seize $71 million from Aave hack

Lawyers Argue New Legal Strategy in Case Involving Frozen Ether

Lawyers seeking to seize $71 million in frozen ether for victims of North Korean terrorism have changed their legal strategy in a new court filing. They argue that the recent exploit involving rsETH was not theft but fraud, directly challenging Aave’s attempt to release the assets.

In a 30-page opposition brief filed in the Southern District of New York, a lawyer representing the North Korean terror victims argues that the exploit was a fraudulent lending transaction rather than a theft. According to U.S. law, fraudsters who acquire property through deception can obtain legal title to it, even if that ownership is later reversible.

“What actually happened is that North Korea borrowed assets from users of the ‘Aave Protocol’ and did not pay it back, and when the ‘Aave Protocol’ sought to liquidate North Korea’s collateral, the ‘Aave Protocol’ unhappily discovered that the collateral was worthless,” the new filing reads.

The dispute stems from a cross-chain bridge exploit that drained approximately $230 million from Aave, the leading decentralized lending protocol by total value locked. An attacker, believed to be linked to North Korea’s Lazarus Group, minted unbacked rsETH tokens, used them as collateral on Aave’s lending markets, and borrowed real ether against the worthless deposits. Developers associated with the Arbitrum blockchain intercepted about $71 million before it could be cashed out.

The filing also brings in the Terrorism Risk Insurance Act (TRIA), a federal law post-9/11 that allows individuals who obtain court judgments against state sponsors of terrorism to collect those judgments from any U.S.-held property of the country in question. This could potentially impact Aave’s arguments regarding New York property law.

The filing questions Aave’s legal standing to challenge the freeze, citing the company’s terms of service stating that it does not have “possession, custody, or control” over user assets, a fundamental aspect of decentralized finance.

Furthermore, the lawyers note that the affected users may not necessarily require the frozen ether. DeFi United, a recovery fund supported by the industry and including Aave, has raised $327.95 million, surpassing the disputed $71 million.

A hearing is scheduled for Wednesday, May 6, in a Manhattan federal court.