In an important case heard in the US Southern District of New York, lawyers took a new step to transfer $71 million worth of ether frozen during the bridge attack last month via Aave, which resulted in a loss of $230 million, to the victims of terrorism. Within the scope of the case, a change in legal strategy was made and it was argued that the attack was not a theft but fraud. This approach was put forward in direct response to Aave’s legal attempt to release the funds.
Background of the attack and the case
It was stated that the cross-chain attack that took place on the Aave platform in April belonged to the North Korea-linked Lazarus Group, according to the findings of cyber security and analysis companies Chainalysis and TRM Labs. The attackers generated unsecured rsETH tokens and collateralized those assets on Aave, then used these fake deposits to borrow real ether. Blockchain developers managed to prevent approximately $71 million on the Arbitrum chain from being converted to cash.
Lawyers representing the victims of the incident pointed out an important provision of US law regarding the nature of the attack in their latest 30-page document. The document emphasized that the fraudster temporarily gained ownership rights in assets acquired through fraud. With this argument, it was noted that classical theft and fraud should be handled differently by law.
“The legislation is very clear; the person who is cheated transfers not only the possession of the asset but also the numerical property right to the fraudster… This is how Charles Ponzi obtained the money of the victims in the system that bears his name.”
TRIA law is in effect
Lawyers also applied to the Terrorism Risk Insurance Act (TRIA), which was enacted in the USA after September 11, in the case. This federal law allows people who have received court compensation orders against states that support terrorism to collect their receivables from any assets belonging to the relevant country located in the USA. In the lawsuit, it is argued that it is legal to seize the ether in question within the scope of TRIA. If the court adopts this approach, Aave’s objections based on New York property law may become less important.
The legal document questioned Aave’s legal status over frozen assets. The company’s user agreement clearly states that it does not have any direct access, control or storage authority over user assets. Lawyers highlighted this article and stated that Aave may not be legally authorized to request the release of the ethers in question at the hearing.
Crypto industry and funds
Another issue that stood out in the case was that users may not actually need these frozen ethers at the moment. Under the leadership of the industry, including Aave, a recovery fund named DeFi United was established, and it has been reported that this fund has collected $ 327.95 million so far. This amount of funds raised is more than four times the $71 million figure under discussion.
The parties will be heard in the federal court in Manhattan on Wednesday, May 6, for the next phase of the trial. The litigation is expected to lead to new jurisprudence on decentralized finance (DeFi) and the legal status of international assets in the United States.
