The legal battle over who can claim DeFi’s stolen millions

A New York federal judge ruled that $71 million in Ether frozen on Arbitrum could be transferred to Aave as part of a broader recovery effort. 

The funds are tied to the $293 million Kelp DAO exploit linked to North Korean hackers. Terrorism victims who were awarded $877 million in unpaid judgments against North Korea argue the stolen funds should be redirected to satisfy their claims, on the basis that the exploit was carried out by the state-sponsored Lazarus Group.

The case has forced the crypto industry to confront a paradox it has long avoided, where acting responsibly can be riskier than doing nothing at all for decentralized protocols.

Magazine spoke to Yuriy Brisov, partner at Digital & Analogue Partners, about the legal fault lines running through the Arbitrum case, why noble actions can open DAOs to legal liability, and what Circle and Tether’s diverging approaches to asset freezing mean for stablecoins.

This conversation has been edited for clarity and length.

Magazine: When a decentralized protocol freezes stolen funds, can this open the door to legal liability?

Brisov: From a moral ground, Arbitrum acted as any bona fide actor should: you see somebody steal a phone, you chase them down.

Generally, in a fully decentralized protocol, there shouldn’t be any people involved in your activities — founders, attorneys or legal entities. The moment there’s a unified business interest, courts may treat you as a legal entity. So a noble action can open you to legal action.

That’s the controversy with DAOs right now. Markets in Crypto-Assets (MiCA) in Europe and the Clarity bill in the US give exemptions for DeFi when it’s completely decentralized. 

What is completely decentralized in our world? Only Bitcoin. Everything else has some human control. When an attack or a theft happens, there’s someone who tries to fork the chain, freeze assets or file a complaint. You’re now a legal entity under some jurisdiction.

My personal opinion is that it’s more honest to just register as a DAO LLC from the start under US law, the Marshall Islands or as a Cayman Foundation. When there’s no legal entity behind a DAO, courts treat it as a partnership where every partner is personally liable. There’s no liability shield like an LLC provides.

Protocols that relinquish complete control may look like the smart guys here, but in some cases, cancel culture can punish you harder than any lawsuit. Personally, I stand with the protocols that do the right thing.

Magazine: Does having a security council or a kill switch undermine a protocol’s decentralization claims?

Brisov: They show that they have the power to freeze assets. They had this special council authority displayed in their documents, but I’m sure that many users and customers of their protocol would reconsider using them again.

Crypto people are usually very private and they don’t like to follow all the laws, even though they don’t precisely break them. They just try to be decentralized. And this crypto philosophy comes from something real.

In our modern world, to say that you own anything is really difficult. The money you have in the bank — is it really yours? In the crypto world, the philosophy is that it’s finally something that belongs to us.

So when a hack happens and we suddenly see a centralized mechanism, it undermines the whole premise.

Magazine: Is there a legal basis for treating stolen crypto assets as sovereign property of a terrorist state?

Brisov: There are laws that allow plaintiffs to directly confiscate funds belonging to…