Arbitrum regulators seek permanent injunctions in three cases of abuse of appropriations

The Arbitrum Supervisory Committee proposes to permanently ban three DeFi projects from participating in future DAO plans

The Arbitrum Supervisory Committee has proposed to permanently exclude three DeFi projects from future DAO plans because they involve violations involving approximately 457,553 ARBs (worth approximately US$76,000).

Core Points:

• Good Entry, Limitless and APX Finance face separate permanent ban votes.
• The committee found that these three projects were suspected of misusing funds, involving a total of 457,553 ARBs.
• Relevant projects must respond and return any disputed funds by September 10.
• If the ban is passed, it will restrict its participation in future DAO projects, but will not freeze wallets or agreements.

The Arbitrum funding case involves three different findings

A governance proposal released on September 3 states that Good Entry, Limitless (formerly ApolloX) and APX Finance were classified by the Oversight Board as "highly serious" misuse of DAO funds. According to the committee's definition, the "high-severity" case involves the deliberate misuse of large amounts of funds allocated by the Arbitrum DAO, such as falsifying work products or theft, although the specific findings for the three projects differ.

The total amount cited is 457,553 ARBs, which is approximately US$76,000 based on a valuation within the scope of the proposal. However, this total does not represent a single confirmed theft or a single balance owed to Arbitrum DAO. It consists of multiple independent findings, including the distribution of funds to ineligible accounts, the removal of funds out of the Arbitrum ecosystem, and allegedly unused or delayed distribution of grant tokens.

Good Entry: 200,000 ARBs flowed to unqualified users

Good Entry received 200,000 ARBs through the first round of the Arbitrum short-term incentive program. On-chain analysis reviewed by the committee showed that during and after the incentive period, 142,839 ARBs flowed to 1,032 users deemed ineligible. The proposal also states that wallets associated with the Good Entry team show signs of self-farming. When investigators sought explanations, the team refused to cooperate. Good Entry is currently no longer operating, so any approved ban will apply to its founders, not active teams.

Arbitrum has been using community funding for years to attract users and developers. In November 2023, a total of 500,000 ARBs were allocated through three funding plans through retrospective funding, matching grants and tool awards.

Limitless: Suspected of transferring all grants to the Base Network

Limitless faces another independent survey related to long-term incentive pilot programs. The project received 75,000 ARBs, but the full grant was subsequently converted into USDC stablecoins and the funds were transferred to the Base network. The oversight board classified the case as suspected theft because this conversion and cross-chain transfer removed all grant funds from the Arbitrum ecosystem. The committee said it could not reach any Limitless team members for explanations or recovery of funds.

Limitless also appears to have stopped operating since participating in the incentive program. Under the proposed enforcement policy, a permanent ban would apply to its founders. The committee did not claim that transferring assets to other blockchains was per se misconduct, and its findings focused on the use of funds allocated to the Arbitrum incentive program and the fact that the team failed to explain or return the funds.

Base is the Ethereum Layer-2 network incubated by Coinbase, while Arbitrum runs as a separate Ethereum extended ecosystem. The proposal states that moving grants to Base removes assets from the network they were originally provided to support.

APX Finance: Overlap issue involving 239,714 ARBs

APX Finance was approved to receive 525,000 ARBs in the long-term incentive pilot program, but the oversight committee's investigation focused on the 239,714 ARBs rather than the entire award. On-chain analysis found that most of the grants were still in APX Finance's treasury address and were not transferred to the distribution contract. Investigators also identified transfer of distribution contracts after the required deadline, as well as a suspected Sybil (witch attack) cluster associated with the team's address.

Sybil activities typically involve one operator controlling multiple wallets to obtain a larger share of incentives that should be allocated to different users. The committee described APX Finance's case as a combination of unreturned funds, delayed distribution and suspected self-Sybil activities. According to the documents, investigators were unable to reach APX Finance team members for clarification or recovery. APX later merged with Astherus, and the combined platform adopted the Aster brand.

Unlike Good Entry and Limitless, if the DAO believes the project or its successor operating entity is still active, the proposed language may cover not only the founders of APX Finance, but also current team members and relevant contributors. After the merger, Aster's operations became closer to BNB Chain, and the controversial incentive allocation involved APX Finance's early participation in the Arbitrum program.

Independent vote to determine each Arbitrum ban

Each targeted project has one week from the date the governance forum issues its proposal to respond to the survey results. The committee tentatively set a deadline of September 10 for replies, but the announced timetable may change. If the explanation is not satisfactory to the committee and the relevant funds are not returned within the same period, the Arbitrum DAO will hold three independent Snapshot votes. Token holders can choose to vote for the ban, oppose it, or abstain in each case.

There are currently no projects officially banned. The committee proposed a separate vote because of the different evidence, amounts and operating status of Good Entry, Limitless and APX Finance. Snapshot voting aims to seek social consensus on the DAO without executing blockchain transactions. Because no on-chain operations are required, the approved ban will not freeze project wallets, remove deployed smart contracts, or prevent users from trading related tokens. It will disqualify affected people and projects from participating in future Arbitrum DAO plans.

Arbitrum created the Oversight Program to encourage evidence-based reporting and improve the regulation of ecosystem grants. As of September 2, the program has received 90 reports, recovered approximately 532,000 ARBs, and issued approximately 268,000 ARBs to whistleblowers as rewards. The data suggests that the number of ARBs recovered by the program exceeds the total amounts cited in the three cases mentioned above, although each investigation has its own findings and recovery status.

U.S. investors are indirectly exposed to risk through Robinhood

For U.S. investors, the proposed ban has no clear trading restrictions or access changes. Its more direct relevance lies in how Arbitrum DAO controls treasury plans and infrastructure associated with companies serving the U.S. market.

Nasdaq-listed Robinhood uses Arbitrum's Orbit software to build the Robinhood Chain. According to reports, chains covered by the Arbitrum expansion plan will return 10% of net agreement revenue to the ecosystem, 8% of which goes to the DAO treasury and 2% to fund the Arbitrum Developers Guild. Robinhood Chain has accumulated revenue of more than $2 million since its launch on July 1, and approximately $200,000 has been sent to the Arbitrum ecosystem under the arrangement. This revenue link gives listed company shareholders an indirect reason to focus on how Arbitrum DAO manages treasury funds and handles suspected violations.

DAO governance may also raise legal issues for U.S. participants. Recent DAO governance notes note that the Commodity Futures Trading Commission's (CFTC) Ooki DAO case established that in certain circumstances, governance participants may be held legally responsible for the actions of the DAO. The pending Arbitrum measures differ in scope because they seek to implement eligibility restrictions through off-chain voting. The proposal does not announce a transfer of cases to the CFTC, the Securities and Exchange Commission (SEC), the Justice Department or any other U.S. authority.