Federal prosecutors have recovered $3.36 billion in bitcoin stolen a decade ago from Silk Road, the dark web bazaar responsible for distributing vast amounts of illegal drugs and other illicit goods and services to people around the world.
Last November, federal agents executing a search warrant at a then-defendant’s house in Gainesville, Georgia, seized a little more than 50,491 bitcoins that were kept in an underground safe and on a “desktop computer” that was submerged under blankets in a popcorn box stored in a bathroom cabinet, the Justice Department said Monday. During the same search, agents recovered $661,900 in cash, 25 Casascius coins (physical bitcoin) with an approximate value of 174 bitcoin, 11.1160005300044 additional bitcoin and four one-ounce silver bars, three one-ounce gold bars, four 10-ounce silver bars and a gold-colored coin.
A $3.3 billion mystery
At the time, the seizure was the largest cryptocurrency seizure in US Justice Department history, and today remains the department’s second-largest financial seizure ever, behind a $3.6 billion seizure that prosecutors made earlier this year from a married couple charged with money laundering.
The $3.36 billion belonged to James Zhong, 32, of Gainesville and Athens, Georgia. On Friday, Zhong pleaded guilty to one count of wire fraud, a felony that carries a maximum sentence of 20 years in prison.
“James Zhong committed wire fraud over a decade ago when he stole approximately 50,000 bitcoins from Silk Road,” Damian Williams, U.S. Attorney for the Southern District of New York, said in Monday’s release. “For nearly 10 years, the whereabouts of this huge chunk of missing bitcoin had become a mystery worth over $3.3 billion. Thanks to state-of-the-art cryptocurrency tracking and good old-fashioned policing, law enforcement found and recovered this impressive cache of proceeds of crime.”
Prosecutors said Zhong carried out a sophisticated scheme to defraud Silk Road of approximately $650,000 worth of bitcoins, based on the value of the cryptocurrency when the fraud took place in September 2012. To carry out the scheme, prosecutors said Zhong created about nine Silk Roads accounts and funded them with an initial deposit of 200 to 2,000 bitcoin. Zhong then triggered 140 transactions in quick succession to trick the Silk Road withdrawal processing system into releasing around 50,000 bitcoins into the accounts.
“As an example, on September 19, 2012, Zhong deposited 500 bitcoins into a Silk Road wallet,” prosecutors said. “Less than five seconds after the first deposit, Zhong made five withdrawals of 500 bitcoins in quick succession – i.e. within the same second – resulting in a net profit of 2,000 bitcoins.”
One of Zhong’s other fraudulent accounts made a single deposit and more than 50 withdrawals before the account stopped its activity. Within days of the transactions, Zhong moved the bitcoin out of Silk Road and consolidated them into two high-value amounts.
When bitcoin performed a hard fork coin split in August 2017, Zhong’s 50,000 bitcoin windfall received a corresponding number of bitcoin cash coins. Zhong used a foreign exchange to convert the bitcoin cash into approximately 3,500 bitcoin, bringing his total spending to approximately 53,500 bitcoin.
Starting earlier this year, Zhong began voluntarily surrendering a little more than 1,004 bitcoins to federal authorities.
Silk Road operated from 2011 to 2013 and was used to trade illegal goods worldwide. The platform’s founder, Ross Ulbricht, was sentenced to life imprisonment in 2015.
IRS Special Agent in Charge of Criminal Investigation Tyler Hatcher said that once Zhong completed the robbery, “he attempted to conceal his loot through a series of complex transactions that he hoped would be enhanced as he hid behind the mystery of the ‘dark web.'” in reality, the bitcoin blockchain provides a history of each transaction that forensic investigators can use to track stolen coins even as they pass through tumblers and other tools designed to hide their origin.
However, even cryptocurrencies with stronger privacy insurance are not automatically protected from public seizure. For example, some of the $3.6 billion recovered in March was in the form of monero, a cryptocurrency designed to hide the traces of funds on the blockchain by mixing the payments of multiple users. Using techniques that are still not clear, the IRS was able to recover the monero funds anyway.
Zhong is scheduled to be sentenced on February 22, 2023.
