IRS Seizes $3.36B Crypto Hoard Originally Stolen From Dark Web Drug Market

On November 7, 2022, the US Department of Justice (DOJ) announced that the Internal Revenue Service (IRS) had seized over 50,676 illegally obtained Bitcoins from defendant James Zhong. According to the press release, the defendant pleaded guilty to wire fraud in September 2012 when he stole over 50,000 Bitcoins from Silk Road’s dark web marketplace. The charge carries a maximum penalty of 20 years in prison.

The plea comes nearly a year after police seized the crypto from Zhong’s home. According to court documents, officials found Bitcoin in an underground safe and on a single desktop computer hidden in a bathroom cabinet under blankets in a popcorn box. During the search, officials also found $661,900 in cash and 25 Casascius coins (physical Bitcoin) worth approximately 174 bitcoin.

Valued at over $3.36 billion, the stolen crypto marks America’s second largest financial seizure to date. The largest was a February 2022 seizure of $3.6 billion worth of stolen Bitcoin.

Dark Web Drug Market Scam

Appearing on the Dark Web in 2011, Silk Road was an online black market where users could buy and sell illegal drugs anonymously. In 2012, the defendant attempted to defraud Silk Road of the money and property by creating a series of fake accounts and triggering over 140 transactions in quick succession to trick the marketplace’s withdrawal processing system. After releasing approximately 50,000 Bitcoins into Zhong’s accounts, the defendant transferred it to a number of separate addresses that he controlled to obscure the source of the funds and launder the proceeds.

Silk Road’s creator and operator was busted by the FBI in 2013, and was convicted of seven felonies in 2015, including conspiracy to commit money laundering, and sentenced to life in prison.

Digital Assets Development Framework

Pursuant to Executive Order (EO) 14067, effective March 2022, the DOJ issued a report to the White House on the role of law enforcement in detecting, investigating, and prosecuting criminal activity related to digital assets. In part three of the report, the DOJ called for an expansion of the federal government’s ability to seize and retain cryptocurrency. Several updates to the existing law were proposed, including:

• Amendments to the Commodities Exchange Act (CEA) to provide criminal and civil forfeiture powers for commodity-related violations, such as securities and commodity fraud
• Lifting the monetary limit for administrative confiscation of cryptocurrency, which is currently limited to $500,000
• Amending United States Sentencing Commission (USSC) §2S1.3 to more accurately reflect the seriousness of Bank Secrecy Act (BSA) violations that facilitate money laundering and other illegal activity

The evolution of cryptocrime

According to blockchain analysis firm Chainalysis, hackers have stolen more than $3 billion in crypto so far this yearand broke the previous record of $2.1 billion set in 2021. While hackers previously focused on attacking crypto exchanges, cross-chain bridges are increasingly being targeted as exchanges have tightened security.

In May 2022, blockchain analytics firm Elliptic reported that more than $4 billion in illegal crypto had been laundered through cross-chain bridges, DEXs, and coin exchanges. In particular, Elliptic identified RenBridge, where criminals have laundered over $540 million in illegal crypto assets.

To stay ahead of cryptocrime trends, compliance teams should ensure their blockchain analytics solution works in real-time to receive risk insights into cryptoassets that provide increased visibility and faster response times.

Originally published November 11, 2022, updated November 11, 2022