The US gets $215 million in the sale of seized Silk Road Bitcoin

PayPal adds the ability to buy/sell and use crypto, the cost of Bitcoin spikes

A sale of 9,800 seized bitcoins has netted the US government $215 million.

The sale was completed last month. It was a small number of the roughly 50,000 bitcoins the government seized from James Zhong, a Georgia man, in 2021. Federal prosecutors announced in November 2022 that Zhong had pleaded guilty to wire fraud in obtaining the bitcoin a decade earlier from Silk Road, a dark web marketplace that shut down in 2014.

The sale brought in nearly $22,000 on a per-coin basis.

How Zhong got the goods

According to the press release released by the US Department of Justice following Zhong’s guilty plea, the original theft and subsequent recovery of the bitcoin played out as a high-tech hijacking.

The government says Zhong defrauded Silk Road of the money and property by creating a series of accounts designed to hide his identity, then launching a series of 140 quick-trigger transactions that tricked Silk Road’s withdrawal processor and released more than 50,000 bitcoins into his accounts.

He funded these accounts with an initial deposit of 200 to 2000 bitcoin.

Silk Road was hardly innocent, a haven for drug trafficking and illegal goods and services and money laundering. In 2015, after international authorities shut down Silk Road, founder Ross Ulbricht was convicted on seven charges – including drug trafficking, criminal enterprise, aiding and abetting the distribution of drugs over the internet, computer hacking and money laundering – and was sentenced to life in prison.

As an example of Zhong’s scheme, prosecutors released a series of actions he took on September 19, 2012:

• First, he deposited 500 bitcoins into a Silk Road wallet.
• Less than five seconds later, he made five withdrawals of 500 bitcoin in quick succession – all in a single second – and walked away with 2,000 bitcoin.

How the government got Zhong

On Nov. 9, 2021, IRS criminal investigation agents searched Zhong’s Gainesville, Ga., home and found 50,491 06251844 of the approximately 53,500 proceeds of bitcoin crime they sought.

According to the Justice Department’s November 2022 release, the bitcoin was found in an underground safe and “on a single desk computer that was submerged under blankets in a popcorn box stored in a bedroom closet.”

US Attorney Damian Williams of the Southern District of New York emphasized the latter details in announcing Zhong’s guilty plea: “This case shows that we will not stop following the money, no matter how skillfully hidden, even to a circuit board at the bottom of a popcorn box.”

Follow the money

At the time of the seizure of Zhong’s ill-gotten bitcoin, the government pegged the value of the cryptocurrency at $3.36 billion. That’s about $66,000 per coin, slightly below the reported value for the day. The sale in March represents a small part of what the government will eventually liquidate from the seizure.

As mentioned above, 9,800 bitcoins come to $215 million at roughly $22,000 per coin.

Late Thursday, the bitcoin price was around $30,600.

Someone is profiting from that investment. Neither Ulbricht nor Zhong, but someone.

Context matters

Javelin Strategy & Research analyst Joel Hugentobler said it’s important to look past the flashy headlines to what’s really going on with bitcoin.

“The Bitcoin network has reached a milestone in Q1 2023, settling $100 trillion worth of transactions worldwide since its inception in 2009,” he said. “According to Chainalysis’ data, less than 1% of all crypto transactions are linked to illegal activities.”

He said there is also a call to harness the technological advantages of crypto transactions to further thwart illegal activity.

“Fiat cash has been the method used for illegal activities for decades,” Hugentobler said. “The kicker here is that transactions on the blockchain can be screened for those types of transactions while cash cannot.”