US secures conviction in historic dark web encryption fraud case
A man who once held more than $3 billion in bitcoin obtained from the infamous Silk Road marketplace has pleaded guilty to wire fraud and was ordered to forfeit his crypto assets, the US Department of Justice said Monday.
James Zhong’s actions date back to September 2012 when he illegally obtained over 50,000 bitcoins from the now infamous dark web site that accepted the cryptocurrency in exchange for drugs and other illegal items.
The announcement is the latest indication that law enforcement agencies are becoming more sophisticated in cracking down on illegal activity in a crypto industry that has grown significantly since the Silk Road market was shut down in 2013.
Founder Ross Ulbricht, who went by the name “Dread Pirate Roberts,” was sentenced to life in prison in 2015, and the court designated all bitcoin passing through Silk Road’s payment system as having been laundered.
“For nearly ten years, the whereabouts of this huge chunk of missing bitcoin had turned into a $3.3 billion-plus mystery,” said U.S. Attorney for the Southern District of New York, Damian Williams.
“Thanks to state-of-the-art cryptocurrency tracking and good old fashioned police work, law enforcement found and recovered this impressive cache of crime proceeds.”
The bitcoin obtained by Zhong, 32, in 2012 came before the crypto industry experienced any kind of significant bull run. Although by the end of November 2021, the price of Zhong’s illegal holdings had risen to approximately $3.3 billion, and despite this year’s collapse in the crypto market, it is worth over $1 billion in today’s prices.
According to the Justice Department, Zhong executed a multi-step scheme to defraud Silk Road, including the creation of approximately nine Silk Road accounts in an attempt to conceal his identity, and transferring bitcoin to separate addresses under his control to prevent detection and obscure the source of funds.
According to a search warrant, IRS agents recovered bitcoin from Zhong’s house in Gainesville, Georgia, some of which was stored on a simple computer hidden in a popcorn box and in a safe under the floorboards.
In addition to the stolen bitcoin, police recovered over $660,000 in cash.
Zhong pleaded guilty on Friday the 4th. November before US District Judge Paul Gardephe, and is expected to be sentenced in February of next year.
Michael Bachner, a lawyer for Zhong, pointed out that he was convicted of transactions that occurred “over 10 years ago when [Zhong] was only 22 years old”.
“Mr Zhong returned virtually all of the bitcoins he improperly obtained,” Bachner added.
“Ironically, given the rise in bitcoin value over the past decade, the value of the bitcoin he returned exponentially exceeded the value of the bitcoin he took.”
