Federal prosecutors have recovered $3.36 billion in bitcoin stolen a decade ago from Silk Road, the dark web marketplace responsible for distributing large quantities of illegal drugs and other illegal goods and services to people around the world.
Last November, federal agents executing a search warrant at the then-defendant’s home in Gainesville, Georgia, seized just over 50,491 bitcoins stashed in a basement safe and a “single-board computer” buried under a blanket. On Monday, the Department of Justice said the popcorn tin was stored in a bathroom cabinet. During the same search, agents found $661,900 in cash, 25 Casascius coins (physical bitcoins) worth approximately 174 bitcoins, 11.1160005300044 additional bitcoins, and four one-ounce silver bars, three one-ounce gold bars. 10 oz silver bullion and one gold coin.
A $3.3 billion mystery
At the time, the operation was the largest cryptocurrency seizure in the history of the US Department of Justice, and today it remains the department’s second-largest financial seizure, behind the $3.6 billion seized by prosecutors from a couple accused of money laundering earlier this year.
$3.36 billion belonged to 32-year-old James Zhong from Gainesville and Athens, Georgia. On Friday, Zhong pleaded guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison.
“James Zhong committed wire fraud ten years ago by stealing approximately 50,000 bitcoins from Silk Road,” U.S. Attorney Damian Williams for the Southern District of New York said in a statement Monday. “For nearly 10 years, the whereabouts of this large chunk of missing bitcoin has been a mystery, over $3.3 billion. Thanks to state-of-the-art crypto mining and good old-fashioned police work, law enforcement has located and recovered this impressive stash of criminal proceeds.”
Prosecutors said Zhong ran an elaborate scheme to defraud Silk Road of about $650,000 worth of bitcoin in September 2012, based on the cryptocurrency’s value when the fraud occurred. Prosecutors said Zhong created about nine Silk Road accounts. and funded them with an initial deposit of 200 to 2000 bitcoins. Zhong then triggered 140 transactions in quick succession to trick the Silk Road mining-processing system into releasing 50,000 bitcoins into the accounts.
“For example, on September 19, 2012, Zhong deposited 500 bitcoins into a Silk Road wallet,” prosecutors said. “Less than five seconds after making the initial deposit, Zhong made five consecutive withdrawals of 500 bitcoins — that is, within the same second — resulting in a net profit of 2,000 bitcoins.”
One of Zhong’s other fraudulent accounts made one deposit and over 50 withdrawals before the account became inactive. Within days of the transactions, Zhong removed bitcoin from Silk Road and merged them into two high-value sums.
In August 2017, when bitcoin implemented a hard fork coin split, Zhong’s 50,000 bitcoin windfall received a matching amount of bitcoin cash. Zhong used an overseas exchange to convert his bitcoin cash into about 3,500 bitcoins, bringing his total value to about 53,500 bitcoins.
Beginning earlier this year, Zhong began voluntarily handing over just over 1,004 bitcoins to federal authorities.
The Silk Road was operational from 2011-2013 and was used to trade illegal goods around the world. The founder of the platform, Ross Ulbricht, was sentenced to life imprisonment in 2015.
IRS Criminal Investigation Special Agent Tyler Hatcher said that after Zhong completed the heist, he tried to hide his loot through a series of sophisticated operations that he hoped would be enhanced by the secrecy of the ‘dark web’. in reality, the bitcoin blockchain provides a history of every transaction that forensic investigators can use to trace stolen coins even as they pass through containers and other means designed to conceal their origin.
However, even cryptocurrencies with stronger privacy guarantees are not automatically safe from government seizures. Some of the $3.6 billion recovered in March, for example, was in the form of monero, a cryptocurrency designed to hide the traces of funds on its blockchain by confusing the payments of many users. Using methods that are still unclear, the IRS was able to recover the monero funds anyway.
Zhong is scheduled to be sentenced on February 22, 2023.