On 7th November, 2022, the Department of Justice (DOJ) announced that over $3.36 billion worth of Bitcoin affiliated with the darknet marketplace ‘Silk Road’ was seized by law enforcement in November 2021.
The Department stated that James Zhong from Georgia pled guilty to committing wire fraud in September 2012 when he unlawfully obtained over 50,000 Bitcoins from the darknet marketplace.
The Wire Fraud statute makes it illegal for anyone to use, or cause the use of wire, radio, television communication or any physical or electronic mail system in foreign or interstate commerce for the purposes of executing a scheme to defraud or to obtain money by false or fraudulent pretenses. Wire fraud is punishable by up to 20 years in prison and can result in a fine of up to $250,000.
On November 9, 2021, the law enforcement seized approximately 50,676 Bitcoins, then valued at over $3.36 billion. This is the second largest cryptocurrency seizure by the Department of Justice till date following the largest seizure of 3.6 billion in stolen crypto linked to the Bitfinex hack in 2016.
U.S. Attorney Damian Williams said: “James Zhong committed wire fraud over a decade ago when he stole approximately 50,000 Bitcoin from Silk Road. For almost ten years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3 billion mystery. Thanks to state-of-the-art cryptocurrency tracing and good old-fashioned police work, law enforcement located and recovered this impressive cache of crime proceeds. This case shows that we won’t stop following the money, no matter how expertly hidden, even to a circuit board in the bottom of a popcorn tin.”
In operation between 2011 and 2013, Silk Road was an online black market used for carrying various illicit activities including drug dealing and distributing massive quantities of illegal goods and services. It was operated as a Tor hidden service, that users could browse anonymously surpassing any potential monitoring by authorities.
In October 2013, the Federal Bureau of Investigations (FBI) shut down the website and arrested Ross Ulbricht, the site's pseudonymous founder. Ulbricht was convicted of seven charges related to Silk Road and was sentenced to life imprisonment without any possibility of parole. In November 2020, the U.S. government seized more than $1 billion worth of Bitcoin related to Silk Road.
In September 2012, James Zhong executed a scheme to launder the illegally acquired assets from the darknet marketplace by:
Zhong was able to steal the funds from Silk Road by exploiting a vulnerability in the website’s payment system. To orchestrate this, he created fraud accounts by providing the minimum information required for creating an account on Silk Road.
Zhong funded the fraud accounts with initial deposits of 200 to 2000 Bitcoins. After the initial deposits, Zhong quickly executed a series of withdrawals. Through this, Zhong was able to withdraw more Bitcoins than he had deposited into the protocol. For instance, on September 19, 2012, Zhong deposited 500 Bitcoins into a Silk Road wallet. Less than five seconds after making the initial deposit, Zhong carried out five withdrawals of 500 Bitcoins within the same second resulting in a net gain of 2000 Bitcoins. Zhong was able to exploit the functionality of Silk Road’s withdrawal function to gain a net positive amount of BTC instead of receiving the exact deposited amount.
While executing the September 2012 fraud, Zhong did not list any goods or services for sale on Silk Road, nor did he buy any goods or services on Silk Road.
As another example, a different fraud account made a single deposit and withdrew 50 Bitcoins before the account ceased its activity. Zhong moved these Bitcoins out of Silk Road and consolidated them into two high-value accounts.
In August 2017, nearly 5 years after the fraud, Zhong received a matching amount of 50,000 Bitcoin Cash on top of the 50,000 Bitcoins. In a hard fork coin split, Bitcoin split into two cryptocurrencies, the traditional Bitcoin and Bitcoin Cash(BCH). As a result of this split, every address that held some amount of Bitcoin, now had the exact same balance on the Bitcoin as well as the Bitcoin Cash blockchain. Thus, as of August 2017, Zhong possessed 50,000 BTC and 50,000 BCH.
Zhong then exchanged the BCH for additional Bitcoins, amounting to approximately 3,500 Bitcoins. Collectively, by the last quarter of 2017, Zhong possessed approximately 53,500 Bitcoins of total crime proceeds.
In connection with ZHONG’s guilty plea, on November 4, 2022, the authorities forfeited Zhong’s interest in the following property:
With criminals becoming highly skilled at obfuscating trails of their illegally acquired assets, on-chain security is becoming more and more crucial with every passing day. To stay a step ahead of bad actors, law enforcement officials and compliance professionals can leverage sophisticated blockchain tracing tools. Investigators can take help from various on-chain analytics technologies to catch cyber criminals.
Merkle Science is a next-generation Web3 risk mitigation, compliance, and forensics platform. The firm works with crypto and DeFi businesses, blockchain bridges, NFT players, retailers, financial institutions, insurers, and government agencies around the globe. Merkle Science’s focus on multi-chain and liquidity pool analysis, real-time transaction monitoring, and predictive machine learning-driven analytics provides its clients with best-in-class compliance solutions, thereby enabling Web3’s safe and healthy growth.