US Announces Historic $3.36 Billion Cryptocurrency Seizure as Silk Road Bitcoin Thief Pleads Guilty
Damian Williams, the United States Attorney for the Southern District of New York, and Tyler Hatcher, the Special Agent in Charge of the Internal Revenue Service, Criminal Investigation, Los Angeles Field Office, announced that JAMES ZHONG pled guilty to committing wire fraud in September 2012 when he unlawfully obtained over 50,000 Bitcoin from the Silk Road dark web internet marketplace.
ZHONG pled guilty on Friday, November 4, 2022, before United States District Judge Paul G. Gardephe.
The DOJ explained that law enforcement conducted a search at Zhong’s house in Gainesville, Georgia, on Nov. 9, 2021, and seized approximately 50,676.17851897 bitcoin, then valued at over $3.36 billion, commenting,
“This seizure was then the largest cryptocurrency seizure in the history of the U.S. Department of Justice and today remains the department’s second-largest financial seizure ever.”
ZHONG also had about 3,500 more bitcoins from exchanging into BTC over 50,000 bitcoin cash (BCH) which he received following the bitcoin blockchain hard fork in August 2017. He used an overseas cryptocurrency exchange for the conversion.
Besides the BTC seized at his house, Zhong began voluntarily surrendering to the government additional bitcoin beginning in March this year, the DOJ revealed, adding that “in total, Zhong voluntarily surrendered 1,004.14621836 additional bitcoin.”
The government is seeking the forfeiture of “approximately 51,680.32473733 bitcoin,” the DOJ noted. At the time of writing, BTC is trading at $20,641.28, so the amount sought by the government is about $1.07 billion.
Zhong’s scheme to defraud
Silk Road was an online “darknet” black market. In operation from approximately 2011 until 2013, Silk Road was used by numerous drug dealers and other unlawful vendors to distribute massive quantities of illegal drugs and other illicit goods and services to many buyers and to launder all funds passing through it. In 2015, following a groundbreaking prosecution by this Office, Silk Road’s founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison.
In September 2012, ZHONG executed a scheme to defraud Silk Road of its money and property by (a) creating a string of approximately nine Silk Road accounts (the “Fraud Accounts”) in a manner designed to conceal his identity; (b) triggering over 140 transactions in rapid succession in order to trick Silk Road’s withdrawal-processing system into releasing approximately 50,000 Bitcoin from its Bitcoin-based payment system into ZHONG’s accounts; and (c) transferring this Bitcoin into a variety of separate addresses also under ZHONG’s control, all in a manner designed to prevent detection, conceal his identity and ownership, and obfuscate the Bitcoin’s source.
While executing the September 2012 fraud, ZHONG did not list any item or service for sale on Silk Road, nor did he buy any item or service on Silk Road. ZHONG registered the accounts by providing the bare minimum of information required by Silk Road to create the account; the Fraud Accounts were merely a conduit for ZHONG to defraud Silk Road of Bitcoin.
ZHONG funded the Fraud Accounts with an initial deposit of between 200 and 2,000 Bitcoin. After the initial deposit, ZHONG then quickly executed a series of withdrawals. Through his scheme to defraud, ZHONG was able to withdraw many times more Bitcoin out of Silk Road than he had deposited in the first instance. As an example, on September 19, 2012, ZHONG deposited 500 Bitcoin into a Silk Road wallet. Less than five seconds after making the initial deposit, ZHONG executed five withdrawals of 500 Bitcoin in rapid succession — i.e., within the same second — resulting in a net gain of 2,000 Bitcoin. As another example, a different Fraud Account made a single deposit and over 50 Bitcoin withdrawals before the account ceased its activity. ZHONG moved this Bitcoin out of Silk Road and, in a matter of days, consolidated them into two high-value amounts.
Nearly five years after ZHONG’s fraud, in August 2017, solely by virtue of ZHONG’s possession of the 50,000 Bitcoin that he unlawfully obtained from Silk Road, ZHONG received a matching amount of a related cryptocurrency — 50,000 Bitcoin Cash — on top of the 50,000 Bitcoin. In August 2017, in a hard fork coin split, Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash (BCH). When this split occurred, any Bitcoin address that had a Bitcoin balance (as ZHONG’s addresses did) now had the exact same balance on both the Bitcoin blockchain and on the Bitcoin Cash blockchain. As of August 2017, ZHONG thus possessed 50,000 BCH in addition to the 50,000 Bitcoin that ZHONG unlawfully obtained from Silk Road. ZHONG thereafter exchanged through an overseas cryptocurrency exchange all of the BCH Crime Proceeds for additional Bitcoin, amounting to approximately 3,500 Bitcoin of additional crime proceeds. Collectively, by the last quarter of 2017, ZHONG thus possessed approximately 53,500 Bitcoin of total crime proceeds.
The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge. ZHONG is scheduled to be sentenced by Judge Gardephe on February 22, 2023, at 3:00 p.m.
