Saturday, November 26, 2022
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Feds Seize Over $1 Billion in Crypto Originally Stolen from Dark Web Drug Marketplace Silk Road

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The largest amount of illicit funds ever recovered by federal law enforcement came in the form of bitcoin on a disconnected drive stuffed at the bottom of one Georgia man’s linen closet.

Federal prosecutors announced Monday they had recovered $1.074 billion in bitcoin kept hidden by a Georgia man for just under a decade. The man in question, James Zhong from Gainesville, Georgia, allegedly pulled off a massive heist from the dark web drug marketplace Silk Road back in 2012 but kept the over 50,000 bitcoin in the most awkward place imaginable, on a small computer in a “popcorn tin” under some blankets in his bathroom closet safe. At the time the feds seized the crypto in 2021, it was worth close to $3.36 billion.

The U.S. Attorney’s office said that back in September of 2012, when Silk Road was still going strong as the premiere way to purchase drugs anonymously online, Zhong hatched a scheme to steal what was, at the time, a few hundred thousand dollars in crypto. Prosecutors wrote the then-fraudster created nine fake accounts and filled them with between 200 and 2,000 bitcoin, then blasted the Silk Road system with over 140 transactions in less than a second that caused it to release 51,680 bitcoin, which Zhong then sent to other bitcoin wallets he controlled. According to court documents, he then ran some of that crypto through a crypto mixer to conceal where it came from.

Tyler Hatcher, a special agent with the Internal Revenue Service’s criminal investigation arm, said in the release that Zhong “attempted to hide his spoils through a series of complex transactions which he hoped would be enhanced as he hid behind the mystery of the ‘darknet.’” U.S. Attorney Damian Williams said they used “cryptocurrency tracing and good old fashioned police work” to find the funds that remained hidden for nearly a decade. While they do not go into the specifics on how they conducted the investigation, there have been other investigations that have managed to trail these supposedly “anonymous” crypto transactions through wallet transfers and user activity tracking.

Prosecutors charged Zhong with wire fraud, and the man pleaded guilty on Nov. 4. He was released on a $310,000 bail that same day, according to court documents. In addition to all the digital assets seized by federal law enforcement, authorities also took around $661,900 in cash and some silver and gold bars from his safe. Zhong was also forced to divest from some interest he held in a real estate company.

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Of course, back then, bitcoin was still in its relatively nascent stages. The price of the world’s most popular cryptocurrency hovered around $10 to $11 and closed at $13.45 at the end of that year. It means his robbery was only a modest $500,000 in bitcoin that he apparently never offloaded. Since the price of bitcoin ballooned in recent years, and even with the ongoing crypto winter, that few hundred thousand has turned into billions. One other early bitcoin investor, James Howells from the UK, has repeatedly tried to recover lost bitcoin from a landfill he mined back in the early crypto days that is worth big bucks in today’s market.

The charges of wire fraud could mean up to 20 years in prison, though Zhong’s sentencing isn’t until February. Zhong’s attorney, Michael Bachner of New York law firm Bachner and Associates, told Gizmodo in an email statement “Mr. Zhong is extremely remorseful for his conduct that occurred over 10 years ago when he was just 22 years old. Mr. Zhong returned virtually all of the bitcoin he improperly acquired. Ironically, given the increase in bitcoin value over the last decade, the value of the bitcoin he returned exponentially exceeded the value of the bitcoin he took.”

Feds said they executed a search warrant on Zhong’s home on Nov. 9 last year where they found a single board computer disconnected from the internet in an underground floor safe “submerged under blankets in a popcorn tin stored in a bathroom closet.” Though he kept the bitcoin in his personal wallets, when bitcoin executed a hard fork in 2017, which established the new bitcoin as well as Bitcoin Cash, Zhong received an identical amount of the new cryptocurrency, which counted among feds’ total take of crypto assets. According to the release, Zhong surrendered little more than 1,000 bitcoin that he had access to.

As noted by the U.S. Attorney’s Office in the court documents, because Silk Road founder Ross Ulbricht was convicted of operating the drug selling operation in 2015, the federal government is making the motion that Zhong’s bitcoin is open to seizure after being involved in Ulbricht’s money laundering charge. Though drug dealing with crypto was hit hard thanks to the loss of Silk Road, there are other, smaller dark web operations as well as larger schemes still trying to make money off anonymous transactions.

Other crypto heists as of late have targeted DeFi projects and cross chain bridges, often squirreling away thousands or millions of dollars in the process, making Zhong’s original 2012 heist look like lemonade stand robbery in comparison, at least when the fraud was originally completed.

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