$3.36 Billion Cryptocurrency Seizure Connected to the Silk Road.

• Over 53,500 Bitcoin (Currently $3.36 Billion) were Seized, making it the most valuable Department of Justice seizure ever.
• James Zhong makes claims that the Bitcoin stolen from the Silk Road Darknet Market back in 2012
• Zhong pled guilty to atleast one count of wire fraud
• Zhong will be sentenced on February 22, 2023. Currently, the maximum sentence could be 20 years in prison.

The Silk Road Darknet Market needs no introduction. It’s been just over nine years since the FBI took down the Silk Road servers and arrested Ross Ulbricht. The website that paved the way for the modern darknet market still makes headlines: as is the case with this article. And the people who keep benefiting from it are the IRS. 

Such is the case with James Zhong. On November 7th, the US Department of Justice (DOJ) announced that a 32-year-old male had pled guilty on atleast one count of wire fraud. As Zhong worked with the feds, he forfeited a 50,000 stash of Bitcoin that he’d allegedly stolen from the Silk Road back in 2012. This makes it the making it the most valuable Department of Justice seizure ever. 

According to the U.S. Attorneys Press Release, Zhong stored his stash of Bitcoin on a circuit board that was hidden in a safe under the floorboards of his bathroom closet! In his hidden stash, he also had $661,900 in cash, 25 Casascius coins (physical Bitcoin), four silver bars (one ounce each), three gold bars (one ounce each), and one gold coin. 

How did Zhong Aquire the Stolen Bitcoin?

Although Ross Ulbricht was the man who brought darknet markets into fashion, he didn’t do a great job in his website coding. First of all, the Americans failed to follow basic OpSec rules, and then it’s come out over the last few years that the website had multiple flaws. 

Just two years ago, the IRS captured Individual X, who held just under 70,000 Bitcoins (worth about $1 billion at the time). This individual hacked the Silk Road and removed a few thousand Bitcoin at a time while Ulbricht had control of it. It’s unclear whether Ulbricht knew of Individual X stealing Silk Road funds, but he was powerless to stop him. 

Zhong is now the second Silk Road hacker to turn over more than a billion dollars stolen from the Silk Roads website. According to the DOJ’s report, in 2012, Zhong found and exploited a vulnerability in the dark web marketplace’s website.  The exploit allowed Zhong to deposit Bitcoin, then withdraw more funds than he’d deposited. 

In an attempt to hide his dealings, Zhong would register multiple accounts with random names (such as “thetormentor”) Essentially, the exploit allowed Zhong to withdraw the Bitcoin from his account. Then he’d send a “rapid-fire” command to the website. The website would believe all his requests were legit, and he’d receive his initial request several times over before the website registered the issue. 

As special agent, Trevor McAleenan from the IRS-IC explains,

[Using this exploit Zhong], moved at least approximately 50,000 Bitcoin [Over 140 transactions] out of Silk Road in just a few days.” At the time of the exploit, the Bitcoin was worth about $675,000 at the time. 

Trevor McAleenan from the IRS-IC

Zhong claims that he never sold or bought anything off of the website at any point, which seems unlikely. 

When Silk Road went down, Zhong understood that his stolen Bitcoins would likely be traced back to him. Out of fear, he chose to hide the Bitcoin until he figured out a safe way out. Perhaps he did not trust a website such as Tornado Cash or Chipmixer to do the job. Which left Zhong sitting on over $3 billion dollars that he couldn’t use. 

Acquired Assets

In total, Zhong has forfeited the following assets to the IRS. 

• 80% of the interest in RE&D Investments, with substantial real estate holdings;
• $661,900 in cold cash
• 25 Casascius coins (physical Bitcoin)
• Valuable metals including four Silver bars (one ounce each), three gold bars (one ounce each), and one gold coin. 
• 53,500 Bitcoin

It wasn’t until November 9th, 2021, that the IRS launched an investigation into Zhong. They requested authorization to search the premises of his house in Gainesville, Georgia. 

Since his arrest, Zhong has worked with the IRS to provide the rest of his hidden Bitcoin and pled guilty to in his court case. As the 32-year-old has pled guilty to one count of wire fraud, he could face a maximum sentence of 20 years in prison. However, as he’s worked with the IRS since his capture, that will likely drop to about nine years in prison. 

IRS Criminal Investigations Unit Does it Again.

2022 has been a big year for the IRS. Just a year ago, the IRS released a report claiming that their Cyber Crime Unit (CCU) had Seized a total of $3.5 billion dollars in cryptocurrencies. Over $1 billion in total from the Silk Road.)

Then, earlier this year, the IRS arrested a couple from New York for running a crypto laundering service. Over  $3.6 billion of stolen cryptocurrency was recovered by the IRS. Including the laundering couple and Zhong’s funds. Meaning the funds the IRS has claimed have more than tripled in 2022 alone.

In addition, the darknet has suffered big time as they’ve shut down multiple marketplaces, and dark web services such as “Tornado Cash” have been slowed down drastically. Note: The app still works, the website is now down.)

In an interview with US Attorney Damian Williams, he explained that

“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. [Zhongs] 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.”

US Attorney Damian Williams