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US Seize $54million in Cryptocurrency Traceable to Darknet Narcotics Scheme

Operation Skin Deep
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In possibly one of the greatest busts of 2023, the U.S. Attorney’s Office has recovered an additional $54 million in cryptocurrency, including 30,000 Ethereum, linked to a Darknet Market vendor group from New Jersey. The scheme’s leader has been apprehended after attempting to move the funds out of the United States, allowing LE to seize all his crypto holdings. This case highlights law enforcement’s determination to track and hold criminals accountable in the realm of both Darknet Market usage and cryptocurrency fraud.

A Multi-Million Darknet Vendor

According to a recent report, the U.S. The Attorney’s Office filed a forfeiture action to recover more than $54 million in cryptocurrency, including 30,000 ETH, previously seized from the proceeds of an illegal narcotics distribution scheme operating in New Jersey. The seizure forms part of an ongoing civil forfeiture action against illicit activities funded through cryptocurrency.

“The civil action we are taking today seeks to recover millions of dollars of cryptocurrency, which the defendant allegedly obtained from drug sales. Whether it’s as simple as bags of cash or as sophisticated as cryptocurrency, we will take the steps necessary to seize financial gains defendants obtain from criminal activity.”

U.S. Attorney Phillip R. Sellinger said,

The U.S. Department of Justice announced on Thursday that federal law enforcement agents seized 30,000 ETH, valued at $54 million. The funds were allegedly linked to the illegal distribution of narcotics in New Jersey through the use of Darknet Markets.

Darknet Vendor Christpher Castelluzzo

Sellinger confirmed in a statement that the digital assets were traced back to an individual named Christopher Castelluzzo, a notorious drug ring leader based in New Jersey. Christopher Castelluzzo and 11 other conspirators ran a narcotics distribution scheme from 2010 to 2015. 

The group allegedly distributed a wide range of narcotics, such as cocaine, designer drugs, and methylone from China. Although they initially ran their operation in street drugs, in 2013, Castelluzzo and his crew searched for new distribution avenues.

The narcotics distribution group wanted a way to stay out of sight and moved part of their operation to the darknet. Castelluzzo and his partners began to market and distribute various narcotics on the dark web.

The narcotics group operated through popular darknet marketplaces such as Blue Sky and Silk Road. Customers exchanged Bitcoin for narcotics and received their products through the mail.

Purchasing 30,000 ETH

By 2014, Castelluzo purchased 30,000 ETH during Ethereum’s Initial Coin Offering. He bought the ETH using 15 Bitcoin, which he obtained through the sale of narcotics in his illegal operations.

At the time, Ethereum was only worth around $9,000. Since then, the price surge of ETH sent the value of 30,000 coins to approximately $54 million. In addition, Castelluzzo also received an additional amount of 30,000 ETH Classic in 2016.

Castelluzzo bought ETH Classic to acquire various other cryptocurrencies in an attempt to launder his profits. In 2015, Castelluzzo and 11 conspirators were indicted in an investigation by the Division of Criminal Justice called “Operation Skin Deep.”

The investigation targeted the illicit sale of narcotics on dark web marketplaces. Criminals use dark web marketplaces to avoid detection from law enforcement agents for distributing and purchasing illicit goods. 

After Castelluzzo’s arrest, he received a 21-year prison sentence, with 18 years of parole ineligibility. Castelluzzo’s managing partner, Luke Atwell, received a 19-year sentence in prison. Both parties pleaded guilty to a first-degree charge of leader of a narcotics trafficking network.

Done And Busted

Castelluzzo, leader of the darknet drug scheme, originally converted his Bitcoin earnings into 30,000 Ether. His holdings, which included 30,000 ETH classics, were part of a broader strategy to disburse the illicit funds amongst cryptocurrencies.

Despite this, Castelluzzo strategized to liquidate his holdings, evade taxes, and move 30,000 Ethereum outside the United States. In 2021, U.S. authorities were alerted to his plan through recorded prison telephone calls.

In prison conversations, Castelluzzo and his conspirators discussed the merits of offshore accounts for their crypto fortunes. Destinations such as Latin America, Ireland, and Malta emerged. Castelluzzo stated, “The Bahamas would be awesome.”

Federal law enforcement agents intervened, seizing all of Castelluzo’s crypto holdings. 

Earlier this year, Castelluzo reportedly wrote a letter to the New Jersey Attorney General’s Office stating that “He sold millions of dollars worth of drugs every single week for almost four years and that he believed that what started as 9,000 ethers initially invested developed into over $53 million.”

Law enforcement agents acted on the information and uncovered the narcotic groups’ crypto wallets before the funds left the country. The crypto wallets of the group contained various cryptocurrencies, including Solana (SOL), Cardona (ADA), and Bitcoin. 

U.S. Attorney Philip R. Sellinger emphasized that civil forfeiture action seeks to recover millions of dollars in cryptocurrency emanating from the sale of narcotics.

The U.S. Attorney’s General’s Office linked the various cryptocurrencies to the initial drug trafficking. Bad actors and criminals on the dark web are paid in cryptocurrency to avoid detection from law enforcement agents. These illicit funds are then converted into other cryptocurrencies to obfuscate the origins of funds.   

FBI Newark Special Agent James E. Dennehy, who oversees the entire case, said, “Many criminals use cryptocurrency on the darknet to operate away from the prying eyes of law enforcement.” His views spoke to the increase in criminal activities on the dark web and the link between cryptocurrencies.

“Our forfeiture action of $54 million should serve as a lesson to those who mistakenly believe we can’t trace their illicit behavior or their ill-gotten proceeds.”

He later committed to hold dark web criminals responsible in the open, with real-world consequences.

The Attorney General’s Office of New Jersey investigative operation was a combined effort of several law enforcement agencies, including Homeland Security Investigations, FBI’s Virtual Asset Unit, and local law enforcement agents.

The Castelluzzo case illustrates law enforcement agencies’ stance on the use of cryptocurrency for illicit activities and laundering money. Cryptocurrencies are often viewed by criminals as an anonymous method of payment, compared to fiat currency. However, it doesn’t entirely shield criminals from the prosecution of law enforcement agencies.