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U.S. government seizes $3.36 billion in cryptocurrency from Silk Road fraud

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(Kitco News) - The United States Justice Department and the Internal Revenue Service announced on Monday that James Zhong has pleaded guilty to committing wire fraud in September 2012 when he stole over 50,000 Bitcoin worth $3.36 billion from the Silk Road dark web internet marketplace.

“James Zhong committed wire fraud over a decade ago when he stole approximately 50,000 Bitcoin from Silk Road,” U.S. Attorney Damian Williams said in a statement. “For almost ten years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3 billion mystery.”

Silk Road was an online ‘darknet’ black market, which operated from approximately 2011 until 2013. It was used to sell drugs and other illegal goods and to launder all the funds passing through it. In 2015, Silk Road’s founder Ross Ulbricht was convicted on seven drug and conspiracy counts and sentenced to life in prison.

In September 2012, Zhong created nine Silk Road accounts with an initial deposit of between 200 and 2,000 Bitcoin, and by triggering over 140 transactions in rapid succession, he was able to withdraw many times more Bitcoin out of Silk Road than he had deposited in the first instance, tricking its withdrawal-processing system into releasing over 50,000 Bitcoin. Zhong then transferred the Bitcoin into separate addresses to prevent detection, conceal his identity, and hide the origin of the Bitcoin.

Then, in August 2017, Bitcoin underwent a hard fork coin split and divided into two cryptocurrencies, traditional Bitcoin (BTC) and Bitcoin Cash (BCH). When this split occurred, Zhong received 50,000 Bitcoin Cash on top of the 50,000 Bitcoin that he had stolen from Silk Road. After converting the BCH into BTC, Zhong was left with approximately 53,500 Bitcoin in total.

On Nov. 9, 2021, federal law enforcement officers executed a search warrant of Zhong’s home in Gainesville, Georgia, where they found 50,676 Bitcoin, then valued at over $3.36 billion. This was the largest seizure of cryptocurrency in the history of the U.S. Department of Justice and remains the Department’s second-largest financial seizure ever.

IRS agents found 50,491 Bitcoin in an underground floor safe and on a single-board computer that was submerged under blankets in a popcorn tin stored in a bathroom closet. They also recovered gold and silver, other cryptocurrency, and $661,900 in cash. In March of 2022, Zhong also surrendered over 1000 additional Bitcoin.

“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,” Williams said. “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.”

On Friday, Nov. 4, 2022, Zhong pled guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison. Zhong is scheduled to be sentenced on February 22, 2023.

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