US justice department seizes $3.4bn worth of Bitcoin after man pleads guilty to fraud

The US Department of Justice on Monday announced that it seized $3.36 billion worth of Bitcoin — the world’s biggest cryptocurrency — from a man who unlawfully obtained more than 50,000 digital currencies from the Silk Road dark web internet marketplace more than a decade ago.

The US attorney for the Southern District of New York said that James Zhong, 32, of Gainesville, Georgia, pleaded guilty on November 4 to the wire fraud.

In November last year, the DoJ seized more than 50,676 Bitcoin hidden in devices in Mr Zhong’s home.

He could face a maximum sentence of 20 years in prison.

This seizure was, at the time, the largest cryptocurrency haul by the DoJ and today it is second largest such haul, the agency said in a statement.

“For almost 10 years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3bn mystery,” US attorney Damian Williams said.

“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. 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,” he said.

In addition, the agency recovered $661,900 in cash, 25 Casascius coins (with an approximate value of 174 Bitcoin), more than 11 additional Bitcoin, and nearly 11 silver- and gold-coloured bars.

“Mr Zhong executed a sophisticated scheme designed to steal Bitcoin from the notorious Silk Road marketplace,” said Tyler Hatcher, special agent in charge of the Internal Revenue Service criminal investigation at the Los Angeles field office.

“Once he was successful in his robbery, he 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 dark net.”

Digital currencies have rapidly become popular over the past few years, especially in Asian and Middle East markets.

Bitcoin plunged from a record high of about $68,000 last year to trade at about $20,687.10 on Monday, while the sector’s market capitalisation has fallen below $1 trillion.

The sector's rollercoaster ride is far from over, dragged down by this year’s equity bear market, global economic uncertainty, higher interest rates and a sharp rise in the cost of living around the world, analysts said.

What is Silk Road?

Silk Road was an online dark net black market. From 2011 until 2013, it was used by drug dealers and other unlawful individuals to distribute drugs and other illicit goods and services and to launder all funds passing through it.

It was shut down by the US government and, in 2015, its founder, Ross Ulbricht, was convicted by a unanimous jury vote and sentenced to life in prison.

What was Mr Zhong’s modus operandi?

In September 2012, Mr Zhong created nine fraud Silk Road accounts in a manner designed to conceal his identity. He registered the accounts by providing the bare minimum of information required by Silk Road.

The accounts triggered more than 140 transactions in succession and tricked Silk Road’s withdrawal-processing system into releasing 50,000 Bitcoin from its Bitcoin-based payment system into Mr Zhong’s accounts.

All transactions were encrypted and designed to prevent detection and conceal Mr Zhong’s identity and ownership.

He funded the fraud accounts with an initial deposit of between 200 and 2,000 Bitcoin.

“After the initial deposit, Mr Zhong then quickly executed a series of withdrawals. Through his scheme to defraud, he was able to withdraw many times more Bitcoin out of Silk Road than he had deposited in the first instance,” the DoJ said in a statement.