$3.36 Billion Cryptocurrency Seizure and Conviction for Silk Road Fraud

In November 2021, Law Enforcement Seized Over 50,676 Bitcoin Hidden in Devices in Defendant JAMES Zhong’s Home; Zhong pled Guilty to fraudulently obtaining the Bitcoin from the Silk Road Dark Web in 2012.

In September 2012, James Zhong pleaded guilty to wire fraud for stealing over 50,000 Bitcoin from Silk Road. Zhong pleaded guilty to US District Judge Paul G. Gardephe on Friday, November 4, 2022.

“James Zhong committed wire fraud over a decade ago when he took nearly 50,000 Bitcoin from Silk Road,” stated U.S. Attorney Damian Williams.

This big portion of missing Bitcoin was a $3.3 billion mystery for almost ten years. Law enforcement recovered this enormous stash of illicit money using innovative cryptocurrency tracing and old-fashioned investigative labour.

Zhong’s actions to defraud

Silk Road was a darknet illegal market. From 2011 to 2013, many drug traffickers and other criminal vendors utilized Silk Road to distribute enormous amounts of illegal drugs and other items and services to many buyers and launder all monies traveling through it. This Office’s groundbreaking prosecution of Silk Road creator Ross Ulbricht resulted in a unanimous jury conviction and life sentence in 2015.

In September 2012, Zhong executed a scheme to defraud Silk Road of its money and property by 1) creating a string of approximately nine Silk Road accounts (the “Fraud Accounts”) to conceal his identity; 2) triggering over 140 transactions in rapid succession to trick Silk Road’s withdrawal-processing system into releasing approximately 50,000 Bitcoin from its Bitcoin-based payment system into Zhong’s accounts; and 2) transferring this Bitcoin into separate addresses.

Zhong never sold nor bought anything on Silk Road during the September 2012 fraud. Zhong used the Fraud Accounts to steal Bitcoin from Silk Road by supplying the least information required.

Zhong deposited 200–2,000 Bitcoin into the Fraud Accounts. Zhong made several withdrawals immediately after depositing. Zhong stole many times more Bitcoin from Silk Road than he deposited. Zhong deposited 500 Bitcoin into Silk Road on September 19, 2012. Zhong made five 500-Bitcoin withdrawals within a second of making the initial transaction, netting 2,000 Bitcoin. Another Fraud Account made one deposit and over 50 Bitcoin withdrawals before closing. Zhong removed this Bitcoin from Silk Road and aggregated it into two high-value sums in days.

In August 2017, over five years after Zhong’s crime, he got 50,000 Bitcoin Cash (“BCH Crime Proceeds”) in addition to the 50,000 Bitcoin he stole from Silk Road. Bitcoin divided into Bitcoin and Bitcoin Cash (“BCH”) in August 2017 in a hard fork currency split. After the split, every Bitcoin address with a balance, like Zhong’s, had the same balance on both the Bitcoin and Bitcoin Cash blockchains. Zhong had 50,000 BCH and 50,000 Silk Road-obtained Bitcoin in August 2017. Zhong then exchanged all BCH Crime Proceeds for 3,500 Bitcoin on an international cryptocurrency exchange. By the fourth quarter of 2017, Zhong had around 53,500 Bitcoin in crime proceeds.

Zhong, 32, of Gainesville and Athens, Georgia, pleaded guilty to one count of wire fraud, which carries a possible 20-year sentence.

The defendant’s sentence will be decided by the judge, although Congress has set the maximum possible sentence. Judge Gardephe will sentence Zhong at 3 p.m. on February 22, 2023.

Mr. Williams lauded the Western Cyber Crimes Unit of the IRS Criminal Investigation’s Los Angeles Field Office. Mr. Williams also complimented the Athens-Clarke County Police Department in Georgia.

Money Laundering and Transnational Criminal Enterprises Unit is prosecuting this case. Case manager is Assistant U.S. Attorney David R. Felton.