How the Silk Road Affair Changed Law Enforcement

The Silk Road was the first modern dark web marketplace, an online place for anonymously buying and selling illegal products and services using Bitcoin. 

Ross Ulbricht created The Silk Road in 2011 and operated it until 2013 when the FBI shut it down. Its creator was eventually arrested and sentenced to life in prison.

But in a plot twist right out of a spy novel, a cyber attacker stole thousands of bitcoins from Silk Road and hid them away. It took law enforcement years to find the perpetrator. By then, the Bitcoins were worth more than $3.3 billion. 

The extended law enforcement operation was difficult and complex. But ultimately, this saga set the stage for future action against darknet marketplaces. 

Here’s what happened. 

How Silk Road Worked

Two technologies assured anonymity for both sellers and buyers on Silk Road: The Tor network and Bitcoin. The Tor network is a browser and service that routes internet traffic through a series of servers. Each of these servers then hides the IP address so that it becomes untraceable.

Bitcoin is a digital currency created in 2009. It allows for peer-to-peer transactions without the need for a central authority, such as a bank or government. Instead, the blockchain records, secures and authenticates these transactions.

People bought and sold a wide range of products and services on the Silk Road. By 2013, however, some 70% of the purchases were drugs.

Tracing drugs shipped by mail to temporary P.O. boxes became The Silk Road’s undoing. This allowed law enforcement to arrest Ulbricht’s freelance employees and piece together the Silk Road story. 

Still, the Tor network prevented law enforcement from nailing down exactly who was behind Silk Road. That was the case until an FBI agent got a lucky break. A Reddit post warned that Silk Road’s IP address had become visible online. The agent probed the claim by posting various data on Silk Road, then used software to analyze the traffic until he could expose the IP address. 

After some incredible and persistent desk-jockey sleuthing, Ulbricht, who used the online nickname “Dread Pirate Roberts”, was eventually caught logged into the site from a public library. He was arrested and charged with money laundering, computer hacking crimes, conspiracy to traffic narcotics and attempted murder to silence at least five people who threatened to unmask Silk Road. 

Ulbricht turned down a plea deal offering a minimum 10-year sentence, which turned out to be a big mistake. He was convicted, given five sentences, including two life sentences without parole, and fined $183 million.

Mystery of the Missing Billions

Initiated by U.S. Senator Charles Schumer, the DEA and Department of Justice conducted a long and intense investigation to find the billions in Bitcoin stolen from Silk Road before the site’s shutdown. 

In 2012, a man named James Zhong created some nine Silk Road accounts anonymously. He then triggered more than 140 transactions in a way that tricked Silk Road’s withdrawal processing system into releasing around 50,000 Bitcoins into those accounts. 

He exploited a flaw in the system, where he made an initial deposit, then rapidly withdrew an amount less than the deposit but made the same withdrawal many times within a second before the system could register that the account was depleted. Zhong repeated this on multiple accounts, making a total of 140 withdrawals. 

Zhong then moved his ill-gotten proceeds into a range of addresses to conceal who owned and controlled the Bitcoins. 

Almost five years after this theft, Zhong benefited from a hard fork coin split, where Bitcoin split into two cryptocurrencies: traditional Bitcoin and Bitcoin Cash. He converted the latter back to Bitcoin, which amounted to 3,500 Bitcoin.  

He then used an exchange to convert the stolen bitcoin to dollars. This made it easy for investigators to trace the transaction. They knew he was out there somewhere and waited for him to reveal himself. 

To Catch a Bitcoin Thief 

After the government had been investigating the crime for a decade, they finally got tipped off when a man in Athens, Georgia, called the police to say that he was burglarized and that the thieves stole “a lot of Bitcoin”, which attracted the attention of the IRS. That man was James Zhong. 

Police raided his home and found Bitcoin hidden in a “single-board computer” stashed in a popcorn tin in Zhong’s bathroom. They also found $662,000 in cash, along with bars of gold and silver, in a floor safe. 

In November of 2021, the U.S. Attorney for the Southern District of New York announced that a law enforcement operation seized more than 50,676 Bitcoin worth an incredible $3.36 billion.

Zhong pleaded guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison. He is scheduled to be sentenced on February 22, 2023, and is currently out on bail. 

How the Silk Road Affair Changed Crime and Law Enforcement

The value of the seizure, the second largest ever after the $3.6 billion in stolen crypto linked to the 2016 hack of Bitfinex, caused federal law enforcement to prioritize crypto-related crimes, adding expertise and developing methods for tracing such transactions. 

To cyber criminals — and also many law-abiding citizens who shared Ulbricht’s utopian libertarian views advocating for the freedom for people to buy and sell anything they like — Ulbricht’s double life sentence without the possibility of parole was a shock and an outrage. Still, no doubt, it strongly discouraged participation in dark web sites for people within reach of Western law enforcement. It also motivated everyone involved in such marketplaces to up their security and anonymity. 

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