US secures conviction in historic crypto dark web fraud case

A man who once held over $3bn worth of bitcoin taken from the notorious Silk Road marketplace has pleaded guilty to wire fraud and been forced to forfeit his crypto assets, the US Department of Justice said on Monday.

James Zhong’s actions date back to September 2012 when he unlawfully obtained over 50,000 bitcoins from the now-infamous dark web site that accepted the cryptocurrency in exchange for drugs and other illicit items.

The announcement is the latest indication that law enforcement agencies are becoming more sophisticated in cracking down on unlawful activity in a crypto industry that has grown significantly since the Silk Road marketplace was shut down in 2013.

Its founder Ross Ulbricht, who went by the name “Dread Pirate Roberts,” was sentenced to life in prison in 2015, and the court designated all bitcoin that passed through the Silk Road’s payment system as having been laundered.

“For almost ten years, the whereabouts of this massive chunk of missing bitcoin had ballooned into an over $3.3bn mystery,” said US attorney for the Southern District of New York Damian Williams.

“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”.

The bitcoin obtained by Zhong, 32, in 2012 came before the crypto industry experienced any kind of significant bull run. Although by late November 2021, the price of Zhong’s illicit holdings had surged to roughly $3.3bn, and despite this year’s crypto market collapse, is worth over $1bn by today’s prices.

Mr Zhong returned virtually all of the bitcoin he improperly acquired.

According to the justice department, Zhong executed a multi-step scheme to defraud Silk Road, including the setting up of approximately nine Silk Road accounts in a bid to conceal his identity, and transferring the bitcoin to separate addresses under his control to prevent detection and obfuscate the source of funds.

Pursuant to a search warrant, IRS agents recovered the bitcoin from Zhong’s house in Gainesville, Georgia, some of which was stored on a simple computer hidden in a popcorn tin and in a safe beneath the floorboards.

In addition to the stolen bitcoin, law enforcement recovered over $660,000 in cash.

Zhong pleaded guilty on Friday November fourth before US district judge Paul Gardephe, and is expected to be sentenced in February next year.

Michael Bachner, a lawyer for Zhong, pointed out that he was convicted for transactions that occurred “over 10 years ago when [Zhong] was just 22 years old”.

“Mr Zhong returned virtually all of the bitcoin he improperly acquired,” Bachner added.

“Ironically, given the increase in bitcoin value over the last decade, the value of the bitcoin he returned exponentially exceeded the value of the bitcoin he took.”