The United States Department of Justice (DOJ) has announced that dark web fraudster James Zhong has pleaded guilty to wire fraud in connection to over 50,000 BTC he had stolen from darknet marketplace Silk Road. They also announced the confiscation of $3.36 billion worth of ‘cryptocurrency,’ including 50,000 BTC, in connection with the fraud.
According to the DOJ, Zhong used nine Silk Road accounts to trigger over 140 transactions in rapid succession to trick the market’s withdrawal-processing system into releasing 50,000 BTC to his accounts.
As part of law enforcement’s investigation against Zhong, they used a search warrant to raid his Gainesville, Georgia, home in November 2021. The BTC was recovered physically, said the DOJ. Most of the coins were located in an underground floor safe and on a single-board computer found at the bottom of a popcorn tin. They also recovered $661,900 in cash, bars of various precious metals, 25 Casascius coins valued at 174 BTC, and almost 150 BTC that Zhong voluntarily turned over.
The $3.36-billion seizure would have been the largest-ever digital currency seizure and the second-largest ever for the DOJ at the time it was made. However, earlier this year, the DOJ seized $3.6 billion worth of digital assets in connection with the 2016 Bitfinex hack.
Zhong entered the guilty plea on November 4. As part of that, Judge Paul Gardephe ordered the forfeiture of Zhong’s 80% interest in a real estate holding company with ‘substantial’ assets, the $661,900 cash, the metal bars, the Casascius coins, and the Bitcoin voluntarily handed over by Zhong.
As for the more than 50,000 BTC pilfered from Silk Road, the government filed a motion in the United States v Ross Ulbricht docket, applying for the forfeiture of that amount from Zhong, thanks to its connection to the Silk Road case.
“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,” said U.S. Attorney Damian Williams in announcing the plea.
The seizure is announced at a time when law enforcement is increasingly looking at ways to recover digital assets that have been associated with criminal activity. According to Chainalysis, $1.9 billion worth of digital assets was stolen between January 2022 and July 2022 compared to $1.2 billion over the same period in 2021. In addition to the well-publicized Bitfinex seizure earlier this year, the United Kingdom’s National Crime Agency reported that it had seized around £26.9 million ($30.7 million) in digital assets between April 1, 2021, and March 31, 2022, while U.K.’s London Metropolitan Police seized £180 million ($205.67 million) worth of digital assets suspected of being connected with money laundering in July of 2021.
The idea of law enforcement having to dig through popcorn tins to find physical storage of digital assets makes for amusing imagery, but it’s also somewhat absurd, considering the physical location of a hardware wallet or computer containing a software wallet is irrelevant when it comes to the assets themselves: digital assets such as Bitcoin can be frozen and re-assigned at the protocol level provided there’s a valid court order, regardless of who currently happens to be in control of the keys associated with them. After all, if law enforcement had failed to find a particularly well-hidden computer somewhere in Zhong’s flat, why should that mean the assets are safe from forfeiture?
Zhong will be sentenced on February 22, 2023. The charge carries a maximum sentence of 20 years in prison.
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