Silk Road Fraudster Sentenced to Prison for Wire Fraud and Forfeits Over $3.4 Billion in Bitcoin

James Zhong used sophisticated techniques to steal and launder Bitcoin from Silk Road, but law enforcement followed the money and held him accountable.

The United States Attorney for the Southern District of New York, Damian Williams, announced that James Zhong has been sentenced to one year and one day in prison for committing wire fraud in September 2012 when he unlawfully obtained approximately 50,000 Bitcoin from the Silk Road dark web internet marketplace. As part of the investigation, the government has obtained final orders of forfeiture for 51,680.32473733 Bitcoin, valued at over $3.4 billion at the time of seizure and over $1.57 billion today.

Zhong’s Sophisticated Scheme to Defraud Silk Road

Silk Road was an online “darknet” black market that operated from approximately 2011 to 2013, facilitating the sale of illegal drugs and other illicit goods and services. In September 2012, Zhong executed a scheme to defraud Silk Road of its money and property by creating a string of approximately nine fraudulent Silk Road accounts in a manner designed to conceal his identity. He then triggered 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 his accounts. Zhong transferred this Bitcoin into a variety of separate addresses also under his control, all in a manner designed to prevent detection, conceal his identity and ownership, and obfuscate the Bitcoin’s source.

Zhong did not list any item or service for sale on Silk Road, nor did he buy any item or service. The fraudulent accounts were merely a conduit for Zhong to defraud Silk Road of Bitcoin. He funded the accounts with an initial deposit of between 200 and 2,000 Bitcoin and then quickly executed a series of withdrawals, resulting in him being able to withdraw many times more Bitcoin out of Silk Road than he had initially deposited. For example, in one instance, Zhong deposited 500 Bitcoin into a Silk Road wallet and within the same second, executed five withdrawals of 500 Bitcoin each, resulting in a net gain of 2,000 Bitcoin.

Laundering the Proceeds and Receiving Additional Bitcoin

Nearly five years after Zhong’s fraud, in August 2017, solely by virtue of his possession of the 50,000 Bitcoin that he unlawfully obtained from Silk Road, Zhong received a matching amount of a related cryptocurrency, 50,000 Bitcoin Cash (BCH), on top of the 50,000 Bitcoin. This occurred during a hard fork coin split, where Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash. As a result, Zhong possessed 50,000 BCH in addition to the 50,000 Bitcoin. He then exchanged all of the BCH for additional Bitcoin through an overseas cryptocurrency exchange, amounting to approximately 3,500 Bitcoin of additional crime proceeds. In total, by the last quarter of 2017, Zhong possessed approximately 53,500 Bitcoin from his fraudulent activities.

Law Enforcement’s Relentless Efforts to Uncover Zhong’s Scheme

U.S. Attorney Damian Williams commended the relentless and skillful efforts of law enforcement in following the money and uncovering Zhong’s scheme. Zhong had used a decentralized Bitcoin mixer, an overseas cryptocurrency exchange, and an array of technological tools to frustrate tracing efforts. However, law enforcement was able to uncover his scheme and obtain final orders of forfeiture for over 51,680 Bitcoin, sending a clear message to cyber-criminals that they will be held accountable, no matter how sophisticated their schemes are or how long they try to evade detection. The investigation into Zhong’s illegal activities was a testament to the dedication and expertise of law enforcement in tracking down criminals who use cryptocurrency to launder their illicit proceeds. The use of Bitcoin mixers, overseas exchanges, and other technological tools by Zhong to obfuscate his tracks did not deter law enforcement from uncovering the truth and securing the forfeiture of his ill-gotten gains. This successful outcome sends a resounding message to cyber-criminals that the U.S. government will not tolerate illegal activities involving cryptocurrency, and that those who engage in such activities will face the full force of the law, regardless of how sophisticated their schemes may be or how long they attempt to evade justice.

Law enforcement located these crime proceeds in an underground floor safe and on a single-board computer that was submerged under blankets in a popcorn tin stored in a bathroom closet.  In addition, law enforcement recovered $661,900 in cash, 25 Casascius coins (physical bitcoin) with an approximate value of 174 Bitcoin, 11.1160005300044 additional Bitcoin, four one-ounce silver-colored bars, three one-ounce gold-colored bars, four 10-ounce silver-colored bars, and one gold-colored coin.  Photographs of the popcorn tin, single-board computer, underground floor safe, and some of the seized items are included below:

Law enforcement’s relentless pursuit of Zhong’s scheme demonstrates their unwavering commitment to protecting the integrity of the financial system and holding accountable those who engage in criminal activities, including those involving cryptocurrencies. This case serves as a clear warning to cyber-criminals that using advanced technological tools to try and evade detection will not go unnoticed, and that law enforcement agencies have the capability and determination to uncover even the most sophisticated schemes.

Furthermore, the forfeiture of over 51,680 Bitcoin in this case sends a strong message about the consequences of engaging in illegal activities with cryptocurrencies. It highlights that law enforcement agencies are actively monitoring and investigating cryptocurrency transactions, and are capable of tracing and seizing illicit proceeds, even when sophisticated methods are used to hide them. This outcome serves as a deterrent to would-be criminals who may be considering using cryptocurrencies for illegal purposes, and reinforces the notion that criminal activities will not go unpunished, regardless of the technology or methods employed.

The successful uncovering of Zhong’s scheme and the forfeiture of his ill-gotten gains demonstrates the resolve of law enforcement to combat cyber-crime and hold perpetrators accountable, no matter how complex or elusive their schemes may be. It serves as a strong message to cyber-criminals that they will be pursued and brought to justice and underscores the importance of continued efforts by law enforcement agencies to safeguard the financial system and protect against illicit activities involving cryptocurrencies.