IRS Criminal Investigations has seized $3.4 billion in bitcoin stolen from The Silk Road by a man named Zhong, who appears to have discovered a weakness in that dark-web market that in 2012 allowed him to somehow pull more coins out of accounts he made there than he had placed.
The Silk Road, a fabled drug marketplace on the dark web, was intended to be an unregulated, anarchic underworld economy. Instead, it has turned out to be the IRS’s gift that keeps on giving years after it was taken offline.
A Georgian named James Zhong admitted guilt to wire fraud on Monday, nine years after he had stolen more than 50,000 bitcoins from the Silk Road, according to the US Department of Justice. Zhong forfeited that enormous amount of bitcoins to the DOJ as part of his plea deal; at the time the coins were seized in late 2021, this amount would have been the largest-ever seizure of any sort of currency by the Justice Department. In the end, the bitcoins were discovered buried in a popcorn can on what court filings refer to as a “single-board computer,” together with more than $600,000 in cash and precious metals, all kept in a safe hidden beneath the floorboards of Zhong’s bathroom closet.
The recent case represents yet another accomplishment for IRS Criminal Investigations, or IRS-CI, which over the past few years has used cryptocurrency tracing techniques that have led to record-breaking troves of illegally obtained bitcoins and to the alleged hackers and money launderers who amassed them. Frequently working in partnership with blockchain analysis firm Chainalysis. In fact, Zhong is the second Silk Road hacker to hand over a billion-dollar stash of coins to the IRS-CI; the first, an unnamed person, agreed the year before to forfeit nearly 70,000 bitcoins he had stolen from the drug market—a record-breaking, even larger collection of coins that was valued at $1 billion at the time of lower Bitcoin exchange rates. The IRS-CI case against two alleged money launderers in New York accused of stealing $4.5 billion in cryptocurrencies from the Bitfinex exchange broke both of those milestones earlier this year.
“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,” wrote US Attorney Damian Williams, a prosecutor for the Southern District of New York, in a statement about the latest indictment and 10-figure seizure. “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.”
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Zhong appears to have discovered a weakness in that dark-web market that in 2012 allowed him to somehow pull more coins out of accounts he made there than he had placed, according to an IRS-CI affidavit documenting his theft of the more than 50,000 bitcoins from the Silk Road. The affidavit details how he signed up for a series of accounts on the website with names like “thetormentor” and “dubba,” made a deposit of coins into each account’s Bitcoin wallet, and then repeatedly withdrew the full amounts held there in a single second to multiply his money by a number of times. This reportedly took advantage of a Silk Road bug that permitted those quick withdrawals without first verifying that the requested funds were still present in a user’s account.” In this fashion, [Zhong], using each of the fraud accounts, moved at least approximately 50,000 Bitcoin out of Silk Road in just a few days,” reads the affidavit, which was signed by IRS-CI special agent Trevor McAleenan.
Zhong seems to have kept that enormous windfall almost entirely untouched over the nine years that followed—possibly out of concern that turning it out into traditional currencies might draw the notice of law enforcement. Even though IRS-CI agents were able to link Zhong’s money to his accounts on an unknown cryptocurrency exchange, which allowed them to learn his identify, it appears that even such heroic restraint was in vain. Zhong’s situation is quite similar to the earlier Silk Road hacker, known only as Individual X in court filings, who used a similar vulnerability to steal about 70,000 bitcoins from the website and store them for more than seven years. However, no charges against Individual X have been made public, presumably as a result of the unpredictable nature of discussions over large bitcoin assets. Zhong, in contrast, is currently facing up to 20 years in prison after being found guilty of wire fraud.
Ross Ulbricht, the site’s creator, was apprehended after the Silk Road was shut down by a major law enforcement operation in late 2013. Ulbricht received a life sentence and was ordered to pay $183 million in compensation. However, in yet another unusual turn of events, Ulbricht’s debt was completely paid off in exchange for his agreement not to claim any of the remaining 70,000 bitcoins that had been seized from the Silk Road by Individual X.
It may seem strange that someone would pay the inventor of the Silk Road’s restitution with bitcoins that were taken from that website. However, there seems to be enough to go around in a time when IRS-CI cryptocurrency seizures routinely bring in billions of dollars for the US Treasury.