How James Zhong stole $3.36 billion in Bitcoin?

The US Department of Justice on Monday has seized about $3.36 billion worth Bitcoin from a man who unlawfully obtained 50,000 Bitcoin from online dark marketplace Silk Road a decade ago. The department announced on 7th November that James Zhong is found guilty of committing wire fraud, a kind of federal crime that involve defrauding an individual or a party using electronic communication channels.

According to the U.S Attorney for the Southern District of New York, 32- year-old James Zhong has pleaded guilty to wire fraund on Friday, 4th november 2022 in a 10-year-old September 2012 case. Last year on November 9, 2021, law enforcement searched Zhong’s house in Gainesville, Georgia and confiscated about 50, 000 bitcoin which worth close to $3.36 billion. Some of the stolen Bitcoin was found on a computer in a popcorn tin stored in a bathroom closet. The federal law enforcement also took about $661,900 in cash in addition to some gold and silver bars from his vault. Zhong was also made to disinvest from a real estate company.

At that time it was the largest seizure in the history of the seizures conducted by the U.S Department of Justice and still remains the Department’s second largest financial seizure ever.

U.S. Attorney Damian Williams in his judgement held James Zhong guilty of committing wire fraud over a decade ago when he stole approximately 50,000 bitcoin from Silk Road. He thanked state-of-the-art cryptocurrency tracing and good old-fashioned police work, law enforcement located and recovered this impressive cache of crime proceeds.

RS-CI Special Agent in Charge Tyler Hatcher told that Zhong executed a sophisticated scheme designed to steal Bitcoin from the notorious Silk Road Marketplace. After he stole the Bitcoin, he tried to hide those through a series of complex transactions by the use of darknet.

Zhong could carry imprisonment of up to 20 years. Next judgement on his punishment is scheduled to be held on February 22, 2023.

The Scheme that led to fraud

Silk Road is an online dark marketplace for purchase and sale of illegal goods and services especially drugs unlawfully, in exchange of Bitcoins. It was founded by Ross Ulbricht in 2011. The Silk Road was shut down by U.S federal authorities in 2013 following multiple FBI raids. In 2015, Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison in 2017.

Zhong’s case dates back to September 2012 when the Silk Road was one of the most popular routes to buy drugs anonymously. Zhong executed a very sophisticated scheme to defraud the Silk Road of its money and property. He was only 22-year-old at that time. He created about 9 fake Silk Road accounts in order to hide his original identity. He filled them with between 200 and 2000 Bitcoins. Zhong then activated over 140 transactions in rapid succession in order to trick Silk Road’s withdrawal-processing system causing it to issue 51,680 bitcoins into Zhong's accounts. He transferred this Bitcoin into different addresses controlled by himself. This was cleverly done to prevent detection, hide his identity and ownership and confuse the Bitcoin’s source.

In August 2017, Bitcoin witnessed hardfork. The cryptocurrency split into traditional Bitcoin and Bitcoin Cash (BCH). When this split occurred, any Bitcoin address that had a Bitcoin balance now had the exact same balance on both the Bitcoin blockchain and on the Bitcoin Cash blockchain. At that moment Zhong’s account had 50,000 BCH in addition to the 50,000 Bitcoin that Zhong unlawfully obtained from the Silk Road. He exchanged all of this BCH through overseas cryptocurrency exchange for additional Bitcoin. As per the U.S authorities collectively, by the last quarter of 2017, ZHONG thus possessed approximately 53,500 Bitcoin of total crime proceeds.

It is interesting to note that Zhong did not spend the stolen Bitcoin perhaps for fear that cashing it out into traditional currency would reveal his robbery to the law enforcement.

However this is not the first time such an incident is happening. In March, 2022 a gaming- focused blockchain network was targeted by hackers who made off with about $625 million worth of Ethereum and USDC. In 2020 US feds seized $1 billion worth Bitcoin of Silk Road. An unnamed hacker ‘individual X’ agreed to forfeit the Bitcoin who stole it in 2013 and held them for around 7 years.

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