Silk Road Bitcoin Thief Sentenced to One Year in Prison After $3.4 Billion in Cryptocurrency Seized

In a major development, James Zhong, a Silk Road dark web fraud defendant, has been sentenced to one year and one day in prison for committing wire fraud in September 2012. Zhong had unlawfully obtained approximately 50,000 Bitcoin from the Silk Road dark web internet marketplace.

This news comes after the United States government seized and forfeited over $3.4 billion in cryptocurrency, including 51,680.32473733 Bitcoin, which was valued at over $1.57 billion at the time of the seizure and over $3.4 billion today.

Silk Road was an online “darknet” black market, and from approximately 2011 until 2013, it was used by numerous drug dealers and other unlawful vendors to distribute massive quantities of illegal drugs and other illicit goods and services to many buyers and to launder all funds passing through it.

In September 2012, Zhong executed a scheme to defraud Silk Road of its money and property by creating a string of approximately nine Silk Road accounts, triggering over 140 transactions in rapid succession in order to trick Silk Road’s withdrawal-processing system into releasing approximately 50,000 Bitcoin from its Bitcoin-based payment system into Zhong’s accounts.

While executing the September 2012 fraud, Zhong did not list any item or service for sale on Silk Road, nor did he buy any item or service on Silk Road. Zhong registered the accounts by providing the bare minimum of information required by Silk Road to create the account; the Fraud Accounts were merely a conduit for Zhong to defraud Silk Road of Bitcoin.

Through his scheme to defraud, Zhong was able to withdraw many times more Bitcoin out of Silk Road than he had deposited in the first instance. Nearly five years after Zhong’s fraud, in August 2017, solely by virtue of Zhong’s possession of the 50,000 Bitcoin that he unlawfully obtained from Silk Road, Zhong received a matching amount of a related cryptocurrency, Bitcoin Cash (“BCH Crime Proceeds”), on top of the 50,000 Bitcoin.

In August 2017, in a hard fork coin split, Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash (“BCH”). When this split occurred, any Bitcoin address that had a Bitcoin balance (as Zhong’s addresses did) now had the exact same balance on both the Bitcoin blockchain and on the Bitcoin Cash blockchain. As of August 2017, Zhong thus possessed 50,000 BCH in addition to the 50,000 Bitcoin that he unlawfully obtained from Silk Road.

Zhong used a decentralized Bitcoin mixer, an overseas cryptocurrency exchange, and an impressive array of technological tools to frustrate tracing efforts. However, thanks to the relentless and skillful efforts of law enforcement in following the money, the federal government uncovered Zhong’s scheme and obtained final orders of forfeiture for over 51,680 Bitcoin.

In his statement, U.S. Attorney Damian Williams said, “Cyber-criminals should heed this message: we will follow the money and hold you accountable, no matter how sophisticated your scheme and no matter how long it takes.”

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