On November 7, 2022, the U.S.Department of Justice (DOJ) announced that it had seized more than $3.36 billion worth of bitcoin as part of a continuing investigation into a 10-year fraud involving the Silk Road dark web marketplace.This seizure signifies the DOJ’s second-largest cryptocurrency seizure and financial seizure in history,[1] and it demonstrates the DOJ’s commitment to chase funds and prosecute those involved, despite the passage of years.On November 4, Defendant James Zhong pleaded guilty to one count of wire fraud before the U.S.District Court for the Southern District of New York in connection with his scheme.
As detailed in the DOJ’s press release, in September 2012, Zhong stole over 50,000 bitcoin from the now-defunct Silk Road, a dark web marketplace that enabled users to purchase and sell drugs and illicit goods and services via anonymous, untraceable transactions.[2] Zhong executed his scheme by creating at least nine Silk Road accounts with initial deposits of between 200 and 2,000 bitcoin and quickly triggering over 140 transactions, which tricked Silk Road’s withdrawal-processing system into depositing approximately 50,000 bitcoin into Zhong’s accounts.[3] The bitcoin were then transferred into a variety of separate addresses also under Zhong’s control in a manner designed to conceal Zhong’s identity and prevent detection.[4] Five years after Zhong’s initial fraud, in August 2017, he received a matching amount of a related cryptocurrency – 50,000 Bitcoin Cash – in addition to the 50,000 bitcoin, because of a hard fork coin split.[5] Zhong subsequently exchanged all of the Bitcoin Cash for additional bitcoin, ultimately possessing approximately 53,500 bitcoin of total crime proceeds.[6]
The DOJ worked in concert with the Internal Revenue Service Criminal Investigation (IRS-CI) Office out of Los Angeles to unravel Zhong’s sophisticated scheme.And in November 2021, agents from the IRS-CI executed a search warrant on Zhong’s home in Georgia.[7] Among other forms of currency, the agents recovered approximately 50,491 bitcoin of the crime proceeds.In March 2022, Zhong began to voluntarily surrender additional bitcoin, totaling 1,004.14621836 bitcoin, that remained in his control.[8]
Zhong was arrested and arraigned, and he pleaded guilty to one count of wire fraud on Nov.4, 2022.[9] As part of Zhong’s guilty plea, U.S.
District Court Judge Paul G.Gardephe entered a consent preliminary order of forfeiture as to specific property and substitute assets/money judgment, forfeiting Zhong’s interest in RE&D Investments LLC, a Memphis-based company with real estate holdings, and additional monies and items seized from Zhong’s home in November 2021, including $661,900 in U.S.currency; silver- and gold-colored bars or coins of varying ounce weights; and approximately 11.12 bitcoin.In addition, Zhong voluntarily surrendered more than 140 bitcoin between April and June 2022.[10] He is scheduled to be sentenced in February 2023.
This action serves as a reminder of the criminal threat cryptocurrency platforms are exposed to and that the DOJ will continue to investigate and bring charges from dated conduct.In the fall of 2021, the DOJ announced the formation of its National Cryptocurrency Enforcement Team, highlighting the department’s interest in crypto-related fraud.Moreover, the DOJ published a report in September 2022, proposing, inter alia, that the statute of limitations for prosecution of criminal activity related to digital assets be extended from five years under 18 U.S.C.§ 3282 to 10 years under 18 U.S.C.§ 3293.[11] This matter runs in parallel with these increased enforcement measures and highlights the government’s use of cryptocurrency-tracing technology to recover ill-gotten proceeds.
[1] The largest seizure to date was announced by the DOJ in February 2022 and involved $3.6 billion in cryptocurrency stolen during the 2016 hack of Bitfinex.
See Press Release, U.S.Dep’t of Justice, Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency (Feb.8, 2022), available at https://www.justice.gov/opa/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency.
[2] Press Release, U.S.Dep’t of Justice, U.S.Attorney Announces Historic $3.36 Billion Cryptocurrency Seizure And Conviction In Connection With Silk Road Dark Web Fraud (Nov.
7, 2022), available at https://www.justice.gov/usao-sdny/pr/us-attorney-announces-historic-336-billion-cryptocurrency-seizure-and-conviction.
[5] When this split occurred, Bitcoin addresses with a bitcoin balance – like Zhong’s accounts – came into possession of the exact balance on both the Bitcoin blockchain and on the Bitcoin Cash blockchain.
[6] See footnote 2 supra.
[9] United States v.Zhong, 22-cr-606 (PGG) (S.D.N.Y.Nov.
4, 2022).
[10] See footnote 2 supra.
[11] The Report of the Attorney General Pursuant to Section 5(b)(iii) of Executive order 14067: The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets, U.S.Dep’t of Justice (Sept.6, 2022), available at https://www.justice.gov/ag/page/file/1535236/download.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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