A court document filed on Mar 31 outlining the US government’s plan to sell 51,351 Bitcoin confiscated from Silk Road exploiter James Zhong has shed new light on the thief’s activities, providing new details of how the 2012 theft occurred and what Zhong did with the proceeds in the following years. The filing comes two weeks after the government began liquidating the BTC, selling 9,861 of it on Mar 14 for slightly over $217.7 million, which represented a nearly $2,000 discount per coin at the spot price on that day.
This government has plans to liquidate another $1.1 billion in four batches through the remainder of the year, raising some concerns about a possible dampening effect on the price of BTC. On Mar 14, the date of the first sale, the price of BTC ended up over 3% for the day, however.
The government’s IRS-Criminal Investigation agency began investigating the whereabouts of Silk Road’s 50,000+ missing BTC, stolen by Zhong through crafty manipulation of an exploit in the market’s withdrawal system in Sept 2012. Using at least nine different accounts which he funded with 200 – 2,000 BTC each, he was able to trick the system into processing multiple withdrawal requests that were submitted nearly instantaneously, causing the system to return him far more BTC than he deposited.
Photo of Zhong’s floor vault discovered in a raid on his home.
In Aug 2017, Zhong received close to 50,000 Bitcoin Cash (BCH) as a result of the Bitcoin hard fork that resulted in the creation of the new cryptocurrency. Before the end of the year, he had traded all of it for an additional 3,500 BTC which he added to his stash. Between Jan and Nov 2021, Zhong sent nearly 750 BTC through a “decentralized Bitcoin mixer,” attempting to cash out a portion of the mixed proceeds at a cryptocurrency exchange. The exchange, which asked him about the source of his funds, found his answers to be “untruthful” and “misleading.”
Zhong was arrested on Nov 9, 2021, after a search warrant was executed at his residence. The search resulted in the seizure of over 50,491 BTC, $661,900 in cash, and 25 Casacius physical Bitcoins which had a total value of around 174 BTC. The majority of the BTC recovered was stored on devices in an underground floor safe and in a popcorn tin containing a single-board computer.
Zhong is scheduled to be sentenced on Friday, Apr 14. The Probation Office has recommended a sentence of 24 months in prison for charges of wire fraud. This is a less serious offense than for what he was initially charged, which was money laundering. He is estimated to have spent around $16 million of the BTC from the Silk Road theft over the course of the last 12 years. The same amount of BTC would have been worth over $61 million today.
The government estimates that around 9.9 million BTC flowed through Silk Road during its two-and-a-half-year existence, which was from Feb 2011 to Oct 2013. This accounted for nearly 1.5 million transactions, which generated close to 640,000 BTC in commissions for the market, with the “vast majority” of transactions being for illegal drugs.