Hacker took pains to hide $3.36B of stolen bitcoin. Feds found it anyway

The dark web bazaar Silk Road was responsible for distributing massive quantities of illegal drugs and other goods and services to people around the world.

In November of last year, federal agents executed a search warrant on a house in Georgia and found a small amount of digital currency in an underground safe and a single board computer submerged in a popcorn tin. The agents recovered $661,900 in cash, 25 Casascius coins with an approximate value of 174 bitcoin, and four one-ounce silver-colored bars.

A $3.3 billion mystery

The largest financial seizure in the history of the US Justice Department was made earlier this year and it is still the second largest seizure ever.

James Zhong was the owner of the $3.36 billion. The maximum sentence for a wire fraud conviction is 20 years in prison.

Damian Williams, US Attorney for the Southern District of New York, said in Monday's release that James Zhong committed wire fraud over a decade ago. For almost 10 years, the location of this massive chunk of missingbitcoin had ballooned into an over $3 billion mystery. Law enforcement located and recovered an impressive cache of crime proceeds thanks to state-of-the-artcryptocurrencies tracing and good old-fashioned police work.

The Silk Road fraud took place in September of 2012 and involved the theft of about $650,000 worth of digital currency. The plan was to create about nine Silk Road accounts and fund them with an initial deposit of 200 to 2,000 bitcoins. The Silk Road withdrawal-processing system was fooled by 140 transactions in a row.

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Prosecutors said that on September 19 of last year, Zhong deposited 500 bitcoins into a Silk Road wallet. Less than five seconds after making the initial deposit, Zhong executed five withdrawals of 500bitcoin in rapid succession, resulting in a net gain of 2,000bitcoin.

The account made a single deposit and more than 50 withdrawals before it stopped being active. After a few days, the Silk Road transactions were consolidated into two high value amounts.

When the hard fork took place in August of last year, Zhong received a matching number of bitcoins.

Over the course of this year, Zhong has surrendered a little more than 1,100 bitcoins to federal authorities.

Silk Road operated from 2011 to 2013 and was used to trade illicit goods around the world. The platform’s founder, Ross Ulbricht, was sentenced to life in prison in 2015.

Tyler Hatcher, the IRS Criminal Investigation Special Agent in Charge, said that once Zhong completed the robbery, he tried to hide his spoils through a series of complex transactions which he hoped would be enhanced. forensic investigators can use the history of every transaction to trace stolen coins even when they pass through tumblers and other tools.

Even cryptocurrencies with stronger privacy assurances, however, aren’t automatically safe from government seizures. Some of the $3.6 billion recovered in March, for instance, was in the form of monero, a cryptocurrency designed to obfuscate the trails of funds within its blockchain by mixing up the payments of multiple users. Using techniques that still aren’t clear, the IRS was able to recover the monero funds anyway.

The sentencing for Zhong is scheduled for February 22,23.