Silk Road: biggest Bitcoin seizure ever occurred

Yesterday, the US Attorney General officially announced a massive seizure of Bitcoin.

It involves more than 50,676 BTC seized from James Zhong, who pleaded guilty to illegally obtaining it from Silk Road in 2012. 

Bitcoin: the Silk Road case

Silk Road was a dark web marketplace launched in 2011 that was shut down in 2013 by the FBI. Because of the crimes committed, Ross Ulbricht was sentenced to life in prison on seven charges by the US Federal Court in Manhattan, with no possibility of parole. 

This was simply a platform where sales could take place, but among them illegal ones took place. In particular, it was used by numerous drug dealers to distribute illegal drugs to many buyers, and to launder the funds thus obtained. 

However, Zhong was not selling illicit substances, but defrauded the platform by managing to launder a lot of money. 

The Silk Road fraud

In September 2012 he created a series of accounts on Silk Road so as to conceal his identity. With those accounts, he generated over 140 transactions in quick succession in order to induce Silk Road’s withdrawal processing system to release about 50,000 Bitcoin to his accounts. After cashing them in he then transferred them to various Bitcoin addresses in order to prevent detection, hide his identity and obfuscate the origin of those BTC. 

While executing this fraud, Zhong did not sell any products or services on Silk Road, nor did he make any purchases. He only generated transactions with the sole purpose of inducing the platform to send him BTC. 

He initially deposited a total amount of between 200 and 2,000 BTC, and then quickly executed a series of withdrawals. In this way he was able to withdraw far more BTC than he had deposited. 

The prosecutor’s statement says that, for example, on 19 September 2012 he deposited 500 BTC into a wallet on Silk Road, and less than five seconds later executed five withdrawals, also of 500 BTC each, in rapid succession within a single second. In this way, he received 2,500 BTC, with a net gain of 2,000 BTC. 

The seizure of Silk Road Bitcoin

Although the prosecutor’s statement was published yesterday, the seizure actually took place a year ago, on 9 November 2021. 

The 50,676 BTC seized at the time were worth about $3.36 billion, making it the largest-ever cryptocurrency seizure by the US Department of Justice, and the second largest ever. 

To date, their value has fallen to just over $1 billion. 

It may be no coincidence that from the day after the seizure, the price of Bitcoin began to fall, and the price reached on 9 November 2021 ($69,000) remains the all-time high to date. 

Although the seizure occurred a year ago, and news of it was heard shortly thereafter, yesterday’s statement nonetheless reports something new. Namely, the fact that Zhong pleaded guilty on 4 November 2022 before US District Judge Paul G. Gardephe. 

What will happen to those BTC?

Now that Zhong has pleaded guilty, the legal proceedings against him that began years ago will end. 

At that point, the US will be able to freely dispose of the seized funds, and it is possible that they will auction them off. 

It has happened many times before that the US Department of Justice has auctioned off seized BTC. The most famous case is that of Tim Draper, who in June 2014 managed to buy 30,000 BTC seized by the US government and then auctioned them off. He invested $19 million, and this investment returned him 3,000% during the peak of December 2017.

For now, the US government, i.e., the Department of Justice, has filed a petition to have these funds confiscated, but it does not appear to have done so yet. So it is not known when they might be put up for auction.