Damian Williams, the United States Attorney for the Southern District of New York, and Tyler Hatcher, the Special Agent in Charge of the Internal Revenue Service, Criminal Investigation, Los Angeles Field Office (IRS-CI), announced today that James Zhong pleaded guilty to committing wire fraud when he unlawfully obtained over 50,000 Bitcoin from the Silk Road dark web internet marketplace.

Zhong pleaded guilty on Friday, November 4, 2022, before United States District Judge Paul G. Gardephe.

Pursuant to a judicially authorized premises search warrant of Zhong’s Gainesville, Georgia, house, law enforcement seized approximately 50,676.17851897 Bitcoin, then valued at over $3.36 billion. This seizure was then the largest cryptocurrency seizure in the history of the U.S. Department of Justice and today remains the Department’s second largest financial seizure ever. The Government is seeking to forfeit, collectively: approximately 51,680.32473733 Bitcoin; Zhong’s 80% interest in RE&D Investments, LLC, a Memphis-based company with substantial real estate holdings; $661,900 in cash seized from Zhong’s home; and various metals also seized from Zhong’s home.

U.S. Attorney Damian Williams said:

“James Zhong committed wire fraud over a decade ago when he stole approximately 50,000 Bitcoin from Silk Road. For almost ten years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3 billion mystery. Thanks to state-of-the-art cryptocurrency tracing and good old-fashioned police work, law enforcement located and recovered this impressive cache of crime proceeds.”

Silk Road was an online “darknet” black market. In operation from approximately 2011 until 2013, Silk Road 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 2015, following a groundbreaking prosecution by this Office, Silk Road’s founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison.

In September 2012, Zhong executed a scheme to defraud Silk Road of its money and property by (a) creating a string of approximately nine Silk Road accounts in a manner designed to conceal his identity; (b) 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; and (c) transferring this Bitcoin into a variety of separate addresses also under Zhong’s control, all in a manner designed to prevent detection, conceal his identity and ownership, and obfuscate the Bitcoin’s source.

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. He 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 him 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 — 50,000 Bitcoin Cash— 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 thereafter exchanged through an overseas cryptocurrency exchange all of the BCH Crime Proceeds for additional Bitcoin, amounting to approximately 3,500 Bitcoin of additional crime proceeds. Collectively, by the last quarter of 2017, he thus possessed approximately 53,500 Bitcoin of total crime proceeds.

Zhong, 32, of Gainesville, Georgia, and Athens, Georgia, pleaded guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison.