On Monday, the Department of Justice announced that it had seized $3.36 billion in stolen bitcoin in a previously unannounced raid on the residence of James Zhong.
Friday, Zhong pleaded guilty to wire fraud. This act is punishable by up to twenty years in prison.
According to the Department of Justice, U.S. authorities seized about 50,678 bitcoin from Zhong during a search of his house on Nov. 9, 2021. This seizure follows the $3.6 billion allegedly stolen cryptocurrency linked to Sept. 2016’s Bitfinex hack.
Officials say Zhong took bitcoin from the illegal Silk Road marketplace, a dark web forum on which drugs and other illicit products were bought and sold with cryptocurrency. Silk Road was launched in 2011 but shut down by the FBI in 2013. Its founder, Ross William Ulbricht, is now serving a life sentence in prison.
Zhong’s Masterplan
In September 2012, Zhong made a successful wire fraud attempt by simultaneously publishing nine fake accounts to the Silk Road withdrawal process. The bitcoin was then dispersed into multiple accounts, which were transferred to different bitcoin wallets, making accounting for the money impossible.
Initially, Zhong would deposit amounts ranging from 200 to 2,000 BTC to start an account. Quickly after he attempt fast withdrawals for the amount of BTC funded by the account, but the system couldn’t track how many withdrawals had been paid out.
US Attorney Damian Williams said, “For almost ten years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into a $3.3 billion mystery.”
The Southern District of New York suggests that Zhong took advantage of the vulnerabilities in these marketplaces to execute the hack.
A federal law enforcement agent says that Zhong stole over $100,000 in bitcoin from Silk Road using a sophisticated scheme. The press release states that Zhong created nine fraudulent accounts on the marketplace and funded them with between 200 and 2,000 bitcoin.
He then made over 140 transactions rapidly to trick the withdrawal-processing system into transferring over 50,000 bitcoin. Zhong then moved the money across many different wallets, all under his control.
Public records show Zhong was the president and CEO of a self-created company called JZ Capital LLC. He registered it in Georgia in 2014, where his work mainly focused on “investments and venture capital.” According to his LinkedIn profile, he has been working in these areas since 2013.
His profile says he was a “large early bitcoin investor” with computer programming experience.
Zhong’s social media profiles include pictures of him on yachts and in front of private jets. He even attends high-profile football games when he can.
Vulnerability of Crypto Sites
Hacks like this are not just limited to the Silk Road. Crime is prevalent in the crypto world, too.
In October 2022, the world’s largest crypto exchange, Binance, suffered a $570 million hack. They blamed it on a bug in a smart contract. The hackers were able to exploit the Cross-Chain Bridge, BSC Token Hub. As a result, they withdrew the platform’s native currency: BNB tokens.
In March of 2022, a hacker found vulnerabilities in the Ronin Network and created a vulnerability that allowed them to steal more than $600 million in cryptocurrency from the platform. Private keys are used to protect funds on wallet accounts, and the hacker was able to breach this protection mechanism.
A Chainalysis report shows that $1.9 billion worth of cryptocurrency had been stolen in hacks through July 2022. That’s a significant increase from the $1.2 billion stolen at the same point in 2021.
Zhong will face sentencing on Feb. 22, 2023, at 3 p.m. by Judge Gardephe.
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