A billion-dollar dispute over a trove of Silk Road bitcoins could reveal identity of 'Individual X'

Last November, the U.S. government made headlines when it seized a trove of bitcoin valued at more than $1 billion which it said was connected to the now-defunct dark web marketplace Silk Road.

The coming weeks may provide new details about the true identity of the unnamed hacker who cut a deal that led to the seizure, which is worth more than $3 billion at today's prices.

Back in November, the Department of Justice detailed the activities of someone identified only as “Individual X” who, in the government’s telling, stole the BTC from Silk Road between 2012 and 2013. Court documents indicated that convicted Silk Road operator Ross Ulbricht learned of Individual X’s actions but ultimately, the hacker kept the funds and did not spend them.

As reported at the time, the government -- by some as-yet-to-be-disclosed means -- became aware of Individual X’s identity. In November of 2020, Individual X signed a Consent and Agreement to the Forfeiture of the funds from wallet address 1HQ3Go3ggs8pFnXuHVHRytPCq5fGG8Hbhx, or 1HQ3. 

Court filings show that after the initial media flurry around the seizure, several different parties sought to intervene in the case and lay claim to at least some of the BTC holdings. 

One particular claim, which will be the subject of a hearing early next month, emerged this spring and offered tantalizing clues to the identity of Individual X. The claim invoked a long-running legal effort to collect billions of dollars from an accused fraudster -- a process that ultimately led to claims of a connection with the Silk Road bitcoins. The U.S. government, however, has fought back against the claim, setting the stage of the current legal fight.

A billion-dollar mystery

With its seizure, the DOJ obtained 69,370 units of Bitcoin, Bitcoin Gold, and undisclosed amounts of Bitcoin SV and Bitcoin Cash from wallet address 1HQ3. It marked the largest seizure of cryptocurrency in the history of the DOJ. As noted, the seizure was facilitated thanks to an agreement with Individual X. 

As alleged by entrepreneur Jay Bloom in a lawsuit, accused Las Vegas fraudster Raymond Ngan was in control of 1HQ3 in December 2018.

Bloom won a $2.2 billion summary judgment in the state of Nevada against Ngan in 2017 after a business deal between the two fell apart. Details of the dispute were reported by The Smoking Gun, which reported on Bloom’s initial efforts to intervene in the Silk Road bitcoin case. 

After Ngan filed for bankruptcy, Bloom began trying to seize assets from Ngan that could cover the judgment. That, his legal team now contends, includes the contents of wallet 1HQ3. Bloom’s legal team presented evidence that Ngan was in control of the 1HQ3 wallet: a screenshot that Ngan sent to someone who was trying to buy bitcoin from him. 

But the government has argued that this evidence is thin since it's only a screenshot of an address on Blockchain.com, which anyone could feasibly obtain.

Still, in 2019, Bloom's team sought to compel Ngan to turn over the wallet. Ngan's consistent failure to appear — and then the onset of the COVID-19 pandemic — stalled the procedures. 

Then, in November of 2020, 1HQ3 was in the hands of the government.

A late submission, a new puzzle

Months after the DOJ’s headline-sparking announcement, Bloom's team filed to compel the U.S. government to turn over the forfeited funds as part of the assets Bloom was owed in the bankruptcy procedures. 

Yet the government contends that the request missed the Jan. 26, 2021 statutory deadline. Bloom's entities filed on March 16, since they say they were not aware of the seizure until Jan. 28 and weren't made aware of the deadline.

Notably, near the end of Bloom's teams' filing is a request for the government to hand over information related to Individual X's identity. It’s there that the filing offers a theory for who Individual X might be:

"While Claimants’ investigation has been hampered by the lack of legal process, it has revealed evidence of a possible connection between Mr. Ngan and an individual that may be the Government’s Individual X – Nikita Kislitsin."

The filing then goes on to explain Bloom and his legal team believe Kislitsin is involved.

Kislitsin was previously accused by the U.S. government of involvement in the 2012 hack of Formspring, a social media company. His alleged actions were contained in an indictment from 2014, as reported last year by Cyberscoop. 

The claims in Bloom’s filing center around the proximity of Kislitsin and Ngan, as well as the timing of actions around his 2014 indictment and its current status. Per the court filing, Kislitsin “listed Las Vegas as his location on Twitter at roughly the same time Mr. Ngan lived there.”

The document goes on to state:

“Mr. Kislitsin apparently cooperated in the Government’s prosecution of a hacker associate, Yevgeniy Nikulin. A jury convicted Mr. Nikulin at trial and the court sentenced him to 88 months in prison on September 29, 2020. Just four weeks after Mr. Nikulin’s sentencing, Individual X signed an agreement with the Government, providing the key to 1HQ3. Seventeen days after that agreement, a federal judge in Nevada unsealed Mr. Kislitsin’s 2013 indictment in response to a Government motion, after virtually nothing had occurred in the case over seven years. High ranking federal prosecutors have commented that the unsealing of an indictment often indicates that the Government does not anticipate an arrest or prosecution.”

The filing later hedges on establish an unequivocal link between Kislitsin and Individual:

"Mr. Kislitsin may not be Individual X. But circumstantial evidence suggests that either he or an associate is, and that he has a connection to Mr. Ngan. A connection between Individual X and Raymond Ngan would be further evidence supporting Mr. Ngan’s (and Claimants’) ownership of 1HQ3 because it could explain how Individual X obtained 1HQ3, how Mr. Ngan obtained it from him, and/or how Individual X was able to transfer 1HQ3 to the Government. If the Court views the motion as one for summary judgment, the Court should permit Claimants to take discovery before deciding it against Claimants."

Government pushback

The U.S. government actively denies the link between Ngan, his associates and Individual X and there is no evidence Ngan was in possession of 1HQ3 despite his claims that he had access to the wallet:

<blockquote>"While the government sympathizes with Claimants’ desire to recover on Bloom’s investment and collect on the bankruptcy court’s judgment, the reality is that they are looking in the wrong place. Raymond Ngan is not Individual X.  Neither are any of the 12 of Ngan’s associates identified by Claimants’ counsel. Individual X is in no way connected to the bankruptcy debtor from which Claimants are trying to recover. As such, Claimants lack standing to bring their claims."</blockquote>

Attorneys at Coblentz Patch Duffy & Bass LLP, the firm representing Bloom's entities, declined to comment on the state of the proceedings. The DOJ did not respond to request for comment. 

A hearing between the two is slated to take place over zoom on Sept. 9 at 1:30 before Hon. Richard Seeborg.