Silk Road hacker sentenced for multibillion dollar bitcoin fraud

Prosecutors have secured another prison term in connection with the infamous darknet marketplace Silk Road, though this time the person serving a sentence was convicted of stealing from the website. 

James Zhong, 32, of Gainesville, Ga., stole over 50,000 bitcoin from the Ross Ulbricht-run marketplace by using nine accounts to create rapid transactions that tricked the illicit marketplace’s withdrawal processing system. He pleaded guilty to one count of wire fraud and was sentenced to one year and one day in prison.

The incidents occurred between 2011 and 2013, when bitcoin held far less value. The original cryptocurrency ended 2013 at less than $800 per coin, far less than its current market price of approximately $30,000. Authorities raided Zhong’s home on Nov. 9, 2021, close to the time when bitcoin reached its highest ever value of nearly $69,000. Zhong became a multibillionaire due to the market appreciation.

At the time federal authorities took control of the bitcoin, both in the initial seizure and two voluntary forfeitures after Zhong’s arrest, the tokens in total were worth $3.4 billion. They were still worth over $1.57 billion at the time of his sentencing. 

Silk Road's flaw

In one instance Zhong deposited 500 bitcoin into a wallet and within five seconds executed five withdrawals, exploiting a flaw in Silk Road’s payment system that turned his initial deposit into 2,500 bitcoin, according to the U.S. Justice Department. 

Zhong also received over 50,000 in bitcoin cash following the 2017 hard fork split between bitcoin and bitcoin cash’s blockchains.

Federal law enforcement recovered the nearly 50,500 bitcoin from a single-board computer hidden under blankets in a Cheetos popcorn tin stored in a bathroom closet, according to a Justice Department release announcing Zhong’s sentencing.

In addition to that bitcoin, law enforcement also seized nearly $662,000 in cash and 25 Casascius coins, physical metal coins created to represent bitcoin that also contained private keys to control actual bitcoin. Those physical representations held value totaling approximately 174 bitcoin. 

Zhong’s over 50,000 bitcoin, 25 Casascius coins, several physical metal bars, cash, and an investment in a real estate holding company are now property of the United States.