Law enforcement agents are using advanced methods to apprehend criminals and confiscate their assets by tracking cryptocurrency transactions.
In December 2012, Mr. James Zhong, a 22-year-old University of Georgia computer-science student, encountered a software bug on Silk Road, an online marketplace that utilized blockchain technology and the dark web to facilitate anonymous criminal transactions. He had been using the site to purchase cocaine.
Mr. Zhong expressed shock in federal court when he confessed that he had unintentionally double-clicked the withdraw button, leading to him being able to take out twice the amount of bitcoin he had originally deposited. Records from federal prosecutors show that after this first fraudulent withdrawal, he managed to steal a total of 50,000 bitcoins, which had a value of approximately $600,000, through making new accounts and dedicating several hours to the task.
One year after the launch of Silk Road, federal authorities shut it down due to criminal activity and confiscated the computers that contained its transaction records. However, these records failed to expose Mr. Zhong’s activities initially, as investigators had yet to understand the ways of tracing individuals and groups concealed by blockchain wallet addresses – a combination of letters and numbers used for anonymous cryptocurrency transfers. This system was designed to provide users with complete privacy.
For eight years, Mr. Zhong concealed his stolen bitcoins by transferring them between different accounts. By the end of 2021, the booming crypto market had driven the value of his hoard up to $3.4 billion. Despite his immense wealth, Mr. Zhong maintained a humble lifestyle in a modest house in Athens, GA, and dressed casually in shorts and t-shirts. He also owned a lake-house retreat in Gainesville, GA, a Lamborghini sports car, and a $150,000 Tesla.
In November 2021, federal agents conducted a surprise search at the residence of Mr. Zhong using a warrant. During the search, they found a safe containing the digital keys to his crypto fortune and a popcorn tin with the same keys in the bathroom. Mr. Zhong pleaded guilty to wire fraud, and is scheduled to be sentenced on Friday in a New York federal court. The prosecutors in this case are requesting a prison sentence of less than two years for Mr. Zhong.
Mr. Zhong’s case is a prominent example of how federal authorities have successfully traced blockchain transactions, which were originally intended to be anonymous. Investigators from both the private and public sector can now identify wallet addresses associated with criminals, such as terrorists, drug dealers, money launderers and cybercriminals.
Matthew Price, a former IRS investigator who currently works on investigations for Binance Inc., likened the situation of a criminal stealing bitcoins to “a guy that robbed a bank in the snow”. The criminal’s identity may not be known, but the digital evidence they leave behind can be tracked just like footprints in the snow.
Read Full Report: The U.S. Cracked a $3.4 Billion Crypto Heist—and Bitcoin’s Anonymity