• J McGlynn and M Bacina

Uncle Sam seizes a Billion in Bitcoin

Updated: Nov 19


Interest rippled through the bitcoin community recently when a digital wallet containing roughly $1 billion in stolen bitcoin — thought to be proceeds from the notorious dark web drug marketplace Silk Road — was emptied by an anonymous individual. But, in an encouraging turn of events, the Department of Justice (DOJ) has revealed the money has been seized by the US government as part of a civil forfeiture.


The sixty-four thousand dollar question: Where did the stolen funds go first?

For more than seven years, roughly 70,000 bitcoin has been sitting in this wallet, which had been supposedly hacked from the Silk Road darkweb marketplace, the operator of which, Ross Ulbritch, was arrested in the science fiction aisle of a San Franciscan library in 2013.


Besides a 2015 transfer of 101 bitcoin to BTC-e from the wallet, most of the 70,000 bitcoin had sat untouched, but watched closely, with the controller of the BTC unknown. The movement of such a large amount of BTC raised (digital) eyebrows.


A civil complaint filed on 5 November reveals that the DOJ was responsible for clearing out the funds, with the assistance of an anonymous person, who’s name although known to authorities, is referred to in court documents as “Individual X”.


Whodunit?


According to the IRS criminal investigation unit, it was “Individual X” who managed to hack the Silk Road sometime between May of 2012 and April of 2013, redirecting the bounty of mostly (if not all) illicit funds from the dark web site's bitcoin wallets before Ulbricht's downfall in October of 2013.


It is not entirely clear how the IRS found the hacker and why the investigation took more than seven years, but the 2015 transfer of 101 bitcoin to BTC-e (an exchange which was involved in alleged money laundering of funds stolen from Mt Gox) appears to have helped but the US Federal Government latch onto Individual X’s trail.


The organisation explained in a statement:


On approximately 23 April 2015, [the bitcoin account] sent 101 bitcoins (approximately $23,700 at that time) to BTC-e, a company that provided bitcoin-related services and operated as an unlicensed cryptocurrency exchange [which was indicted in 2017].

US attorney David Anderson added to the conversation, explaining how the Department of Justice worked with Chainalysis, a blockchain analysis company, to lock in on the hacker’s behavior and track down the money:

Individual X was able to hack into Silk Road and gain unauthorized and illegal access to Silk Road, and thereby steal the illicit cryptocurrency from Silk Road and move it into wallets that Individual X controlled. According to the investigation, [Ross Ulbricht, the now jailed founder of the site] became aware of Individual X’s online identity and threatened Individual X for return of the cryptocurrency to Ulbricht. Individual X did not return the cryptocurrency but kept it and did not spend it.

While the agency is refusing to reveal the identity of “Individual X", it appears they are cooperating with the Department of Justice and may even be a local resident of Northern California.


What’s to come?


Despite the mistaken belief that bitcoin is untraceable, this seizure of 10-figure funds demonstrates the potential of law enforcement to track down the owners of illicit cryptocurrency stashes. According to Elliptic co-founder Tom Robinson:

We've already seen an uptick in law enforcement agencies purchasing blockchain analytic tools.

The US Federal Government generally sells property obtained via civil forfeiture, and with bitcoin increasing in value, a tidy sum should flow into the DOJ's coffers. This kind of seizure and the continued investment by law enforcement in blockchain monitoring (including the recent bounty offered for tracking privacy coin Monero) is only likely to increase as criminals learn that an immutable record of transactions creates an immutable trail of evidence.


© Michael Bacina. All rights reserved

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