On Wednesday, it was reported that someone had transferred close to $1 billion in bitcoin out of a wallet likely associated with the Silk Road crime bazaar. Now we know who that mystery party is: the US Department of Justice, which in 2013 shut down Silk Road and went on to put its founder, Ross Ulbricht, behind bars for life.
“The successful prosecution of Silk Road’s founder in 2015 left open a billion-dollar question. Where did the money go?”US Attorney David Anderson said in a news release.
“Today’s forfeiture complaint answers this open question at least in part. $1 billion of these criminal proceeds are now in the United States’ possession.”
Silk Road and Ulbricht were among the most popular and successful online crime figures in Internet history. Hosted on the anonymous Dark Web, the service brought together sellers and buyers of drugs, fake IDs, and just about any other kind of illicit good or service imaginable. There were thousands of dealers and “well over 100,000 buyers,” US attorneys wrote in a civil complaint filed on Thursday. The document said that Silk Road generated revenue of over 9.5 million bitcoin and collected commissions from these sales of more than 600,000 bitcoin.
Thursday's complaint came five years after Ulbricht was convicted and sentenced to two life terms plus 40 years. The Internal Revenue Service Criminal Investigation arm assisted in tracking down the intricate scheme to obfuscate the recipients of the proceeds. The seizure came two days after blockchain analysts noticed someone had transferred 69,369 BTC -—worth about $975 million—out of an account that had received them from Silk Road. The wallet, which remained quiet since 2015, was the world’s fourth biggest.
Enter Individual X
In intriguing details that sound like they’re straight out of a crime novel, the complaint said that a mysterious hacker identified only as Individual X was responsible for transferring the seized bitcoin out of Silk Road coffers.
“According to the investigation, 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, Ulbricht became aware of Individual X’s online identity and threatened Individual X for return of the cryptocurrency to Ulbricht.”The unknown hacker didn’t return or spend the bitcoin. Instead, Individual X on Tuesday signed a Consent and Agreement to Forfeiture with the US Attorney’s office in San Francisco agreeing to turn over the funds to the government.
The complaint details the lengths Ulbricht took to obfuscate the transfer of the funds and the forensic expertise that finally unraveled the true origins of the bitcoin.
Silk Road used a so-called “tumbler” to process Bitcoin transactions in a manner designed to frustrate the tracking of individual transactions through the Blockchain. According to the Silk Road wiki web page‚ Silk Road’s tumbler
“sends all payments through a complex‚ semi-random series of dummy transactions‚ . . . making it nearly impossible to link your payment with any coins leaving the site.”In other words‚ if a buyer makes a payment on Silk Road, the tumbler obscures any link between the buyer’s Bitcoin address and the vendor’s Bitcoin address where the Bitcoins end up—making it fruitless to use the Blockchain to follow the money trail involved in the transaction‚ even if the buyer’s and vendor’s Bitcoin addresses are both known. The only function served by Silk Road’s implementation of such “tumblers” is to assist with the laundering of criminal proceeds.
Earlier this year, federal authorities used a third-party bitcoin attribution company to analyze transactions executed by Silk Road. They zeroed in on 54 transactions that transferred 70,411.46 BTC to two particular wallets—1BADznNF3W1gi47R65MQs754KB7zTaGuYZ and 1BBqjKsYuLEUE9Y5WzdbzCtYzCiQgHqtPN. The bitcoin was valued at about $354,000 at the time. In April 2013, those two wallets sent 69,471.082201 BTC to a third wallet—1HQ3Go3ggs8pFnXuHVHRytPCq5fGG8Hbhx.
Two years later, this third wallet sent 101 bitcoin, worth $23,700 at the time, to BTC-e, an unlicensed cryptocurrency exchange whose founder was arrested in 2017 on allegations that he committed $4 billion worth of bitcoin laundering. The remaining bitcoin stayed in the wallet until this week's seizure.
Blockchain analysis firm Chainalysis, which assisted in the investigation, provided additional details along with the following graphic showing the account flow.
“Criminal proceeds should not remain in the hands of the thieves,”said Internal Revenue Service Criminal Investigation Special Agent in Charge Kelly R. Jackson in a news release, according to the Chronicle.
“Through CI’s [Criminal Investigation] expertise in following the money, we were able to track down the illicit funds.”