This is one article in a collection of 52 articles published weekly throughout 2023 on the basics of Bitcoin. The series is intended for people unfamiliar with Bitcoin or people wishing to enhance their understanding of the fundamentals that underpin the technology. Please contact us, if you have any questions or comments.
A recent Wall Street Journal article highlighted the power of Bitcoin’s immutable public ledger. The story discusses the details surrounding James Zhong’s guilty plea for wire fraud which landed him a prison sentence of one year and one day. One interesting aspect of the story is how the government was finally able to crack the case.
Zhong was a 22 year old University of Georgia student who decided to use the Silk Road website to purchase cocaine. The Silk Road was an online marketplace that leveraged the Tor network to provide anonymity for its users and thus allowed the users to trade illegal goods and services without revealing their identities. The payment mechanism used by the Silk Road customers was bitcoin.
In December 2012 Zhong attempted to withdraw some of his bitcoin from the Silk Road and stumbled into a flaw in the Silk Road software. When Zhong accidentally double clicked on the withdraw button his account was credited with twice the amount of bitcoin than he had requested be withdrawn. Zhong went on to create new accounts and within a few hours he had stolen 50,000 bitcoin worth around $600,000.
At the time of Zhong’s crime the Silk Road had thwarted off all attempts by the federal government to infiltrate the Tor network and shut down the website. However, eventually the investigators found an error made by the Silk Road founder, Ross Ulbricht, that allowed them to take the website down and arrest Ulbriucht in October 2013. Ulbricht’s critical error was in an old email he sent using his real name which allowed investigators to link him to the online persona “Dread Pirate Roberts” the operator of Silk Road.
At this time Bitcoin was still in its infancy and authorities still had not mastered the nuances of how to track the movement of bitcoin between different wallet addresses. After his crime Zhong attempted to cover his tracks by moving the bitcoin to different addresses. Unfortunately for Zhong, investigators were gaining a deeper understanding of how the Bitcoin public ledger operated and were now able to identify wallet addresses used by criminals, terrorist, and other bad actors.
Since Bitcoin’s creation, government investigators have come a long way in harnessing the power of Bitcoin’s open, immutable public ledger that has recorded every single transaction that has ever occurred on the Bitcoin blockchain since the genesis block! Bitcoin’s blockchain performs this service perfectly, free of charge, and provides the ledger for all to review. While Zhong’s stolen bitcoin still resided in a wallet that was anonymous, investigators were able to pinpoint with precision where the stolen bitcoin funds had moved since leaving the Silk Road wallet!
Zhong, who had mined bitcoin dating back as early as 2009, made his critical error when he commingled the stolen bitcoin with bitcoin he had acquired legally through mining. The commingled funds were on a bitcoin exchange which was required to comply with KYC (Know Your Customer) laws and regulations. The government was then able to go to the bitcoin exchange, gain access to the IP address being used by Zhong, and then receive Zhong’s home address from the internet service provider based on the IP address.
Zhong’s story is a perfect example of the power of Bitcoin’s open, immutable public ledger. While critics often yell and scream about how bitcoin is only used by criminals, the truth is bitcoin is a pretty bad medium of exchange for nefarious actors. Bitcoin’s public ledger will continue to perform its audit service free of charge for everyone to see and review for all bitcoin transactions.
