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Record-Breaking Crypto Conviction Highlights Potential for Fraud.

Updated: Nov 23


Last November, U.S. authorities seized approximately 50,676 Bitcoin from the Georgia home of James Zhong. The Bitcoin was worth over $3.36 billion, making it the then largest cryptocurrency seizure in the history of the U.S. Department of Justice (DoJ).


After a rocky year for the digital currency, the Bitcoin seized is now valued at around $1 billion, according to a November 7th article in the Washington Post.


Zhong pled guilty to wire fraud for unlawfully obtaining Bitcoin from the Silk Road dark web marketplace in September 2012 in a court hearing that took place over a decade later, in November 2022.


Details of the Zhong Case


U.S. Attorney Damian Williams said that the missing Bitcoin found in Zhong’s home “had ballooned into an over $3.3 billion mystery.” The hidden crypto was recovered through what Williams called “state-of-the-art cryptocurrency tracing and good old-fashioned police work.”


He continued: “This case shows that we won’t stop following the money, no matter how expertly hidden, even to a circuit board in the bottom of a popcorn tin.”


Zhong has yet to be sentenced but the crime for which he pled guilty (one count of wire fraud) carries a maximum sentence of 20 years in prison.


For more details of the scheme, see the press release from the U.S. Attorney’s Office of the Southern District of New York, available here: https://www.justice.gov/usao-sdny/pr/us-attorney-announces-historic-336-billion-cryptocurrency-seizure-and-conviction.


While the seizure of Bitcoin from Zhong’s home was the largest at the time, it was eclipsed in February when the Justice Department retrieved $3.6 billion that a New York couple allegedly stole as part of a hack of crypto exchange Bitfinex in 2016. These assets were seized from a husband and wife (Ilya Lichtenstein and Heather Morgan) who were charged with conspiring to launder $4.5 billion in cryptocurrency, rather than with responsibility for the hack itself. For more, see https://www.justice.gov/opa/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency


In a statement from the Department of Justice, Deputy Attorney General Lisa O. Monaco said:

“Today’s arrests, and the department’s largest financial seizure ever, show that cryptocurrency is not a safe haven for criminals.”


Implications for Financial Institutions


Governmental interest in catching criminals who steal cryptocurrency and/or in money laundering around Bitcoin and other digital assets is growing. One sign? On October 6, 2021, the Department of Justice launched its National Cryptocurrency Enforcement Team (NCET). Among the many goals for NCET is to “collaborate and build relationships with private sector actors with expertise in cryptocurrency matters to further the criminal enforcement mission,” according to a DoJ press release.


Some members of the banking community are also calling for greater oversight of cryptocurrency. For instance, on June 29, 2022, ICBA, or the Independent Community Bankers of America, asked the Commerce Department to recognize the risks posed by digital assets.


In its letter to Commerce, ICBA wrote: “Cryptocurrencies are frequently used by bad actors to facilitate money laundering, terrorist financing, and other financial crimes.”


ICBA also noted that some community banks have begun to dip a toe into crypto-banking. “A few early adopter banks,” the association wrote, “have started to offer crypto-related products and services, such as custodial services or holding stablecoin issuers’ reserve accounts, to meet customer demand. Most community banks, however, are still in the early stages of learning about the underlying technologies, potential use cases and assessing the associated risks.”

ICBA’s full letter is available here: https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-regulators/comments-on-digital-assets-oversight.pdf?sfvrsn=bfd61f17_0


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We provide guidance for community banks and credit unions that are grappling with how to create strong compliance practices for higher-risk, crypto-banking markets. By applying traditional compliance methods to digital assets, our company can help you recognize potential fraud in this area and identify and mitigate problems as early as possible.

 

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