Apr 22, 2022 7:00 AM

A $3 Billion Silk Road Seizure Will Erase Ross Ulbricht’s Debt

In a twist, a massive trove of stolen bitcoins will repay the dark web market creator's $183 million restitution.

An illustration with a collage of browsers and bitcoin.

Ross Ulbricht, the convicted creator of the legendary Silk Road dark web market for drugs, has never gotten much mercy from the US legal system. In 2015, he was sentenced to life in prison without parole. His appeal was denied, as was the pardon he sought from President Trump. But a little over a year ago, it appears Ulbricht finally got a break of a different kind: The nine-figure debt he owed to the US government as part of his sentence will be erased—all thanks to the fortuitous hoarding of a hacker who'd stolen a massive trove of bitcoins from his market.

Last year, prosecutors quietly signed an agreement with Ulbricht stipulating that a portion of a newfound trove of Silk Road bitcoins, seized from an unnamed hacker, will be used to cancel out the more than $183 million in restitution Ulbricht was ordered to pay as part of his 2015 sentence, a number calculated from the total illegal sales of the Silk Road based on exchange rates at the time of each transaction. Despite the fact that the more recently unearthed stash of bitcoins—now worth billions of dollars—was itself criminal proceeds, the Justice Department appears to have made a deal with Ulbricht to avoid any claim he might have made to the money: In exchange for Ulbricht's agreement to waive any ownership he might have of the bitcoins, a portion of them will be used to pay off his restitution in its entirety.

"The parties agree that the net proceeds realized from the sale of the [bitcoins] forfeited pursuant to this agreement shall be credited toward any unpaid balance of the Money Judgment," reads a court filing from last year, using the phrase "money judgment" to refer to Ulbricht's 2015 restitution order. The document, filed in February of 2021, is signed by both Ulbricht and David Countryman, a prosecutor in the asset forfeiture unit of the US Attorney's office for the Northern District of California. The Department of Justice didn't respond to WIRED's request for comment.

Ulbricht, of course, still faces life in prison. He has already served eight years of that sentence at jails in New York and penitentiaries in Colorado and Arizona. But the repayment of his restitution could mean that he's able to earn money in prison to share with family or friends without it being seized or garnished to pay his debts—or even keep any previously unknown caches of bitcoins that he may possess, so long as they aren't tied to the Silk Road or other criminal sources. And if his sentence is eventually commuted, as his supporters and a years-long Free Ross campaign have petitioned for since even before his sentencing, he would reenter the world as a free man without hundreds of millions of dollars in debt. (Ulbricht is pursuing a "habeas petition" in federal court that would cancel his 2015 sentence based on an argument that he received ineffective representation from his attorneys.)

In a bizarre twist, the agreement to erase Ulbricht's restitution payments appears to have been made without the involvement—or even the knowledge—of prosecutors in the Southern District of New York, the Justice Department attorneys who handled Ulbricht's case. "This resolution was not coordinated with SDNY," one former Justice Department staffer told WIRED. "To not coordinate with the prosecuting authority that obtained the judgement is extremely unorthodox."

The surprise deal to cancel Ulbricht's restitution may have been made simply to smooth out any impediment to the government's massive financial seizure, says Nick Weaver, a researcher and computer scientist at UC Berkeley. Weaver has closely followed Ulbricht's case for years and even proved Ulbricht's bitcoins could be traced to the Silk Road during his trial. "This was a way for the government not to have to deal with pointless legal hassles during the forfeiture process," Weaver says, arguing that Ulbricht could have found an attorney to fight against and delay the seizure in return for a fraction of any potential reward. "I'm certain Ross Ulbricht could have gotten a lawyer on a contingency basis to challenge the forfeiture, simply because a 2 percent chance of winning would still be a multi-hundred-million-dollar payout for the attorney."

The strange series of events that ultimately led to Ulbricht's restitution windfall first came to light in November 2020, when the Justice Department announced that it had seized nearly 70,000 bitcoins from someone it referred to only as Individual X. That unnamed individual, according to an IRS criminal investigations affidavit, had stolen the bitcoin fortune from the Silk Road while it was still online by exploiting a security vulnerability in the site. Ulbricht, according to the affidavit, went so far as to threaten Individual X personally in an attempt to persuade them to return the money. But instead, Individual X held onto the hoard of coins for more than seven years as the cryptocurrency appreciated massively in value. An IRS criminal investigation was able to trace the funds, identify Individual X, and persuade them to forfeit the stolen drug money to avoid criminal prosecution.

By the time the nearly 70,000 bitcoins were seized, they had grown to more than $1 billion in value—at the time, the largest ever criminal seizure ever carried out by the Justice Department. (That record has since been broken by the seizure of $3.6 billion from a New York couple accused of laundering the proceeds of the hack of the cryptocurrency exchange Bitfinex.)

In the time since that seizure, however, court records show that the Justice Department has fought off a series of seemingly frivolous claims to the bitcoins, which prevented it from immediately selling off the coins as it does with other seized cryptocurrency. That resulted in the bitcoins appreciating even more, to nearly $3 billion at current exchange rates. When the coins are eventually sold and that sum is added to the US treasury, it will easily cover Ulbricht's restitution, with billions of dollars to spare.

Ulbricht's mother, Lyn Ulbricht, who has championed her son's defense and the case for a pardon since his arrest, wrote in a statement to WIRED that the repayment of his restitution represents a significant victory. "We’re very pleased that the financial penalty that was wrongly imposed on Ross has been reversed, just as other false charges against him were dropped in federal court after trial," Ulbricht's mother writes, referring to a separate murder-for-hire charge in the District of Maryland that was dropped after Ulbricht's life sentence. "This is just another reminder that the case against Ross has always been misrepresented and weak, and we look forward to the day when Ross' unjust sentence is corrected and he returns to the free world where he can contribute to society."

She notes, however, that like any prisoner, her son can't hold any financial assets in prison beyond a commissary account for basic needs. Recent sales of NFTs based on Ulbricht's artwork, for instance, raised more than $6 million, but the funds went into a trust earmarked for Ulbricht's defense, she says, as well as charitable contributions to other prisoners and their families.

The restitution repayment doesn't mean much for Ulbricht's hopes of a pardon or a change to his sentence, argues Berkeley's Weaver. But it does do away with a restitution order that Weaver has always considered a misguided "blood from a stone" attempt to squeeze Ulbricht for more bitcoins.

"Somebody involved in the early days of Silk Road is no longer the subject of the fed's ire, the fed's got their restitution, and Ross no longer has that stupidity hanging over him," Weaver concludes. "Seems like a win-win-win for all involved."