DOJ Is Considering Charging Crypto VC Firm Dragonfly in Connection With Tornado Cash

U.S. prosecutors are considering bringing charges against Dragonfly Capital Partners’ Tom Schmidt and some of his colleagues over their investment in the developer behind Tornado Cash, Assistant U.S. Attorney Thane Rehn said Friday at Roman Storm’s criminal trial in New York.

The federal government’s revelation came as defense lawyers attempted to call Schmidt as a witness in Storm’s trial. The general partner and his team invested in Pepper Sec Inc., an entity owned by Tornado Cash developers, in 2020. 

“In 2023, we received a DOJ subpoena and have fully cooperated with the government’s investigation of Tornado Cash, confident that we have always complied with the law,” Haseeb Qureshi, co-founder and general partner at Dragonfly, said Friday in a social media post. 

“We don’t believe the DOJ would actually bring such absurd and groundless charges,” he said, adding that the VC firm and its partners would “vigorously defend ourselves.”

Qureshi did not immediately respond to Decrypt’s request for additional comment on the matter. 

After being called to the stand, Schmidt pleaded the Fifth Amendment, which protects him against self-incrimination. However, it remains unclear as of writing time whether the executive will still be forced to testify in federal court.

The outing of the federal government’s potential case against Dragonfly comes amid Tornado Cash developer Roman Storm’s criminal trial—a highly consequential case that could determine whether software developers are legally responsible for what they code.

Created in 2019, Tornado Cash is an Ethereum-based coin mixer that obfuscates the origin and destination of cryptocurrency transactions, making them difficult to trace on public blockchains. It’s an automated tool built with smart contracts—which hold the code that powers decentralized apps—which means there’s no human middleman conducting the transactions.

Storm faces up to 45 years in prison for allegedly operating an unlicensed money-transmitting business and violating U.S. sanctions, in addition to allegedly conspiring to launder money in relation to Tornado Cash.

The U.S. government alleges Storm’s mixer was used by criminals to launder their ill-gotten gains, exposing the developer to legal liabilities. But many members of the crypto community argue that Storm must not be held responsible for users’ activities on his platform, citing cypherpunk principles of privacy and individual autonomy. 

Storm and his co-founders exchanged emails with Dragonfly executives, including Qureshi and Schmidt, according to federal prosecutors. In one such email, Storm and his team sought advice from the venture capitalists on integrating know-your-customer (or KYC) features with Tornado Cash, a process for identifying financial services platforms’ users in compliance with U.S. regulations. 

Schmidt’s home was raided over the course of the U.S.’ criminal investigation into Roman Storm and Tornado Cash, The Rage reported on Friday. The general partner’s devices were also seized, according to the publication.