Tornado Cash Trial: DOJ Weighs Charges Against More Crypto VC Firms

Dragonfly Capital, a cryptocurrency venture capital firm (VC), may be facing charges from the US Department of Justice (DOJ) related to its early investment in Tornado Cash, co-founded by Roman Storm. 

Fox journalist Eleanor Terret reported that federal authorities are contemplating charges against several individuals at Dragonfly, including General Partner Tom Schmidt. 

Dragonfly Capital’s Role In Tornado Cash

During a recent court session, Assistant US Attorney (AUSA) Rehn indicated that charges could extend beyond Schmidt, leading to a request to seal the transcript of his comments. 

The court proceedings revealed email exchanges between Tornado Cash co-founder Roman Storm and Dragonfly partners, Haseeb Qureshi and Tom Schmidt, discussing the potential implementation of Know-Your-Customer (KYC) protocols for the platform. 

This detail adds another layer to the scrutiny surrounding Dragonfly’s involvement with Tornado Cash which has been scrutinized over the past years for allegedly being used by bad actors to launder “billions of dollars” in illicit funds, including stolen crypto.

In response to the ongoing investigation, Haseeb Qureshi took to social media platform X (formerly Twitter), to defend Dragonfly’s position. He clarified that the firm invested in PepperSec, the developers of Tornado Cash, in August 2020, citing a belief in the importance of open-source privacy technologies. 

Qureshi emphasized that prior to the investment, Dragonfly secured an external legal opinion confirming that Tornado Cash was compliant with existing laws, as outlined by the Financial Crimes Enforcement Network (FinCEN) in 2019.

Warns Of Dangerous Precedent

The US Department of Justice has reportedly stated in open court that they are considering charges against Dragonfly based on its investment in the Tornado Cash team. Qureshi expressed concern over this potential course of action, arguing that it would set a dangerous precedent. 

He underscored that Dragonfly did not have operational control over Tornado Cash, maintained no contact with any malicious users, and consistently encouraged compliance with legal standards among its portfolio companies.

Moreover, Qureshi pointed out that bringing charges against a venture capital firm for a portfolio company’s alleged wrongdoing would be unprecedented and could have a chilling effect on investments in the cryptocurrency and privacy-preserving technology sectors. 

He emphasized that Dragonfly has fully cooperated with the Department of Justice’s investigation, stating that the firm has never been a target of the inquiry and has always adhered to legal guidelines.

In light of the potential charges, Qureshi expressed confidence in Dragonfly’s legal standing, asserting that any attempts to prosecute the firm would be unfounded and contrary to the facts. 

He noted that the government’s statements in court could be aimed at undermining Tornado Cash’s defense, making it more challenging for Schmidt to testify.

Featured image from DALL-E, chart from TradingView.com