New York, NY – Federal prosecutors are reportedly considering criminal charges against employees of crypto venture capital firm Dragonfly Capital, including General Partner Tom Schmidt, in connection with their 2020 investment in Tornado Cash developer PepperSec, Inc. This development emerged during the ongoing trial of Tornado Cash developer Roman Storm, where prosecutors indicated their contemplation of charges. Dragonfly Capital, through Managing Partner Haseeb Qureshi, has publicly stated its intent to "vigorously defend" itself if such charges are brought.
Dragonfly invested in PepperSec, Inc. in August 2020, citing a belief in "the importance of open-source privacy-preserving technology." According to Qureshi, the firm obtained an "outside legal opinion that confirmed that Tornado Cash as built complied with the law, under the guidance given by FinCEN in 2019," prior to their investment. The firm asserts it did not operate or control Tornado Cash and had no contact with malicious users.
The U.S. Department of Justice (DOJ) has indicated that Dragonfly is not a target of their broader investigation into Tornado Cash, with Dragonfly confirming full cooperation since receiving a DOJ subpoena in 2023. Despite this, prosecutors have introduced emails between Storm and Dragonfly executives, including Schmidt and Qureshi, during the trial. Some exchanges reportedly show the Tornado Cash founders seeking advice on implementing Know Your Customer (KYC) measures.
Qureshi described the potential charges as "outrageous, contrary to the facts and the law," warning they would "induce a chilling effect onto all investment into crypto and privacy-preserving technologies in America." He emphasized that charging a venture firm for a portfolio company’s alleged misconduct would be "unprecedented." Dragonfly maintains that Tornado Cash itself has a lawful right to exist, a view reinforced by the "Van Loon v. Department of the Treasury" case and OFAC’s subsequent rescission of certain sanctions.
The DOJ's consideration of charges against investors marks a significant escalation in enforcement actions within the crypto space, potentially setting a precedent for investor liability in decentralized finance. The firm believes the government's statement in court was primarily aimed at undermining the defense of Tornado Cash developer Roman Storm.