Dragonfly Capital Faces DOJ Threat Over Tornado Cash Ties

Dragonfly Capital could be the target of federal charges stemming from its early investment in Tornado Cash developer PepperSec, Inc., but the venture firm says it is prepared to “vigorously defend” itself if prosecutors pursue the case.

In a Friday social media post, Dragonfly Capital managing partner Haseeb Qureshi defended the firm’s early backing of Tornado Cash — an open-source protocol that allows users to obscure blockchain transactions — dating back to August 2020.

“We made this investment because we believe in the importance of open-source privacy-preserving technology,” said Qureshi, adding that the company had consulted outside legal counsel before investing and was assured Tornado Cash was compliant.

Despite this legal opinion, Tornado Cash developers Roman Storm and Roman Semenov were charged with money laundering and sanctions violations by the US Attorney’s Office for the Southern District of New York in August 2023.

Storm’s criminal trial is underway in New York, where he faces federal charges that could result in more than 40 years in prison.

On Friday, prosecutors indicated they may pursue charges against Dragonfly for its investment in the Tornado Cash team five years ago.

“We believe the government’s statement in court today was primarily to undermine a defense of Tornado Cash,” Qureshi said, adding that bringing charges after all this time would be “outrageous.”

“We don’t believe the DOJ would actually bring such absurd and groundless charges. But if they do, we intend to vigorously defend ourselves,” he added.

Related: Ethereum core developer testifies in Roman Storm defense as gov’t rests case

Devs claim Tornado Cash was a privacy tool, but prosecutors don’t buy it

Tornado Cash’s developers described the platform as a decentralized, non-custodial privacy tool that enabled users to send and receive digital assets without revealing their wallet history.

Often referred to as a “mixer,” it pooled cryptocurrencies from multiple users before redistributing them, effectively breaking the direct link between sending and receiving addresses.

In 2022, the US Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, alleging it facilitated multibillion-dollar money laundering, supported cybercrime and posed a threat to national security. The tool was also accused of obfuscating illicit transactions.

Despite sanctions and. criminal investigations, Tornado Cash saw a resurgence in 2024. Data from Flipside Crypto showed $1.9 billion in deposits during the first six months of that year.

Related: Judge allows testimony on ‘feasible’ Tornado Cash code changes