DOJ Investigates Dragonfly Capital Over Alleged Tornado Cash Ties

Tornado Cash Developer Trial: Prosecutors Eye Dragonfly Capital Amid Stalled Defense Testimony

The ongoing trial of Roman Storm, a developer of the privacy-focused cryptocurrency mixer Tornado Cash, has taken a significant turn as prosecutors signal a potential interest in pursuing charges against individuals associated with venture capital firm Dragonfly Capital. This advancement emerged when Storm’s defense team sought to call a Dragonfly partner, who afterward invoked his Fifth Amendment right against self-incrimination, refusing to testify.

The prosecution’s case against Storm centers on accusations of conspiracy to commit money laundering, operating an unlicensed money transmitting business, and violating international sanctions, carrying a potential maximum sentence of 45 years. During the proceedings, prosecutors presented private messages exchanged between Storm and Dragonfly’s managing partner, Haseeb Qureshi, and another partner, Alex Schmidt. These messages were presented to establish jurisdiction in New York,demonstrate Storm and his colleagues’ financial gains from Tornado Cash,and highlight frequent updates to the platform’s user interface.

When the defense proposed that Schmidt testify to provide context for these messages and clarify Dragonfly’s investment rationale, prosecutors declined to offer immunity from prosecution. This prompted Schmidt to invoke his Fifth Amendment right, preventing him from taking the stand in Storm’s defense.

In a revealing exchange in open court, the judge questioned the prosecution’s intentions regarding Dragonfly Capital. Prosecutor Danielle Rehn indicated that while not “everyone” at the firm would be targeted, Schmidt and at least one other individual were under scrutiny. The judge subsequently agreed to seal this portion of the transcript.

Haseeb Qureshi, in a public statement on X, defended Dragonfly’s investment in Tornado Cash, emphasizing the firm’s commitment to privacy and the belief that Tornado Cash has a lawful right to exist. He asserted that Dragonfly did not operate or control Tornado Cash, had no contact with illicit users, and consistently advised its portfolio companies to comply with the law. Qureshi characterized any charges against a venture capital firm for a portfolio company’s alleged actions as “unprecedented” and stated that Dragonfly had fully cooperated with the government’s examination.

Qureshi cautioned that bringing charges against Dragonfly years after the investigation began would be “outrageous” and have a “chilling effect” on investment in crypto and privacy technologies. He expressed confidence that the Department of justice would not pursue such “absurd and groundless charges” but affirmed Dragonfly’s intention to “vigorously defend” itself if they did.

How might increased scrutiny of venture capital due diligence processes impact future investments in privacy-focused crypto technologies?

The Examination Unfolds: What we certainly know

The U.S. Department of Justice (DOJ) is reportedly investigating Dragonfly Capital, a prominent venture capital firm specializing in digital assets, over potential violations of sanctions regulations related to Tornado cash. This investigation centers around allegations that Dragonfly Capital failed to adequately vet transactions and ensure compliance with Office of Foreign Assets Control (OFAC) rules, specifically concerning the sanctioned cryptocurrency mixer, Tornado Cash.

The core of the issue revolves around the use of Tornado Cash for laundering illicit funds, including those linked to North Korean hacking groups like Lazarus Group. While Tornado Cash itself was sanctioned by the U.S. Treasury Department in August 2022,the DOJ’s focus now appears to be on firms that may have facilitated its use,even indirectly. dragonfly Capital’s involvement stems from investments made in projects that interacted with Tornado Cash.

Dragonfly Capital’s Response and Public Statements

Dragonfly Capital has acknowledged the investigation and stated its full cooperation with the DOJ. In a public statement released on July 25, 2025, the firm emphasized its commitment to compliance and its proactive efforts to implement robust anti-money laundering (AML) procedures. They maintain that they were unaware of any illicit activity and that their investments were made in good faith.

Key points from Dragonfly’s statement include:

A pledge to provide all requested information to the DOJ.

A reiteration of their dedication to responsible investing in the crypto space.

An assertion that they have strengthened their compliance protocols since the Tornado Cash sanctions were imposed.

A claim that their due diligence processes are continually evolving to address the dynamic regulatory landscape.

Tornado Cash: A Brief Overview & Why it’s Sanctioned

Tornado Cash is a decentralized cryptocurrency mixer built on Ethereum. It utilizes zero-knowledge proofs to obscure the origins of cryptocurrency transactions, making it difficult to trace funds. While proponents argue it enhances privacy, regulators view it as a tool for money laundering and facilitating criminal activity.

Here’s a breakdown of why Tornado Cash attracted regulatory scrutiny:

Obfuscation of Transactions: The primary function of Tornado Cash is to break the link between sender and receiver addresses.

Laundering of Stolen Funds: The platform was used to launder over $7 billion in cryptocurrency, including funds stolen in high-profile hacks.

North Korean Connection: The U.S. Treasury Department specifically linked Tornado Cash to the Lazarus Group,a North korean state-sponsored hacking association responsible for numerous cyberattacks and cryptocurrency thefts.

Sanctions by OFAC: In August 2022, OFAC sanctioned Tornado Cash, prohibiting U.S. persons from interacting with the platform.

Implications for the Crypto Venture Capital Industry

This investigation has sent ripples throughout the crypto venture capital industry. It highlights the increasing regulatory pressure on firms operating in the digital asset space and underscores the importance of robust compliance programs.

Here’s what this means for other VCs:

1. Enhanced Due Diligence: Venture capital firms will likely face increased scrutiny regarding their due diligence processes, notably when investing in projects that interact with privacy-focused technologies.
2. AML Compliance: Strengthening Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures is now paramount.
3. Regulatory uncertainty: the investigation underscores the ongoing regulatory uncertainty surrounding cryptocurrencies and the potential for enforcement actions.
4. Reputational Risk: Association with sanctioned entities or illicit activities can severely damage a firm’s reputation.
5. Increased Legal Costs: Compliance and potential legal defense will likely lead to increased operational costs.

The Broader Regulatory Landscape: Crypto Sanctions Enforcement

the DOJ’s investigation into Dragonfly Capital is part of a broader trend of increased enforcement of sanctions regulations within the cryptocurrency industry. The U.S. government is actively pursuing individuals and entities involved in facilitating illicit financial activity using digital assets.

Recent examples include:

The arrest of Roman Storm, a developer linked to Tornado cash, in August 2023, on charges of conspiracy to commit money laundering.

Ongoing investigations into other cryptocurrency mixers and privacy-focused protocols.

Increased collaboration between U.S. law enforcement agencies and international partners to combat crypto-related crime.

What Happens Next? Potential Outcomes

The outcome of the DOJ’s investigation remains uncertain. Potential scenarios include: