DOJ Abandons Criminal Probe of Dragonfly Capital in Tornado Cash Case

The U.S. Department of Justice (DOJ) has withdrawn from plans to pursue criminal charges against venture capital firm Dragonfly Capital for its early investment in the controversial Ethereum-based crypto mixer Tornado Cash, according to a statement from the firm’s co-founder, Haseeb Qureshi [1]. This development emerged during the ongoing criminal trial of Tornado Cash co-founder Roman Storm, who faces charges including conspiracy and sanctions violations that could carry a sentence of up to 45 years.

Qureshi emphasized that the DOJ had “backtracked” on the matter, noting that the agency had publicly corrected earlier media reports suggesting it was planning to charge Dragonfly. “Neither Dragonfly nor any of its principals are targets in their investigation,” he stated on social media, adding that the initial speculation was “unprecedented” and a violation of DOJ policy, which typically prevents prosecutors from making public threats that could undermine the defense’s right to present testimony [1].

The controversy began when prosecutors, during a Friday court session, suggested that charges against Dragonfly Capital Partners’ Tom Schmidt and others were under consideration. This prompted Qureshi to strongly criticize the move as a breach of ethical boundaries, stating it was designed to deter potential testimony in favor of the defense [1]. When the defense team sought to call Schmidt as a witness, prosecutors refused to grant immunity, leading him to invoke his Fifth Amendment rights and decline to testify [1].

This situation highlights the broader legal uncertainty surrounding open-source cryptocurrency projects and their investors. Dragonfly had initially invested in Tornado Cash in August 2020, citing a belief in the importance of privacy-preserving technologies and after consulting legal counsel to confirm the project’s regulatory compliance [1]. Tornado Cash functions as a mixer that obscures transaction origins, which prosecutors argue has been exploited by cybercriminals, including North Korean hacking groups, for money laundering [1].

Another key development in the case involved a witness from Chainalysis, a blockchain analytics firm, who also invoked the Fifth Amendment after being contacted by prosecutors. The defense claimed that Chainalysis’ role in operating a Tornado Cash relayer could expose it to criminal liability, as prosecutors have described the relayer as part of the alleged conspiracy [1].

The Storm trial is now approaching its closing arguments, with legal experts noting that the outcome could set a significant precedent regarding the extent to which developers and investors in open-source cryptocurrency tools can be prosecuted for potential misuse by third parties [1]. The case follows closely on the heels of the guilty plea entered by the founders of Bitcoin mixer Samourai Wallet, who also faced similar charges [1].

Storm and co-founder Roman Semenov were charged in 2023 for operating an unlicensed money-transmitting business and violating sanctions, after the U.S. Treasury added Tornado Cash to its sanctions list in 2022. A third Tornado Cash co-founder, Alexey Pertsev, was separately convicted in the Netherlands [1].

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[1] https://decrypt.co/332632/dragonfly-capital-no-longer-under-doj-scrutiny-in-tornado-cash-trial-co-founder