DOJ Considers Criminal Charges Against Dragonfly Partner Over 2020 Tornado Cash Investment Linked to Illicit Activity

The U.S. Department of Justice (DOJ) is considering criminal charges against Tom Schmidt, a general partner at crypto venture capital firm Dragonfly Capital, over a 2020 investment in Tornado Cash, a decentralized privacy tool under scrutiny for its alleged role in facilitating illicit financial activity. The development emerged during the ongoing trial of Roman Storm, a Tornado Cash developer facing conspiracy and money laundering charges. Prosecutors revealed that the DOJ is examining Schmidt and another unnamed individual, though they emphasized the focus is not on the firm as a whole [1].

The case gained prominence after the prosecution introduced internal communications between Schmidt, Dragonfly managing partner Haseeb Qureshi, and Storm during a hearing. Schmidt’s decision to invoke the Fifth Amendment and avoid testifying—due to the absence of immunity—shifted the defense’s strategy, as it had hoped to use him to contextualize the investment rationale. Storm faces up to 45 years in prison if convicted on charges including operating an unlicensed money transmitting business [2].

Dragonfly Capital has denied operational involvement with Tornado Cash and stated it cooperated with federal investigations since 2023. Qureshi, in a public statement, reiterated the firm’s belief in the investment’s legality, citing external legal opinions obtained before the 2020 transaction. He argued that the firm had no contact with illicit users and emphasized its commitment to portfolio compliance [3]. The DOJ, however, is reportedly analyzing communications to determine whether the firm knowingly supported activities violating U.S. law, such as sanctions evasion or ransomware-related transactions [4].

The case reflects a broader DOJ strategy to hold investors accountable for funding decentralized technologies later linked to financial crimes. While previous enforcement actions targeted individual users of Tornado Cash, this case represents a new front in the agency’s efforts to address investor liability. Dragonfly’s defense hinges on the argument that the open-source nature of Tornado Cash absolves investors of direct culpability, though prosecutors counter that early-stage funding may have been aware of the risks [5].

Industry observers note the implications for venture capital firms in the crypto space, particularly regarding due diligence in projects with dual-use capabilities. The outcome could reshape risk assessments for DeFi investments, as regulators and innovators grapple with balancing innovation and compliance. Dragonfly’s public defiance and the DOJ’s pursuit of charges underscore the legal uncertainties surrounding decentralized finance, where lines between legitimate use and illicit activity remain blurred [1].

Source: [1] [DOJ Considering Criminal Charges Against Dragonfly Capital Employees for Years-Old Tornado Cash Investments] [https://www.coindesk.com/policy/2025/07/25/doj-considering-criminal-charges-against-dragonfly-capital-employees-for-years-old-tornado-cash-investments]

[2] [Dragonfly Faces DOJ Pressure Over Tornado Cash Investment] [https://99bitcoins.com/news/bitcoin-btc/dragonfly-faces-doj-pressure-over-tornado-cash-investment/]

[3] [Dragonfly Responds to DOJ Scrutiny over Tornado Cash Investment] [https://ground.news/article/the-us-department-of-justice-examines-financial-ties-to-tornado-cash]

[4] [DOJ Is Considering Charging Crypto VC Firm Dragonfly in Tornado Cash Case] [https://cryptonews.net/news/legal/31321767/]

[5] [DOJ Considers Legal Action Against Dragonfly Capital and Tornado Cash Developer] [https://www.ainvest.com/news/doj-considers-legal-action-dragonfly-capital-tornado-cash-developer-investment-2507/]