DOJ Considers Criminal Charges Against Dragonfly Partner in Tornado Cash Probe

The U.S. Department of Justice (DOJ) has left open the possibility of pursuing criminal charges against Tom Schmidt, a general partner at crypto venture firm Dragonfly, as part of its ongoing prosecution of Tornado Cash developer Roman Storm. The revelation emerged during a July 25 court hearing, where Assistant U.S. Attorney Thane Rehn briefly mentioned the DOJ’s consideration of charges before requesting the court to seal the statement [1]. This development signals a potential expansion of legal accountability in crypto cases, with prosecutors exploring whether venture capital firms can be held liable for advisory roles in projects later accused of enabling money laundering, even without operational control over the technology [1].

The Tornado Cash case, which accuses developers of facilitating illicit transactions including those linked to North Korea’s Lazarus Group, has spotlighted Dragonfly’s role as Tornado Cash’s primary backer. Court filings reveal that Schmidt and co-founder Haseeb Qureshi engaged directly with the project’s team, including discussions on implementing know-your-customer (KYC) measures—a detail that complicates the DOJ’s argument of willful criminal intent. Emails presented as evidence show the founders seeking feedback on compliance strategies, suggesting efforts to mitigate risks rather than facilitate wrongdoing [1].

Prosecutors’ strategy hinges on interpreting Dragonfly’s advisory involvement as complicity in Tornado Cash’s misuse. If successful, this approach could establish a precedent where venture investors face liability for downstream misuse of their portfolio projects, regardless of their operational role. The case raises critical questions about the boundaries of investor responsibility in decentralized technologies, where control and intent are often ambiguous [1].

Schmidt’s decision to invoke the Fifth Amendment during pre-trial proceedings underscores the gravity of the DOJ’s investigation. His testimony was sought by the defense to counter the government’s narrative, but without it, the defendants lose an opportunity to highlight Dragonfly’s compliance-focused engagement. This legal maneuver highlights the DOJ’s broader aim to test whether advisory engagement alone can constitute criminal liability in crypto-related cases [1].

The implications extend beyond the current trial. If charges are pursued against Schmidt or other Dragonfly figures, it could deter venture capital from funding privacy tools or open-source projects, prompting investors to demand stricter oversight of technical decisions or avoid high-risk sectors altogether. Critics argue such a shift risks stifling innovation in privacy-centric technologies, which often operate in a legal gray area between compliance and decentralization [1].

Storm and co-defendant Roman Semenov face charges including conspiracy to commit money laundering, with potential prison sentences totaling 40 years. The DOJ maintains that Tornado Cash was designed to aid criminals, while the defendants insist it is neutral infrastructure. The outcome could shape how regulators define intent in decentralized protocols and whether investors are held accountable for misuse by third parties [1].

As the trial unfolds, the DOJ’s focus on Dragonfly reflects a broader regulatory strategy to hold stakeholders at all levels of the crypto ecosystem accountable. This case tests the legal framework’s adaptability to an industry where traditional concepts of control and liability are increasingly challenged by decentralization.

Source: [1] [title1DOJ Leaves Door Open to Charge VC Pro in Tornado Cash Case] [url1https://crypto.news/doj-leaves-door-open-charge-vc-pro-tornado-cash-case/]