DOJ Probes Dragonfly Partner Over Tornado Cash Advisory Role

The U.S. Department of Justice (DOJ) is exploring potential charges against Tom Schmidt, a general partner at venture capital firm Dragonfly, in connection with its advisory and investment role in the Tornado Cash cryptocurrency mixer case. The development, first revealed in a sealed court filing, marks a rare extension of regulatory scrutiny to venture capital participation in crypto projects with compliance risks. Schmidt, who invoked the Fifth Amendment during the ongoing trial of Tornado Cash developer Roman Storm, has not been formally charged but is now under active investigation. Assistant U.S. Attorney Thane Rehn confirmed that the DOJ is “still evaluating” the matter, while emphasizing that Dragonfly’s communications with Tornado Cash are central to its legal theory [1].

The case centers on Tornado Cash, a decentralized protocol designed to obscure the origins of cryptocurrency transactions. The DOJ has previously labeled the tool as facilitating illicit activity, including sanctions evasion and money laundering. Dragonfly, a prominent crypto-focused VC firm, invested in and advised Tornado Cash prior to the DOJ’s 2022 enforcement action against the project. The firm claims it conducted independent legal reviews to ensure compliance with federal regulations, but the DOJ’s focus on Schmidt suggests regulators may now seek to hold investors and advisors accountable alongside developers. Haseeb Qureshi, Dragonfly’s managing partner, has denounced the prospect of charges as “legally unfounded,” arguing that U.S. precedents typically target operators rather than financial backers. “Our investment came after independent legal review that indicated compliance with federal rules,” he stated [1].

The potential charges could signal a shift in U.S. enforcement strategies, expanding the legal exposure of venture capital in the crypto sector. While institutional investors often rely on legal due diligence to navigate regulatory gray areas, this case may challenge such assumptions. The DOJ’s focus on Schmidt’s advisory role raises questions about liability for investors in privacy-focused technologies or infrastructure protocols. Analysts note that such a precedent could deter VC funding for projects with compliance risks, particularly in an environment where crypto regulations remain fragmented and evolving. Dave Craige, a blockchain commentator, highlighted the case’s broader implications in a January 2023 tweet, suggesting it reflects heightened scrutiny of capital flows in decentralized finance [1].

The legal battle also underscores the challenges of applying traditional enforcement frameworks to decentralized systems. Tornado Cash operates as an open-source protocol, with no central operator, complicating efforts to assign culpability. The DOJ’s approach of targeting investors and advisors—rather than developers—could create new compliance hurdles for VC firms. However, critics argue that the charges lack clear legal precedent. U.S. law has historically distinguished between direct operational control and passive investment, with penalties typically reserved for developers who actively maintain illicit tools. The case may test this boundary, potentially reshaping liability standards in crypto finance.

Sources: [1] [title: DOJ Considers Charges Against Dragonfly Partner in Tornado Cash Case] [url: https://coinmarketcap.com/community/articles/688578df361ea207b380139a/]