Dragonfly Capital Under DOJ Probe for 2020 Tornado Cash Investment

Dragonfly Capital, a prominent blockchain-focused venture firm, is under federal investigation by the U.S. Department of Justice (DOJ) for its 2020 investment in Tornado Cash, a privacy protocol criticized for enabling illicit financial activity. The probe centers on whether the firm violated anti-money laundering laws by funding PepperSec, the developer of Tornado Cash, which was later sanctioned by the Treasury Department in 2022. Managing partner Haseeb Qureshi has dismissed the investigation as “groundless,” emphasizing that the investment adhered to then-current FinCEN guidelines and independent legal review [3].

The DOJ’s scrutiny follows broader regulatory actions against privacy tools, including charges against Tornado Cash developer Roman Storm, who faces up to 45 years in prison for alleged money laundering conspiracy. Prosecutors argue that Tornado Cash’s design inherently facilitates criminal activity, particularly for groups like North Korea’s Lazarus. Dragonfly has framed the case as an attempt to undermine Tornado Cash’s legal defense by leveraging testimony from co-founder Tom Schmidt, a firm partner, and warned that prosecuting investors could stifle blockchain innovation [3].

The firm’s legal defense hinges on the claim that Tornado Cash did not enable illicit activity at the time of investment. Qureshi stated that Dragonfly applied the same due diligence standards to all portfolio companies, aligning with pre-2022 regulatory frameworks. However, the DOJ’s focus on historical transactions reflects a shift in enforcement priorities, with regulators increasingly targeting privacy-preserving technologies amid concerns about their role in money laundering [2].

The investigation has already compelled Dragonfly to surrender documents in 2023, though Qureshi clarified the firm was not a primary target and cooperated fully. Despite its confidence in avoiding charges, the case highlights the regulatory risks for institutional players in privacy-focused projects. Previous OFAC sanctions on Tornado Cash led to significant declines in total value locked (TVL) and price volatility across similar protocols, underscoring the potential market impact of the DOJ’s approach [3].

The legal battle could set a precedent for investor liability in decentralized technologies, with implications for crypto venture capital. Privacy advocates argue that tools like Tornado Cash protect user anonymity, a cornerstone of blockchain’s original vision. Regulators, meanwhile, emphasize the need to curb financial crime, creating a tension between innovation and compliance. Dragonfly’s stance reflects broader industry concerns about a “chilling effect” on funding for privacy-preserving innovations, particularly if investors face secondary liability for portfolio company actions [3].

Sources:

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

[2] [title: Dragonfly Capital Faces Potential Legal Action Over Tornado Cash Investment] [url: https://moneycheck.com/dragonfly-capital-faces-potential-legal-action-over-tornado-cash-investment/]

[3] [title: Venture Investor Dragonfly Faces Potential Charges Over Tornado Cash Involvement] [url: https://cryptoslate.com/venture-investor-dragonfly-faces-potential-charges-over-tornado-cash-involvement/]