DOJ Investigates Dragonfly Over Tornado Cash Investment Ties

Highlights:

• DOJ could accuse Dragonfly Capital of investing in Tornado Cash in 2020.
• Haseeb Qureshi defended the firm’s support of privacy tech in a public X post.
• The prosecutors cited email records between Dragonfly and Tornado Cash during the trial.

The United States Department of Justice is considering pressing charges against Dragonfly Capital. Prosecutors raised concerns about Dragonfly Capital’s 2020 investment in Tornado Cash during Roman Storm’s ongoing criminal trial. Moreover, the issue surfaced as part of their case against the Tornado Cash co-founder.

Fox Business journalist Eleanor Terrett posted on X on July 25 that Tom Schmidt, a general partner at Dragonfly, invoked his Fifth Amendment rights. The prosecutors allegedly refused to grant him immunity and barred him from giving possible testimony in defense of Storm.

🚨NEW from the @rstormsf trial: The DOJ is apparently still considering charges against an unspecified number of people at crypto VC firm @dragonfly_xyz, not just General Partner @tomhschmidt, according to AUSA Rehn.

After saying this in court, Rehn asked for the transcript of… https://t.co/jt1XCCWO0P

— Eleanor Terrett (@EleanorTerrett) July 25, 2025

The early communications between Tornado Cash and Dragonfly have been at the focus of the DOJ investigation. The evidence is messages with regard to updating user interfaces and planning finances. Prosecutors state that these contacts contribute to the formation of the legal venue in New York.

Storm, accused of charges such as money laundering and sanctions violations, faces the risk of up to 45 years in prison if convicted. His lawyers claim that he was willing to operate within the law and that Tornado Cash was a neutral tool.

Tornado Cash Trial Uncovers Investor Involvement

In 2020, the email communications of Storm and Dragonfly were found in court records. These emails involved the possibility of implementing Know Your Customer (KYC) checks with Tornado Cash in a bid to demonstrate regulatory consideration. Managing partner Haseeb Qureshi responded to the matter on X, justifying the Dragonfly investment. He claimed that the company was guided by legal advice and had never run the protocol. Dragonfly denies any interaction with bad actors and did not control the development of Tornado Cash.

Dragonfly invested into PepperSec, Inc., the developers of Tornado Cash, in August of 2020. We made this investment because we believe in the importance of open-source privacy-preserving technology. Prior to our investment, we obtained an outside legal opinion that confirmed that…

— Haseeb ＞|＜ (@hosseeb) July 25, 2025

Furthermore, Dragonfly argues that the charges to be brought forward are groundless. According to the company, such a move may scare people who are willing to invest in privacy-related technologies. One of the people backing Storm in his legal battle is Ethereum co-founder Vitalik Buterin. Moreover, some crypto leaders have funded the defense, citing wider questions about innovation and privacy technology.

Tornado Cash Cleared from U.S. Sanctions List

In 2022, Tornado Cash was put under U.S. Treasury sanctions. Law enforcement authorities associated the protocol with laundering over $7 billion, including money from the North Korean Lazarus Group.

Later in 2024, the Fifth Circuit Court sided against the OFAC classification of Tornado Cash. Courts determined that its smart contracts are code that is autonomous and not considered to be property under sanctions law. The restrictions were then removed. However, the criminal case against Storm is still ongoing. Prosecutors still hold the position that Storm had been consciously facilitating the illegal use of Tornado Cash. The defense response to this accusation is that the project was to offer open-source security solutions and not criminal services.

In addition, Dragonfly states that it will go to battle against any litigation. The company affirms that the investment was conducted in good faith under the consideration of the law. According to The Rage, Schmidt’s home was searched, and devices were seized.