DOJ Targets Crypto VC Firm Behind Tornado Cash in Landmark Privacy Crackdown
U.S. prosecutors circle privacy-focused investors as regulatory noose tightens
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The Department of Justice is reportedly building a case against a major cryptocurrency venture capital firm that backed Tornado Cash - the controversial Ethereum mixing service blacklisted by Treasury officials in 2022. Sources suggest this could become the first criminal prosecution of investors in privacy tech.
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Why VCs are sweating
While the DOJ stays tight-lipped, legal experts note the move signals a dangerous precedent for crypto investors: due diligence may no longer shield backers of 'neutral' protocols. The targeted firm allegedly continued funding Tornado Cash developers even after sanctions.
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Privacy tech at crossroads
The case threatens to freeze investment in blockchain anonymity tools entirely - just as Wall Street banks quietly patent their own transaction obfuscation methods (the hypocrisy practically writes itself).
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One crypto lawyer quipped: 'They'll jail a dev for writing code but give a Wells Fargo exec a bonus for laundering actual drug money.' The coming months may determine whether privacy remains a constitutional right or becomes a financial crime.
Dragonfly Entangled in Tornado Cash Trial
The long-awaited trial for Roman Storm, founder of Tornado Cash, is underway, and court reporters are carefully following the proceedings. The prosecution opened by trying to connect the platform to specific victims, and recently tied Storm to offshore dealings. Today, they referred to Tornado Cash’s other business connections, specifically its VC backer Dragonfly Capital:
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
Dragonfly Capital, a longstanding crypto-related VC fund, was an early supporter of Tornado Cash. Therefore, prosecutors found it relevant to show the court a series of emails between Storm and Dragonfly executives.
Apparently, these emails discussed whether or not to add KYC guidelines to Tornado Cash. Some online commentators speculated that the firm explicitly advised Tornado Cash to disregard KYC protocols, but this is controversial.
Possible New Charges
In any event, US prosecutors claimed that they’re considering charges against several Dragonfly employees due to their possible involvement in Tornado Cash’s alleged illegal activity. These charges wouldn’t apply to the entire corporate entity or every employee, but the presiding Judge agreed to seal the exact transcript of this exchange.
Tornado Cash’s lawyers requested that Tom Schmidt, a general partner at Dragonfly, testify on the platform’s behalf. However, Schmidt’s attorney invoked the Fifth Amendment, refusing to do so. Essentially, he argued that Schmidt WOULD be forced to bear witness against himself, which is unconstitutional. It’s unclear if this argument will hold up, but Schmidt didn’t testify today.
For now, then, it’s difficult to make any predictions about Dragonfly’s entanglement with the Tornado Cash case. If prosecutors decline to criminally charge the prominent VC firm, this might jeopardize Schmidt’s bid for immunity. Of course, the defense called him as a witness, so he could potentially refuse to testify without the Fifth Amendment’s protection.
Whatever the case may be, the trial is now in recess for the weekend. Closing arguments are expected next week.
