DOJ Probes Dragonfly’s 5-Year-Old Crypto Play—What’s Brewing Behind the Scenes?

Regulators are circling—again. The U.S. Department of Justice has reportedly set its sights on a half-decade-old maneuver by crypto investment giant Dragonfly. Was it genius strategy or regulatory sidestepping? Here’s the breakdown.

### The Backstory: A Move That Raised Eyebrows

Five years ago, Dragonfly executed a controversial play in the crypto markets. Now, the DOJ wants answers. No details yet on whether this is routine scrutiny or the prelude to enforcement—but in crypto, the line between innovation and loophole is razor-thin.

### Why Now? Timing Is Everything

With Bitcoin flirting with new highs and DeFi protocols sucking in institutional cash, regulators are playing catch-up. A five-year delay? Classic bureaucracy—unless they’ve been building a case all along.

### The Bigger Picture: Crypto’s Regulatory Reckoning

From the SEC’s war on ‘unregistered securities’ to the CFTC’s derivatives crackdown, crypto’s wild west days are numbered. Dragonfly’s case could set a precedent—or just another footnote in finance’s endless game of whack-a-mole.

One thing’s certain: When the DOJ knocks, even crypto’s brightest minds start sweating. And somewhere in Wall Street, a banker sips champagne, muttering ‘told you so.’

• Dragonfly may face legal risks over its 2020 backing of Tornado Cash’s developer, PepperSec.
• Tornado Cash, a crypto mixer, is accused of enabling illegal fund transfers and sanctions evasion.
• Dragonfly defends its investment, claiming it was lawful and based on legal advice at the time.

Dragonfly Capital is likely to get into legal issues in the NEAR future due to its 2020 investment in Tornado Cash developer PepperSec, Inc. The venture firm is accused of backing a project that then formed the subject of sanctions and criminal breaches against the U.S. Corporate prosecutors have indicated possible charges but have yet to file any official charges, with at least a court hearing on Friday.

Tornado Cash is a crypto protocol that covers tracing of transactions. The way it works is that it pools together the funds available with the users and redistributes them. This destroys the connection between the sender and the receiver. Developers named it a privacy technology, rather than a crime law. Nonetheless, the American government says it aided criminals to clean their money and evade sanctions.

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…

From Sanctions to Trials: Tornado Cash Under Fire

Tornado Cash got sanctioned by the U.S. Treasury Office of Foreign Assets Control (OFAC) in 2022. According to the agency, it engaged in illegal transfers of billions of dollars. Part of the money was connected to North Korean hackers and internet thefts. The platform has been closely monitored since then.

As of July 2023, two Tornado Cash developers, Roman Storm and Roman Semenov, had been charged. The allegations involved money laundering and U.S. sanctions violations. Roman Storm is on trial in New York. He could spend more than 40 years behind bars in case of being found guilty.

I’m Roman Storm. I poured my soul into Tornado Cash—software that’s non-custodial, trustless, permissionless, immutable, unstoppable. In 31 days, I face trial. The DOJ wants to bury DeFi, saying I should’ve controlled it, added KYC, never built it. SDNY is trying to crush…

Dragonfly Defends Its 2020 Bet on Privacy

The participation of Dragonfly Capital is owing to its early investment. In August 2020, the project was supported by the firm. It consulted the legal advisors in those days. According to them, this was a project that was in line with U.S Laws.

On Friday, Managing Partner Haseeb Qureshi put out a statement. He said that the company supports privacy technology. He also negatively criticized all possible charges by calling them absurd and unfounded. Qureshi asserts that the government attempts to undermine the defense during the ongoing trial.

He said that Dragonfly is prepared to counterattack. We will strongly protect ourselves, he said. He wondered why prosecutors WOULD attack a three-year-old investment. The strong point made by Qureshi is that the company has not done anything criminal.

Tornado Cash is functioning even after the sanctions. In 2024, it became active again. Flipside Crypto said it has processed $1.9 billion in deposits in a span of half a year. This implies that the need of privacy in crypto is still high.

The case of Dragonfly may act as a turning point. It can state the future treatment of funding of the decentralized privacy mechanisms by the law.