DOJ Keeps Sword Dangling Over VC Partner in High-Stakes Tornado Cash Case
Federal prosecutors just signaled they're playing for keeps—and venture capitalists might be next on the chopping block.
The hammer hovering over crypto's favorite privacy tool just got heavier. Now the feds are eyeing deep-pocketed backers who bet big on anonymity.
VCs used to write checks without consequences. Today's DOJ memo reads different: 'Your portfolio company's tech stack? That's your problem now.'
One hedge fund manager quipped: 'At least they're not going after our Cayman accounts...yet.' The SEC's probably already drafting that memo.
Tornado Cash trial intensifies, investor liability takes center stage
The DOJ’s interest in Tom Schmidt appears to stem from Dragonfly’s role as Tornado Cash’s primary venture backer and from internal communications that prosecutors may argue show deeper involvement than typical investment oversight.
Emails presented in court reveal Schmidt and Dragonfly co-founder Haseeb Qureshi engaged directly with Tornado Cash’s founders, even discussing potential know your customer (KYC) implementations.
This complicates the government’s claim that the developers knowingly facilitated money laundering, as it suggests efforts to explore compliance. Yet prosecutors seem to be testing a novel theory: that financial backers could bear liability if their portfolio companies’ tools are later misused, even if the investors never controlled the protocol’s operations.
Rehn’s request to seal his remark about potential Dragonfly charges hints at the DOJ’s sensitivity around its strategy. Superficially, this may indicate ongoing investigations or a desire to avoid prematurely shaping public perception before charges are finalized.
It also underscores the high stakes for Schmidt, who, by invoking the Fifth Amendment, signaled he believes his testimony might expose him to prosecution. The defense had pushed for immunity to compel his account, seeing him as a key witness to counter the DOJ’s narrative. Without his testimony, Storm’s team loses an opportunity to highlight Dragonfly’s advisory role, which could have helped distance the founders from allegations of criminal intent.
The implications Ripple far beyond this trial. If the DOJ pursues Schmidt or other Dragonfly figures, it could set a precedent that would chill venture investment in privacy tools or open-source projects broadly. Investors may demand unprecedented oversight of technical decisions or avoid contentious sectors altogether.
Meanwhile, Roman Storm and co-defendant Roman Semenov face charges, including conspiracy to commit money laundering and sanctions violations, which carry a combined maximum sentence of 40 years in prison. The DOJ alleges they knowingly enabled criminals, including North Korea’s Lazarus Group, despite the developers’ insistence that Tornado Cash was merely neutral infrastructure.
