- U.S. prosecutors are considering charges against Dragonfly Capital over its investment in Tornado Cash’s developer.
- Dragonfly Capital invested $882,000 in Tornado Cash creator Peppersec Inc in 2020.
- A managing partner at Dragonfly called potential charges “outrageous” and warned it could hurt crypto and privacy tech investment.
- Messages presented in court show active discussions between Dragonfly executives and Tornado Cash founders on business and compliance plans.
- Dragonfly says it cooperated fully with authorities and maintains the firm was told it is not a target of the investigation.
Federal prosecutors may bring charges against executives at Dragonfly Capital because of the firm’s 2020 investment in Tornado Cash developer Peppersec Inc, according to statements from a U.S. assistant attorney in a New York court on Friday.
Court documents show Dragonfly Capital invested $882,000 in Tornado Cash’s creator in August 2020. Managing partner Haseeb Qureshi said that the firm made the investment to support open-source privacy technology and called the possibility of charges “outrageous.”
“Charging a venture firm for a portfolio company’s alleged misconduct would be unprecedented,” Qureshi said on X. He added that “we obtained an outside legal opinion that confirmed that Tornado Cash as built complied with the law.”
Messages revealed in court show that Dragonfly executives discussed several business and compliance strategies with Tornado Cash’s founders. These included talks on adding anti-money laundering features and debating token lockup schedules. In 2022, Tornado Cash co-founder Roman Storm discussed introducing a “relay registry,” which prosecutors say is central to the criminal charges he faces.
The trial of Roman Storm began in the Southern District of New York last week. He faces charges of conspiracy to commit money laundering, running an unlicensed money business, and violating U.S. sanctions. If convicted, Storm could serve over 40 years in prison. Tornado Cash is a crypto tool that helps users hide the movement of their funds on the blockchain. Prosecutors argue it was used by cybercriminals to launder stolen digital currency.
In August 2022, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, citing its failure to stop money laundering by bad actors. These sanctions were lifted after legal action by Ethereum developer Preston Van Loon and others, as noted in a Treasury Department statement and court filings.
Qureshi said Dragonfly always told its portfolio companies to follow the law and noted the firm received a government subpoena in 2023, cooperating fully with the investigation. He stated that authorities assured Dragonfly it was not a target.
“Bringing charges against Dragonfly would be outrageous, contrary to the facts and the law, and would induce a chilling effect onto all investment into crypto and privacy-preserving technologies in America,” Qureshi said.
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