Dragonfly Capital executives face potential prosecution over investment in Tornado Cash | CoinDesk JAPAN

• U.S. authorities are considering criminal charges against employees of Dragonfly Capital, including Tom Schmidt, for their investment in Tornado Cash.
• Roman Storm, the developer of Tornado Cash, is facing charges such as conspiracy to commit money laundering, and he could face a prison sentence of up to 45 years.
• Haseeb Qureshi of Dragonfly Capital asserted the legitimacy of the investments made by his company. During this, he emphasized the privacy rights of U.S. citizens and denied that his company had control over the operations of Tornado Cash.

On July 25, U.S. time, it was stated in court by the prosecution that they are considering criminal charges against some employees, including Tom Schmidt, a general partner at Dragonfly Capital, a venture capital firm related to cryptocurrencies, for their investment in the privacy tool "Tornado Cash" in 2020.

The exchange between prosecutor Nathan Rehn and Judge Katherine Polk Failla of the Southern District of New York (SDNY) occurred during a break in the trial regarding Tornado Cash developer Roman Storm. Storm is charged with conspiracy to commit money laundering, conspiracy to operate an unlicensed money transmission business, and conspiracy to violate international sanctions related to the development of privacy tools. If convicted, he faces a maximum sentence of 45 years in prison.

During the trial, the prosecution presented numerous messages exchanged between Mr. Storm, Mr. Schmidt, and Mr. Hashib Kureshi, a managing partner at Dragonfly Capital. Judging by the government's litigation circumstances, it appears that these messages served several purposes: establishing that New York was a proper venue for the trial (since Mr. Schmidt is based in Manhattan), indicating that Mr. Storm and others had profited from Tornado Cash, and demonstrating that they frequently made changes to the product's front end, that is, the user interface.

However, when Mr. Storm's defense team raised the possibility of calling Mr. Schmidt to testify (likely to explain the background of the messages between Mr. Schmidt and Mr. Storm and to justify the company's investment in Tornado Cash), the prosecution did not grant immunity against the potential adverse use of Mr. Schmidt's (and one of the defense's witness candidates') testimony in future prosecutions. As a result, Mr. Schmidt invoked the Fifth Amendment and refused to testify in support of Mr. Storm's defense.

"Is there a possibility of prosecuting everyone at Dragonfly?" Judge Fela asked Mr. Lane on the same day.

According to Inner City Press, Mr. Lane's response was "not everyone, but Mr. Schmidt and one other person."

Subsequently, a request was made to change the public disclosure of the relevant parts of the discussion record in the public court to non-public, and the judge agreed to this.

Dragonfly claims legitimacy

On the same day, Mr. Kureshi defended his company's investment in Tornado Cash on X, stating the following.

"We firmly believe in the privacy rights of American citizens, and the lack of privacy remains one of the biggest unresolved issues in the cryptocurrency industry. Based on this, we assert the legitimacy of our investments. We do not operate or control Tornado Cash, and we have had no contact with malicious users. We have always encouraged the companies in our portfolio to comply with the law, and we believe that Tornado Cash itself has a legitimate right to exist," said Mr. Kresh.

"It is unprecedented, especially under such circumstances, to prosecute venture capital for allegations of misconduct by companies within the portfolio."

Mr. Kureshi also stated that Dragonfly is "fully cooperating" with the authorities' investigation into Tornado Cash, which began in 2023.

"To prosecute Dragonfly at this late stage, after quite some time has passed, is outrageous, contrary to fact, and will have the effect of stifling any investment in cryptocurrency and privacy protection technologies in the United States," said Mr. Kresh.

"I don't actually believe that the Justice Department would take such an absurd and baseless action. However, if that were to happen, we would thoroughly contest it."