Venture capital firm Dragonfly is facing potential charges from the U.S. government over its 2020 investment in PepperSec, the developer of Tornado Cash. This development marks a rare instance where federal prosecutors may target a venture investor for supporting a crypto project.
Managing partner Haseeb Qureshi of Dragonfly has vehemently denied the allegations, calling the prospect of charges “outrageous” and legally unfounded. He stated that the firm invested in PepperSec after obtaining an independent legal opinion confirming that Tornado Cash complied with federal guidance issued by FinCEN in 2019. Dragonfly firmly believes in supporting open-source privacy-preserving technologies and stands by its investment in the project.
The controversy surrounding Tornado Cash escalated recently during developer Roman Storm’s trial, where the FBI failed to link funds stolen from a key witness to the protocol. Tornado Cash, a decentralized protocol launched in 2019, is designed to mix cryptocurrency transactions to protect sender and recipient details. While privacy advocates value the tool, U.S. authorities have accused it of facilitating money laundering for hacking groups like North Korea’s Lazarus Group.
Despite being sanctioned by OFAC in 2022, legal challenges forced the government to revise certain aspects of its sanctions against Tornado Cash, indicating the protocol’s legal standing. Dragonfly asserts that it had no involvement with illicit users and provided PepperSec with the same level of guidance as other portfolio companies.
Dragonfly fully cooperated with a Department of Justice subpoena in 2023 and is not a direct target of the ongoing investigation. Qureshi believes that the government’s mention of Dragonfly in court proceedings was an attempt to undermine Tornado Cash’s defense.
The potential prosecution of an investor for the actions of a portfolio company years later could have a chilling effect on venture funding for privacy technologies and blockchain innovation. Dragonfly remains confident that the DOJ will not pursue charges but is prepared to defend itself vigorously if necessary.
Regulators are intensifying enforcement efforts against crypto privacy tools due to concerns about illicit finance risks. Dragonfly is committed to defending its position and supporting innovation in the blockchain space.