Dragonfly Capital is facing potential criminal charges from U.S. prosecutors over its 2020 investment in Tornado Cash, a crypto privacy protocol.
Dragonfly Capital may soon find itself in the sights of US prosecutors due to its 2020 investment in PepperSec, Inc., the company responsible for the Tornado Cash developer and the crypto privacy protocol that has since been sanctioned.
The venture capital firm indicated on Friday that it would vigorously oppose the filing of formal charges.
Haseeb Qureshi, Dragonfly managing partner, defended the investment in a social media statement, emphasizing that it was made in good faith after obtaining legal assurances of compliance.
Qureshi stated, “We made this investment because we are committed to preserving privacy through open-source technology.” He also noted that the legal counsel did not identify any regulatory red flags at the time.
US Crackdown on Tornado Cash Sparks Crypto Privacy Debate
The US government’s assault on Tornado Cash, a tool that allows users to conceal the origin and destination of crypto transactions, is the source of the controversy.
Despite its initial promotion as a decentralized privacy enhancer, the protocol quickly became a favorite among sanctioned entities and hackers interested in concealing their digital footprints.
Developers Roman Storm and Roman Semenov were charged by the Department of Justice with violating US sanctions and money laundering in 2023.
Storm’s trial is presently underway in New York and has the potential to lead to a prison sentence that spans decades. Prosecutors indicated on Friday that Dragonfly itself could be the next target.
Qureshi dismissed the concept as an intimidation strategy. “We think that the government’s statement in court today was primarily intended to undermine Tornado Cash’s defense,” he stated. “It would be absurd to file charges at this time.”
Tornado Cash has continued to be a legal and ethical flashpoint in the ongoing discussion regarding privacy and regulation in the cryptocurrency industry.
Its sanctioning by the US Treasury’s OFAC in 2022 was significant, as authorities claimed it facilitated billions in illicit transactions, including funds associated with North Korean hackers.
Tornado Cash has demonstrated remarkable resilience in the face of the sanctions. In the first half of 2024, Flipside Crypto reported $1.9 billion in deposits through the platform, suggesting that there is still a demand for anonymity tools in blockchain transactions.
No Final Ruling Needed After Tornado Cash Removed from Sanctions List
In March, the US Treasury Department argued that the legal battle over its sanctioning of crypto mixer Tornado Cash was resolved without needing a further court judgment. They cited the recent removal of the platform and associated addresses from the sanctions list.
As previously reported, a developer has migrated Tornado Cash to the public testnet of the MegaETH blockchain. This has enabled private transactions on the high-performance network.
MegaETH, which was recently introduced, has a throughput capacity of up to 20,000 transactions per second.
The developer, who goes by the pseudonym Gunboats, stated that the concept was inspired by the US Treasury’s recent removal of Tornado Cash addresses from the OFAC sanctions list, which resulted from a court ruling earlier this year.