DOJ Weighs Charges Against Dragonfly’s Tom Schmidt in Tornado Cash Case

Introduction: A New Front in the Tornado Cash Legal Battle

The U.S. Department of Justice (DOJ) is reportedly considering criminal charges against Tom Schmidt, a general partner at crypto venture capital firm Dragonfly, in connection with the Tornado Cash case. The revelation came during the trial of Tornado Cash developer Roman Storm, where Assistant U.S. Attorney Thane Rehn disclosed that charges against Schmidt were still under review before requesting the court seal his statement.

This development marks a significant escalation in the legal battle surrounding Tornado Cash, as it suggests prosecutors are exploring a novel theory of investor liability—potentially holding venture capitalists accountable for the alleged misuse of their portfolio companies' products. The case could set a precedent with far-reaching implications for crypto investment and open-source development.

The Tornado Cash Case: A Recap

What Is Tornado Cash?

Tornado Cash is an Ethereum-based privacy tool that allows users to obscure transaction histories by mixing funds. While privacy tools are common in crypto, Tornado Cash gained notoriety after the U.S. Treasury’s Office of Foreign Assets Control (OFAC) sanctioned it in August 2022, alleging it facilitated money laundering for entities like North Korea’s Lazarus Group.

The Charges Against Roman Storm and Roman Semenov

Developers Roman Storm and Roman Semenov face charges of conspiracy to commit money laundering, operate an unlicensed money transmitter, and violate sanctions laws. If convicted, they could face up to 40 years in prison. The DOJ alleges they knowingly enabled criminal activity, while the defense argues Tornado Cash was neutral infrastructure with no central control.

Dragonfly’s Role: From Investor to Potential Defendant

Why Is Tom Schmidt Under Scrutiny?

Dragonfly Capital, a prominent crypto VC firm, was Tornado Cash’s primary backer. Internal emails presented in court reveal that 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 DOJ’s argument that the developers knowingly facilitated money laundering, as it suggests efforts to explore compliance measures. However, prosecutors appear to be testing a new legal angle: whether investors can be held liable if their portfolio companies’ tools are later misused—even if they had no direct operational control.

Schmidt Invokes the Fifth Amendment

Schmidt invoked his Fifth Amendment right against self-incrimination, signaling he believes his testimony could expose him to prosecution. Storm’s defense team sought immunity for Schmidt to compel his testimony, seeing him as a key witness who could counter the DOJ’s claims by highlighting Dragonfly’s advisory role rather than criminal intent.

Legal Precedent: Could VCs Face Liability for Portfolio Companies?

A New Theory of Investor Liability

If the DOJ pursues charges against Schmidt or Dragonfly, it could establish a precedent where venture capitalists face legal exposure based on their advisory roles rather than direct involvement in illicit activities. This would mark a significant shift in how regulators approach crypto investments.

Historically, VCs have operated under the assumption that backing a project does not equate to endorsing or controlling its use cases. However, this case could force investors to demand stricter oversight or avoid privacy-focused projects altogether—potentially chilling innovation in decentralized finance (DeFi).

Comparisons to Previous Crypto Cases

This situation differs from past enforcement actions like those against BitMEX or Binance, where executives were directly involved in operations. Instead, the DOJ appears to be testing whether mere financial backing and advisory input could constitute liability—a theory with no clear precedent in crypto law.

Broader Implications for Crypto and Privacy Tools

Impact on Venture Capital in Crypto

If investors become legally vulnerable based on their portfolio companies' regulatory issues, we may see:

• Increased reluctance to fund privacy or anonymity tools.
• More stringent due diligence requirements from VCs.
• A potential slowdown in DeFi innovation due to regulatory fears.

The Future of Open-Source Development

Tornado Cash is an open-source project, meaning its code is publicly available and modifiable by anyone. If developers and investors are held liable for third-party misuse, it could discourage contributions to open-source privacy projects—a cornerstone of blockchain development.

Conclusion: What Comes Next?

The DOJ’s potential charges against Tom Schmidt signal an aggressive expansion of its crackdown on crypto-related financial crimes—one that now includes venture capital firms as possible targets. The outcome could reshape how investors engage with privacy-focused projects and open-source software development.

Key Takeaways:

• The DOJ is weighing charges against Dragonfly’s Tom Schmidt for his advisory role in Tornado Cash.
• Prosecutors may be testing a new legal theory holding investors liable for portfolio companies' alleged misconduct.
• The case could deter VC funding for privacy tools and open-source projects if liability risks increase.
• Developers Roman Storm and Roman Semenov still face severe charges, with their trial ongoing.

What to Watch For:

• Will the DOJ formally charge Schmidt or Dragonfly?
• How will courts interpret investor liability in crypto cases?
• Could this lead to broader regulatory scrutiny of VC-backed DeFi projects?

For now, the crypto industry must brace for another landmark case that could redefine legal boundaries for investors and developers alike.