DOJ leaves door open to charge VC partner in Tornado Cash case

A federal prosecutor let slip that the Department of Justice is still mulling charges against Dragonflys Tom Schmidt, before promptly asking the court to seal the comment. The Tornado Cash case is now entangling venture capital in ways few expected.

Summary

• A DOJ prosecutor revealed that charges against Dragonflys Tom Schmidt are still under consideration, before requesting the statement be sealed.
• The Tornado Cash trial is surfacing a potential new theory of investor liability in crypto cases, implicating VCs for advisory roles

According to a July 25 X post by Fox Business journalist Eleanor Terrett, a Department of Justice prosecutor disclosed in open court that criminal charges are still being considered against Tom Schmidt, a general partner at crypto venture firm Dragonfly.

Assistant U.S. Attorney Thane Rehn disclosed during the trial of Tornado Cash developer Roman Storm, where emails between Schmidt, Dragonfly co-founder Haseeb Qureshi, and Storm‘s team were presented as evidence. One such exchange showed the founders seeking feedback on implementing KYC measures, a detail that complicates the government’s narrative of willful money laundering facilitation.

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Tornado Cash trial intensifies, investor liability takes center stage

The DOJ‘s interest in Tom Schmidt appears to stem from Dragonfly’s role as Tornado Cashs primary venture backer and from internal communications that prosecutors may argue show deeper involvement than typical investment oversight.

Emails presented in court reveal Schmidt and Dragonfly co-founder Haseeb Qureshi engaged directly with Tornado Cashs founders, even discussing potential know your customer (KYC) implementations.

This complicates the government‘s claim that the developers knowingly facilitated money laundering, as it suggests efforts to explore compliance. Yet prosecutors seem to be testing a novel theory: that financial backers could bear liability if their portfolio companies’ tools are later misused, even if the investors never controlled the protocols operations.

Rehn‘s request to seal his remark about potential Dragonfly charges hints at the DOJ’s sensitivity around its strategy. Superficially, this may indicate ongoing investigations or a desire to avoid prematurely shaping public perception before charges are finalized.

It also underscores the high stakes for Schmidt, who, by invoking the Fifth Amendment, signaled he believes his testimony might expose him to prosecution. The defense had pushed for immunity to compel his account, seeing him as a key witness to counter the DOJ‘s narrative. Without his testimony, Storm’s team loses an opportunity to highlight Dragonflys advisory role, which could have helped distance the founders from allegations of criminal intent.

The implications ripple far beyond this trial. If the DOJ pursues Schmidt or other Dragonfly figures, it could set a precedent that would chill venture investment in privacy tools or open-source projects broadly. Investors may demand unprecedented oversight of technical decisions or avoid contentious sectors altogether.