Dragonfly Capital's investment in Tornado Cash developers faces investigation, privacy protocol regulation sparks further controversy.

The U.S. Department of Justice may launch an investigation into the well-known venture capital firm Dragonfly Capital due to its investment in Tornado Cash developer PepperSec, Inc. in 2020. Tornado Cash was sanctioned by the U.S. Department of the Treasury for allegedly assisting in Money Laundering and sanctions evasion, sparking intense debates in the cryptocurrency industry regarding privacy rights and Compliance. Dragonfly insists that its investment decisions are compliant and is prepared to vigorously counter any allegations.

Dragonfly Defends Investment: No Compliance Signals Based on Legal Advice Dragonfly Managing Partner Haseeb Qureshi issued a statement on social media, stating that the investment in PepperSec was made out of a belief in "open source privacy protection technology," and that his legal team was consulted beforehand, finding no Compliance issues. He emphasized: "We believe that this investment was a reasonable business judgment made in good faith."

The statement was made during the U.S. Justice Department's proceedings regarding Tornado Cash developer Roman Storm's case, where the prosecutor hinted that Dragonfly might be the next subject of investigation. In response, Qureshi stated, "The government's statement is more like a deterrent. It would be extremely ridiculous to initiate charges at this time."

Tornado Cash Sanctions Spark Battle Over Encryption Privacy Compliance Tornado Cash is a decentralized encryption mixing protocol that allows users to send and receive digital assets anonymously. Although the tool was originally intended to enhance privacy, it has gradually been abused by hackers and sanctioned organizations (such as North Korean related hacker groups). In 2023, the U.S. Department of Justice filed a lawsuit against developers Roman Storm and Roman Semenov, accusing them of involvement in Money Laundering and violating international sanctions law.

Storm is currently on trial in New York, and if convicted, could face decades in prison.

Tornado Cash shows resilience after being sanctioned Despite the fact that the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash as early as 2022, citing its involvement in the flow of billions of dollars in illegal funds, data shows that user demand for the protocol remains strong. According to data from Flipside Crypto, Tornado Cash still received deposits of up to $1.9 billion in the first half of 2024.

This phenomenon shows that among blockchain users, the demand for transaction privacy has not faded due to tightening regulations.

Removed from the sanctions list, Tornado Cash may be reborn In March of this year, the U.S. Treasury Department stated at a court hearing that there was no need to continue the court ruling since Tornado Cash and its associated addresses had been removed from the sanctions list. This change is seen as a significant easing of the sanctions policy.

Subsequently, the developer Gunboats ported the Tornado Cash protocol to the public testnet of the high-performance chain MegaETH. MegaETH has the capability to process 20,000 transactions per second, and combined with privacy transaction features, it may provide a new vehicle for the revival of encryption privacy technology.

Gunboats stated that its motivation was inspired by Tornado Cash being removed from the OFAC list.

Conclusion The investigation into the Tornado Cash developers by Dragonfly highlights the sharp contradiction between privacy protocols and compliance regulation in the current cryptocurrency space. As technology iterates and regulations evolve, protocols like Tornado Cash will remain at the center of policy storms. For cryptocurrency users and developers, finding a balance between privacy protection and compliance will become a long-term issue. In the future, high-performance platforms like MegaETH may become the new battleground for the next generation of privacy protocols.