Venture capital firm Dragonfly said Friday that the U.S. government is weighing potential charges over its 2020 investment in PepperSec, the developer of Tornado Cash, marking a rare instance where federal prosecutors may target a venture investor for backing a crypto project.

In a detailed statement, Dragonfly managing partner Haseeb Qureshi called the prospect of such charges “outrageous” and legally unfounded.

He said the firm invested in PepperSec in August 2020 after securing an independent legal opinion that confirmed Tornado Cash, as designed, complied with federal guidance issued by the Financial Crimes Enforcement Network (FinCEN) in 2019.

Qureshi further stated that Dragonfly believed strongly in supporting open-source privacy-preserving technologies and continues to stand by that investment.

The development comes days after the prosecution faced a setback in developer Roman Storm’s trial after the FBI failed to connect funds stolen from a key witness to Tornado Cash.

Tornado Cash, launched in 2019, is a decentralized protocol that mixes cryptocurrency transactions to obscure sender and recipient details. The tool, while valued by privacy advocates, has been accused by U.S. authorities of facilitating money laundering for hacking groups, including North Korea’s Lazarus Group.

The Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in 2022, but subsequent court challenges forced the government to scale back certain aspects of its sanctions, a development Dragonfly cited as proof of the protocol’s legal standing.

Qureshi said that Dragonfly neither operated Tornado Cash nor had any contact with illicit users, emphasizing that it offered PepperSec the same level of guidance it provides to all portfolio companies.

He also revealed that the firm fully complied with a Department of Justice subpoena issued in 2023 and was told it is not a direct target of the ongoing investigation.

According to Qureshi, the government’s mention of Dragonfly during a recent court proceeding was an attempt to weaken Tornado Cash’s defense, potentially by complicating testimony from Dragonfly co-founder Tom Schmidt.

He argued that prosecuting an investor over the conduct of a portfolio company years after the fact would have a chilling effect on venture funding for privacy technologies and blockchain innovation.

Dragonfly’s statement comes amid heightened enforcement efforts against crypto privacy tools, which regulators view as a growing risk for illicit finance. The firm said it remains confident that the DOJ will not pursue charges, but it pledged to “vigorously defend” itself if necessary.

“I am not a fixer for anyone,” fired Changpeng “CZ” Zhao on May 23, slamming a Wall Street Journal report that tied him to a Trump-linked crypto venture. The Binance founder called the claims “politically motivated” as the clash over crypto influence escalates.

The WSJ said Changpeng Zhao acted as a behind-the-scenes dealmaker for Trump-linked crypto venture World Liberty Financial (WLF). However, Zhao says the story misrepresented the facts. This is his second fight with the newspaper in just a few months.

Changpeng Zhao vs. WSJ: A Clash of Narratives or Media Bias?

According to The Wall Street Journal, Changpeng Zhao introduced Pakistani entrepreneur Bilal bin Saqib to WLFI co-founder Zach Witkoff, helping arrange meetings that resulted in a government agreement.

Zhao denied this, saying, “I first met Mr. Saqib on that trip,” and argued that Saqib and the Witkoffs already knew each other. He called the story “flawed.”

The dispute revolves around conflicting claims about CZ’s influence. The WSJ suggested his role was key to WLFI’s $550 million token sales and a $2 billion Abu Dhabi deal. Zhao also disputed this, saying the report contained errors.

His team sent corrections, but the Journal did not include them, which Zhao called “biased reporting.”

The report also raised ethical concerns, noting WLFI leaders blend government and private business. Steve Witkoff serves as a Trump envoy while his son Zach runs WLFI, which has raised $550M this year.

This marks the second clash between CZ and the Journal in months after an April report citing unnamed sources claimed Zhao agreed to testify against Tron’s Justin Sun during his plea negotiations. He branded that “baseless,” noting that protected witnesses avoid prison.

Critics see a pattern as Zhao now frames both episodes as anti-crypto media bias, even as regulators sharpen oversight of ventures like WLF. Yet neutral observers have questions.

If Changpeng Zhao wasn’t involved, why did WLF’s Pakistan deal happen after these meetings? And why does the Journal stand by its sourcing? The stakes extend beyond headlines.

Trump’s Crypto Empire: Where Politics and Digital Assets Collide

The controversy echoes wider tensions in Washington. Just three days before CZ’s rebuttal, SEC Chair Paul Atkins faced heated congressional questioning about paused investigations into both Justin Sun and a Trump-linked meme coin. Critics also see a pattern of special treatment, while proponents cry political targeting.

Atkins insisted the Tron case remained active while touting new stablecoin regulations—even as WLFI prepared to launch its own Treasury-backed USD1 stablecoin.

However, the connections run deeper than regulatory filings.

For example, President Trump’s family maintains a 60% stake in WLFI, which directs 75% of token sale revenues to their coffers while allocating just 5% to platform development.

This lopsided financial structure raised a few eyebrows at WLFI’s recent Virginia golf club gala, where Justin Sun received a golden watch from POTUS after amassing major $TRUMP holdings.

The fundraiser brought in $148 million from exclusive dinners, with one investor openly admitting people bought WLFI tokens mainly because of the “crypto president” link.

Watchdog groups call this the clearest mix of political power and crypto yet, where leaders profit from digital assets and regulators advance some cases while slowing others.

From $550M Sales to $3.9B Losses: The Volatility of Trump-Linked Tokens

New data shows $TRUMP whales, including VIPs at last Friday’s Washington dinner, are now deep in the red. According to Bloomberg, 19 key wallets saw their $TRUMP holdings drop 52% in just a month.

The biggest bag plunged $48 million underwater after prices collapsed from $61 to $12 on 800,000 tokens.

The damage spreads far beyond just a few investors. 590,000 wallets lost a combined $3.9 billion, while Chainalysis reports $320 million in trading fees went to Trump-linked entities.

CNBC’s Dan Nathan calls it a “perfect Ponzi scheme,” arguing endless inflows prop up prices while lining the Trump Organization’s pockets.

Now, lawmakers are stepping in. Senators Elizabeth Warren and Adam Schiff want an ethics investigation, and new MEME legislation could block public officials from profiting off tokens.

Meanwhile, World Liberty Financial and backers of the USD1 Treasury-backed stablecoin have blasted the Senate’s inquiry into their dealings.

A letter from major U.S. law firm BakerHostetler, WLF insists USD1 holds full short-term Treasury reserves and pitches the coin as a medium to channel global demand into US debt, keeping crypto dominance on U.S. soil.

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