Key Highlights
- A US federal court dismissed the crypto developer’s lawsuit, saying he failed to prove a real risk of prosecution under money transmission laws.
- The judge avoided deciding whether non-custodial crypto software can be treated as illegal money transmission, leaving a major legal gray area unresolved.
- Industry leaders warn that the ruling, based partly on a non-binding DOJ memo, offers weak protection and could deter developers from building open-source crypto tools.
A federal court in Texas has dismissed a lawsuit filed by crypto developer Michael Lewellen, who sought a judicial declaration that his non-custodial cryptocurrency software would not expose him to criminal prosecution under federal money transmission laws. The ruling leaves a key legal question unresolved for the broader crypto industry.
Chief U.S. District Judge Reed O’Connor of the Northern District of Texas granted the government’s motion to dismiss on Wednesday, finding that Lewellen had not demonstrated a credible threat of prosecution under 18 U.S.C. § 1960, the federal statute that criminalizes operating an unlicensed money transmitting business.
Lewellen, a Coin Center fellow and smart contract security expert, had planned to launch Pharos, a software product designed to facilitate cryptocurrency donations to charitable crowdfunding campaigns. The software is non-custodial, meaning that Lewellen would have no control or custody over any cryptocurrency that users put through it.
“Disappointed to see the court dismiss my suit today,” Lewellen wrote on X following the ruling. “A non-binding DoJ memo is no substitute for real legal certainty. My lawyers are exploring all options for a path forward.”
Why the court said no
The court did not rule on whether non-custodial software developers fall within the scope of U.S. money transmitter laws. Instead, Judge O’Connor found that Lewellen lacked standing to bring the case because he failed to show that the threat of prosecution against him was substantial.
Lewellen had pointed to ongoing federal prosecutions against developers behind Tornado Cash and Samourai Wallet as evidence that he faced a real legal risk. Both cases involved developers charged with operating unlicensed money transmitting businesses using non-custodial technology.
However, the court found those cases were not “substantially similar” to Lewellen’s intended conduct. In the opinion, Judge O’Connor wrote that the “core conduct” of the cited prosecutions was money laundering, not simply running a business. Lewellen, on the other hand, expressly disclaimed any intent to transmit criminal funds.
The court also pointed to a Department of Justice (DOJ) memorandum titled “Ending Regulation By Prosecution,” issued by Deputy Attorney General Todd Blanche in April 2025. That memo formally declared that the DOJ would not pursue enforcement actions against virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or for unwitting violations of regulations.
Judge O’Connor noted that this memo aligned with the reason Lewellen did not face a credible threat of prosecution at the time of filing.
Industry reacts with frustration
Despite the DOJ memo, crypto industry figures expressed sharp disappointment with the ruling.
Peter Van Valkenburgh, Executive Director at Coin Center, said the memo cited by the court “has not provided meaningful protection to developers, given the outcomes in the Tornado Cash and Samourai Wallet cases.”
“So while I hope the court is right that non-custodial software developers are not at real risk, the Blanche memo is not enough to secure their rights. It is a vague enforcement signal, not a durable limit on government power,” Valkenburgh added.
“Worse, the court has now used that vague signal as a reason not to provide actual judicial clarity on the scope of developer liability. Instead of a clear rule, developers get a revocable memo and a court telling them not to worry.”
The case had drawn significant backing from the crypto industry. An amicus brief was filed in support of Lewellen by the Bitcoin Policy Institute, Blockchain Association, Crypto Council for Innovation, DeFi Education Fund, Paradigm, Solana Policy Institute, the Digital Chamber, and the Uniswap Foundation.
What comes next
The dismissal was without prejudice, meaning Lewellen could bring the case again if circumstances change, such as if the government takes enforcement action against a similarly situated developer.
Both Lewellen and Valkenburgh have called on Congress to pass the Blockchain Regulatory Certainty Act of 2026 (BRCA). Introduced by Senators Cynthia Lummis and Ron Wyden in January, the bipartisan legislation aims to clarify that developers and providers of non-custodial software who do not control user funds are not subject to money transmitter laws. The bill is currently being considered as part of broader crypto market structure legislation in the Senate.
The ruling arrives at a sensitive time. Tornado Cash Co-Founder Roman Storm was convicted last year on charges of conspiring to operate an unlicensed money transmitting business and faces a possible retrial on two additional charges where the jury deadlocked. Samourai Wallet co-founders Keonne Rodriguez and William Lonergan Hill pleaded guilty to the same charge in July 2025.
Those outcomes have alarmed developers across the crypto space, many of whom worry that building neutral, open-source tools could expose them to prosecution.
For now, the legal question at the heart of this case remains unanswered: whether writing and publishing non-custodial software amounts to money transmission under federal law. The court chose not to weigh in, and developers are left waiting for either Congress or a future court to draw that line.
Also Read: UK Review Flags Crypto Donations as Risk to Political System
