Federal Court Dismisses Developer Lawsuit Seeking Protection From Money Transmitter Laws

A Texas federal court dismissed a lawsuit filed by crypto developer Michael Lewellen on March 25, 2026, ruling that he failed to demonstrate a credible threat of imminent prosecution for releasing non-custodial crowdfunding software, despite citing the criminal cases of Tornado Cash and Samourai Wallet developers as evidence of legal risk.

Chief U.S. District Judge Reed O’Connor dismissed the case without prejudice, meaning Lewellen could refile with corrections or modifications. Lewellen, a fellow at crypto advocacy group Coin Center, had sought a declaratory judgment that his software, Pharos—which facilitates donations to charitable crowdfunding campaigns—would not subject him to prosecution under money-transmission laws.

The ruling comes as lawmakers race to finalize crypto legislation that could include protections for non-custodial software developers, though the legislative window narrows amid election season.

Case Background and Developer Arguments

Lewellen’s Software and Legal Challenge

Lewellen sued the U.S. attorney general in January 2025, seeking a court order approving his publication of Pharos, an Ethereum-based protocol designed to coordinate crowdfunding campaigns for charities and other projects. The software is non-custodial, meaning Lewellen would have no control, possession, or direction over the cryptocurrency users put through the software. His lawsuit argued that he should not be considered a money transmitter under federal law, comparing the software to “an envelope used to move checks in the mail.”

Citing Precedent

Lewellen cited the prosecutions of Tornado Cash co-founder Roman Storm and Samourai Wallet developers Keonne Rodriguez and William Lonergan Hill, all of whom were charged with operating unlicensed money-transmitting businesses. Storm was convicted in August 2025, while Rodriguez and Hill pleaded guilty in July 2025 and were sentenced to five years in prison. Lewellen argued that these cases demonstrated a real legal threat to developers of similar non-custodial software.

Court’s Ruling and Rationale

No Credible Threat of Imminent Prosecution

Judge O’Connor found Lewellen’s argument “unpersuasive,” ruling that he had failed to demonstrate a credible threat of imminent prosecution. The court noted that the “core conduct” in the Tornado Cash and Samourai cases was money laundering, whereas “the core conduct here would be running a business.” O’Connor wrote: “By contrast, the core conduct here would be running a business. And Lewellen disclaims any knowing transmission of criminal funds, which is central to the prosecutions he invokes.”

DOJ Memo Cited

The court also cited a Department of Justice memo issued by Deputy Attorney General Todd Blanche in April 2025, stating that prosecutors should not pursue crypto exchanges, mixers, and “offline wallets” for “the acts of their end users or unwitting violations of regulations.” Lewellen countered that “a non-binding DoJ memo is no substitute for real legal certainty.”

Industry and Advocacy Responses

Coin Center Reaction

Peter Van Valkenburgh, executive director of Coin Center, expressed disappointment with the ruling, stating that the Blanche memo “has not provided meaningful protection to developers, given the outcomes in the Tornado Cash and Samourai Wallet cases.” He 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.”

Calls for Legislation

Both Van Valkenburgh and Lewellen called for Congress to pass the Blockchain Regulatory Certainty Act of 2026, introduced by Senator Cynthia Lummis in January 2026. The 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.

Jonathan Schmalfeld, director of policy at the Digital Chamber, wrote: “Hugely disappointing result. If the Blanche Memo was actually a panacea for developers’ right to create neutral code freely, [Roman Storm] wouldn’t still be fighting for his freedom. Whether through market structure or elsewhere, developer protections MUST be codified into law.”

Developer’s Next Steps

Lewellen stated on X: “Disappointed to see the court dismiss my suit today. My lawyers are exploring all options for a path forward.” The dismissal without prejudice allows Lewellen to pursue the same action again with certain corrections or modifications.

Frequently Asked Questions

What was Michael Lewellen seeking in his lawsuit?

Lewellen sought a declaratory judgment that his non-custodial crowdfunding software, Pharos, would not subject him to prosecution under money-transmission laws. He argued that without court protection, he faced potential criminal liability similar to the developers of Tornado Cash and Samourai Wallet.

Why did the court dismiss the case?

Judge Reed O’Connor ruled that Lewellen failed to demonstrate a credible threat of imminent prosecution. The court distinguished his case from the Tornado Cash and Samourai prosecutions, noting that those cases involved allegations of money laundering, while Lewellen’s core conduct would be running a business without allegations of knowingly transmitting criminal funds.

What legislative solution are advocates pursuing?

Advocates are calling for passage of the Blockchain Regulatory Certainty Act of 2026, introduced by Senator Cynthia Lummis, which would clarify that developers of non-custodial software who do not control user funds are not subject to money transmitter laws. The legislation is seen as a more durable protection than the DOJ memo cited by the court.