A U.S. federal court dismissed a preemptive lawsuit seeking legal protection for non-custodial crypto software, leaving developers exposed to ongoing regulatory ambiguity. The decision reinforces that current U.S. policy still lacks clear boundaries for software builders operating without custody of user funds.
The Northern District of Texas ruled Wednesday in favor of the U.S. government, rejecting claims from developer Michael Lewellen. Lewellen created Pharos, a non-custodial tool designed to facilitate charitable crowdfunding in cryptocurrency. He argued that complying with federal money transmitter laws was technically impossible due to the software’s privacy design.
Can Non-Custodial Crypto Software Avoid Money Transmitter Rules?
Judge Reed O’Connor found that Lewellen failed to demonstrate a credible threat of prosecution, a key requirement for pre-enforcement challenges. The court distinguished his case from ongoing prosecutions, noting those involved alleged money laundering rather than the operation of neutral software tools. The ruling contrasts with recent enforcement actions, where developers tied to privacy protocols have faced criminal charges.
Lewellen criticized the outcome, stating, “A non-binding DoJ memo is no substitute for real legal certainty.”
Disappointed to see the court dismiss my suit today. A non-binding DoJ memo is no substitute for real legal certainty.
— Michael Lewellen (@LewellenMichael) March 25, 2026
My lawyers are exploring all options for a path forward. Huge thanks to the @coincenter team for their incredible support and expertise through this.
We need… https://t.co/uXJqGww7IO
His legal team is now evaluating next steps, including potential refiling. Policy advocates also raised concerns, with Coin Center’s Peter Van Valkenburgh arguing that recent guidance has not meaningfully reduced risks for developers, particularly following cases involving Tornado Cash and Samourai Wallet. But how can developers build privacy-preserving tools under unclear legal standards?
But that is not real clarity. A DOJ memo is not binding law. It can be revised, revoked, or ignored. And it plainly has not provided meaningful protection to developers, given the outcomes in the Tornado Cash and Samourai Wallet cases. 3/
— Peter Van Valkenburgh (@valkenburgh) March 25, 2026
The case drew support from industry groups including the Blockchain Association and the DeFi Education Fund, signaling broad concern over regulatory scope. Meanwhile, U.S. prosecutors continue to pursue cases against crypto developers, including a retrial request for Tornado Cash developer Roman Storm and prior convictions tied to Samourai Wallet founders.
The dismissal leaves open the possibility of future litigation if enforcement risks become more immediate. Attention now shifts to Congress, where the proposed Blockchain Regulatory Certainty Act could define whether non-custodial developers fall outside money transmitter classifications.
