US Court Dismisses Crypto Developer’s Safe-Harbor Lawsuit Over Non-Custodial Software

TLDR

• The U.S. District Court for the Northern District of Texas granted the government’s motion to dismiss.
• Judge Reed O’Connor said Lewellen did not show a substantial threat of prosecution.
• Lewellen’s software, Pharos, is described as a non-custodial tool for crypto donations to charitable crowdfunding campaigns.
• The dismissal was without prejudice, allowing Lewellen to refile if enforcement risk becomes more immediate.
• The ruling leaves unresolved whether non-custodial blockchain developers can be treated as money transmitters under federal law.

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A federal court in Texas has dismissed a lawsuit brought by crypto developer Michael Lewellen, leaving unresolved the broader legal question of how U.S. money transmitter laws apply to non-custodial blockchain software. The ruling came from the U.S. District Court for the Northern District of Texas, where Chief Judge Reed O’Connor granted the government’s motion to dismiss the case without prejudice.

Lewellen had asked the court to block potential enforcement of federal money transmitter rules against his software project, known as Pharos. He said the product was designed to help route cryptocurrency donations to charitable crowdfunding campaigns and argued that it was non-custodial, meaning he would not hold or control user funds. According to the complaint, he also planned to operate a website that would provide an optional interface for users to access the software.

Court says threat of prosecution was not immediate

The court found that Lewellen had not shown a substantial threat of prosecution, which was necessary for the case to move forward. In the order, the judge said the developer’s concerns were too speculative because the prosecutions he cited involved allegations tied to money laundering activity, rather than the simple operation of software intended for lawful use. The court drew a distinction between those criminal cases and Lewellen’s stated business plan.

Lewellen filed the lawsuit in January 2025, arguing that compliance with federal money transmitter registration requirements would be impossible because the software’s privacy features would prevent him from collecting the user information needed for reporting.

He sought a declaration that his planned conduct was lawful and also requested an injunction against the enforcement of statutes criminalizing the operation of an unlicensed money transmitting business.

DOJ memo referenced in dismissal order

Judge O’Connor also pointed to a recent U.S. Department of Justice memorandum titled “Ending Regulation By Prosecution.” The memo directs prosecutors not to pursue cases against crypto services solely for user conduct or unknowing regulatory violations.

The court referred to that guidance in finding that Lewellen had not established an immediate risk of enforcement based on the facts presented in his complaint.

The dismissal was issued without prejudice, which means Lewellen may bring the case again if later events create a clearer and more direct threat of prosecution. That leaves open the possibility of future litigation, while offering no present court ruling on whether developers of non-custodial software can be treated as money transmitters under federal law.

Industry groups say uncertainty remains

The case drew support from several crypto policy and industry organizations, including the Blockchain Association, the Crypto Council for Innovation, the DeFi Education Fund, and other groups that filed an amicus brief backing Lewellen’s position. Their filings argued that software developers need clearer legal boundaries when building blockchain tools that do not take custody of customer assets.

After the ruling, Lewellen said on X that he was disappointed by the dismissal and that his legal team was reviewing possible next steps. He also called on Congress to advance the Blockchain Regulatory Certainty Act, a bipartisan proposal that would exclude non-custodial blockchain developers from money transmitter classification. Coin Center executive director Peter Van Valkenburgh said the DOJ memo does not offer durable legal protection, pointing to ongoing concerns raised by the Tornado Cash and Samourai Wallet cases.

The decision arrives as federal prosecutors continue to pursue cases involving crypto privacy tools and wallet services. Earlier in March 2026, prosecutors requested a retrial for Tornado Cash developer Roman Storm on unresolved charges tied to alleged money laundering and sanctions violations. The founders of Samourai Wallet had already pleaded guilty in 2025 to conspiracy to operate an unlicensed money transmitter. Against that backdrop, the Texas ruling leaves the status of non-custodial crypto software developers unsettled and keeps the policy debate active in both the courts and Congress.

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