Crypto developer appeals dismissal in fight over U.S. money-transmitter rules

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A new appellate filing in Lewellen v. Blanche is pushing a narrow but consequential question back before the U.S. Court of Appeals for the Fifth Circuit: can a developer seek legal clarity before launching non-custodial crypto software that could later be treated as an unlicensed money-transmitting business?

The case does not challenge cryptocurrency regulation as a whole. Instead, it focuses on whether publishing and operating a non-custodial Ethereum-based crowdfunding tool could expose developer Michael Lewellen to prosecution under the federal money-transmission statute, 18 U.S.C. §1960.

That distinction matters. The case is not about token issuance, crypto trading, exchange licensing or whether digital assets are securities. It centers on the legal boundary between creating software that users control themselves and operating a business that legally transmits money on their behalf.

The software at the center of the dispute

Lewellen wants to launch “Pharos,” an Ethereum-based protocol designed for charitable and public-goods crowdfunding campaigns.

According to his initial complaint, the system would use so-called assurance contracts. Contributors would send cryptocurrency to a smart contract during a defined fundraising period. If the campaign reaches its target, the assets would be released to the intended recipient. If it does not, contributors would be able to recover their funds.

Lewellen argues that Pharos would be non-custodial. He says he would not hold private keys, direct transfers or control the cryptocurrency moving through the protocol. The smart contract would be immutable after deployment, meaning he could not alter its rules once it was live.

However, the proposed business would not merely involve publishing code. Lewellen also planned to maintain an optional website interface for users and receive a predefined fee when campaigns successfully met their funding goals.

What law is being tested?

The key law is 18 U.S.C. §1960, which criminalizes knowingly operating an unlicensed money-transmitting business. The statute may apply when a business fails to comply with federal registration requirements or applicable state licensing rules.

Federal regulations generally define money transmission as accepting currency, funds or other value from one person and transmitting it to another person or location.

Lewellen’s central argument is that a developer who never accepts, holds or controls users’ assets is not a money transmitter. His position is supported by portions of FinCEN’s 2019 virtual-currency guidance, which distinguishes between a provider that merely supplies software and a provider that actually accepts and retransmits customer value.

FinCEN has stated that an anonymizing software provider is not automatically a money transmitter simply because its tools can be used in money transmission. By contrast, a business that accepts and retransmits crypto for users, including through privacy-enhancing services, can fall under money-transmitter rules.

Why the district court dismissed the case

Lewellen originally asked a federal court in Texas to declare that his planned activity was lawful and to prevent the government from enforcing money-transmitter laws against him.

He also argued that the Justice Department’s interpretation of the statute could violate the First Amendment by criminalizing the publication of code, while creating due-process concerns because developers could not clearly determine when their work crosses into regulated financial activity.

On March 25, Chief U.S. District Judge Reed O’Connor dismissed the case without prejudice. The ruling did not decide whether Pharos would qualify as money transmission under federal law.

Instead, the court found that Lewellen had not shown a sufficiently credible threat of imminent prosecution to establish standing for a pre-enforcement lawsuit.

Lewellen pointed to the government’s prosecutions of Tornado Cash and Samourai Wallet developers as evidence that non-custodial software builders face real criminal risk. The court rejected that comparison, finding that the “core conduct” in those cases involved alleged money laundering, while Lewellen’s planned conduct involved running a crowdfunding business.

The court also cited the Justice Department’s April 2025 policy memo, which said prosecutors should not target virtual-currency exchanges, mixers or offline wallets merely for the actions of end users or unwitting regulatory violations.

Why the appeal matters

Lewellen’s appeal is fundamentally about whether developers must first launch software and risk criminal exposure before they can ask a court where the legal line sits.

Supporters of the case argue that policy memoranda do not provide lasting protection because they can be changed or withdrawn and do not create enforceable legal rights. They contend that only a court ruling or congressional legislation can provide reliable certainty for developers of non-custodial tools.

The Justice Department’s current policy may reduce enforcement risk for some software developers, but it does not resolve the underlying statutory question: when does building or operating crypto infrastructure become money transmission?

A Fifth Circuit ruling in Lewellen’s favor would not automatically legalize mixers, privacy tools or decentralized finance platforms. It would simply allow the case to move forward and potentially force a court to address the merits of the money-transmitter question.

If the government prevails, the broader legal uncertainty may remain. Developers could still be left without a clear judicial answer unless they face an actual enforcement action or Congress changes the law.

For the wider crypto industry, the case is therefore less about an immediate regulatory breakthrough and more about a growing demand for a durable legal distinction between publishing non-custodial software and operating a financial intermediary.

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