Texas Judge Dismisses Crypto Developer Case, Leaving Software Rules Unsettled

Highlights:

• A federal judge dismissed the crypto developer’s lawsuit over money transmitter laws.
• The ruling leaves non-custodial software rules unresolved in the United States.
• Congress now faces stronger pressure to define protections for software developers.

A federal court in Texas has dismissed a lawsuit filed by crypto developer Michael Lewellen regarding money transmitter laws in the US. The decision leaves developers in limbo on whether federal regulations apply to tools that never hold user funds. Rather, the challenge returns to prosecutors, lawmakers, and court battles.

Lewellen filed the case in January last year after building Pharos, software for crypto donations and charitable crowdfunding. He argued federal registration rules did not fit his product. He also said the software’s privacy design blocked him from collecting the customer details that those rules demand. Therefore, he asked the court to declare the software lawful and block enforcement.

The case drew support from crypto policy groups. For example, the Blockchain Association, the Crypto Council for Innovation, and the DeFi Education Fund backed his position. They argued non-custodial developers should not face the same rules as financial intermediaries.

Disappointed to see the court dismiss my suit today. A non-binding DoJ memo is no substitute for real legal certainty.

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

— Michael Lewellen (@LewellenMichael) March 25, 2026

The Court Says the Threat Remains too Remote

On Wednesday, Chief Judge Reed O’Connor ruled that Lewellen did not demonstrate a significant threat of prosecution. This ended the case before the court could delve into the deeper legal issues. The judge pointed out that Lewellen referred to criminal cases concerning privacy tools and to non-custodial services. The court claimed that the cases focused on alleged money laundering activities.

Lewellen, however, told the court that Pharos would be a legitimate business tool. He also refuted any plan to knowingly process criminal proceeds. The judge, however, considered the comparison insufficient, and the crypto developers’ lawsuit failed to pass the threshold of forward-looking relief.

The dismissal came without prejudice. Lewellen can refile later if facts change and enforcement risk becomes more immediate. For now, however, the crypto developer lawsuit ends without a ruling on whether Pharos must register under federal law.

A DOJ Memo Offers Little Comfort to Developers

The court also pointed to a recent Justice Department memo titled Ending Regulation By Prosecution. The memo directs prosecutors not to target crypto services for user conduct or unwitting regulatory violations. However, the memo does not create binding legal protection. It reflects current enforcement policy, not a permanent rule.

After the decision, Lewellen said a non-binding memo cannot replace clear legal certainty. Moreover, Coin Center executive director Peter Van Valkenburgh argued that the memo offers little practical protection. He noted that the government still pursues crypto cases despite the guidance.

Frustrated to share that the Northern District of Texas has dismissed Michael Lewellen’s suit for declaratory judgment. The court sided with the government, holding that Michael does not face a credible threat of enforcement for publishing non-custodial privacy tools. 1/

— Peter Van Valkenburgh (@valkenburgh) March 25, 2026

Meanwhile, Samourai Wallet co-founder William Hill was sentenced to four years in prison in November last year after his guilty plea in July. Additionally, President Donald Trump said in December that he would review a pardon regarding Keonne Rodriguez in relation to the Samurai Wallet probe.

Congress Now Faces Pressure to Set Clearer Rules

The focus is now on Congress since the court did not provide an answer to the underlying legal question. Critics claim the crypto developer’s lawsuit provided the opportunity to make the law clearer. Rather, the ruling maintained ambiguity regarding non-custodial tools.

Lewellen and other advocates are asking Congress to pass the Blockchain Regulatory Certainty Act presented by Senator Cynthia Lummis in January. Should it be enacted, it would exempt the non-custodial developers who do not control user funds from money transmitter regulations.