Crypto Developer Sues DoJ to Have Software Declared Legal

Crypto developer Michael Lewellen is suing the federal government to preemptively prevent it from deeming his upcoming crowdfunding protocol illegal.

Lewellen’s lawsuit against Attorney General Merrick Garland asks a Texas federal court to rule that the Department of Justice (DoJ) cannot prosecute him for failure to register as a money transmitter.

The lawsuit comes in the wake of the DoJ’s prosecution of the developers of crypto mixing services Tornado Cash and Samourai Wallet. Tornado Cash developer Alexey Pertsev was sentenced to more than five years in prison in the Netherlands. His colleague Roman Storm is facing trial in the U.S., as are Samourai Wallet developers Keonne Rodriguez and William Lonergan Hill.

The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) had also placed Tornado Cash under sanctions until the move was overturned by a court.

Lewellen’s lawsuit claims that he fears prosecution under what he calls an unreasonable and illegal definition of money transmission, and that his code for the as-yet-unreleased Pharos protocol is protected under the First Amendment’s freedom of speech clause, which has long been applied to written software code.

“Lewellen’s planned cryptocurrency software will be non-custodial, meaning that it will not give Lewellen any control, possession, or direction over the cryptocurrency that users put through the software,” his suit claims. “It will simply be a tool that others can use to move money, like an envelope used to move checks in the mail.”

The lawsuit is supported by crypto advocacy group Coin Center, where Lewellen is a Fellow.

Interpretation of the Law

In United States v. Storm and United States v. Rodriguez, targeting developers of the Samourai Bitcoin wallet, the government has argued that software developers can be money transmitters even without ever having control of the money being transmitted.

The judge in the Storm case accepted that argument, Coin Center Executive Director Peter Van Valkenburgh said in a blog post.

“The DOJ wrongly argues that federal criminal laws do not require someone to have actual control or possession of transmitted funds in order for them to be doing money transmission,” Van Valkenburgh said.

“In essence, they argue that merely providing others with software tools that enable them to move their own money on their own behalf is, itself, money transmission and requires registering with the government.”

That’s an interpretation at odds with what the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) says, Van Valkenburgh adds. FinCEN’s guidance is that cryptocurrency businesses can only be money transmitters “if they have ‘total independent control’ over user funds,” he said.

Like the developers of Tornado Cash and Samourai Wallet, Lewellen will never have control of user funds in Pharos. Yet, he believes he could be at risk of prosecution.

It’s worth noting that Lewellen’s fears are theoretical at this point. The U.S. government is only prosecuting three people, both for creating mixers that have been used by criminals, terrorists and North Korean hackers to launder ill-gotten gains. Of course, those services have also been used by privacy-minded, law-abiding citizens and people living under oppressive regimes.

Lewellen gives the example of someone driving his money from one place to another in a Ford truck. In that scenario, he said, “Ford does not ‘transfer’ or ‘transmit or ‘accept’ the money. That conclusion holds even if Ford manufactured the truck to assist that person with moving money, such as by adding armor and other security features.”