A U.S. federal judge dismissed a lawsuit filed by the developer Pharos on grounds of lack of legal standing, leaving open the core legal question of the obligations of non-custodial software.
The U.S. District Court for the Northern District of Texas has dismissed a lawsuit filed by software developer Michael Lewellen, who sought a prior ruling that his Pharos, a non-custodial cryptocurrency donation platform, would not violate federal money transfer laws.
The judge approved the government's request to dismiss the case on the grounds that Lewellen had not demonstrated a real and imminent threat of prosecution, a prerequisite for standing to sue under preventative proceedings. The case was dismissed without prejudgment, allowing Lewellen to reapply if the legal context changes.
Lewellen argued that because Pharos was non-custodial in nature, meaning users controlled their assets themselves without intermediaries, it should not be classified as a money transfer organization required to register with federal authorities. However, the court did not issue a substantive ruling on this question.
Instead, the ruling noted that recent guidance fromthe Department of Justice indicated that the agency would not pursue enforcement action against crypto asset businesses due to end-user conduct or unintentional regulatory breaches, an argument that undermined the persuasiveness of the risk of prosecution cited by Lewellen.
The core question remains open as Tornado Cash prepares for a retrial.
It is noteworthy that the court did not address the substantive issue in the dispute: whether non-custodial software developers fall under the purview of U.S. money transfer laws. This omission carries greater implications than a single lawsuit.
The case received support in the form of amicus comments from the Blockchain Association, Paradigm, DeFi Education Fund, and Uniswap Foundation, reflecting the industry's shared concern that decentralized tool developers may be held liable under financial laws designed for intermediaries who hold and transfer client assets.
The ruling comes as federal prosecutors prepare to retry Tornado Cash developer Roman Storm in October on two counts of conspiracy, which carry a maximum sentence of up to 40 years in prison.
The Storm case is XEM as a more important legal test: if the court concludes that a software developer focused on privacy can be held liable under money transfer and money laundering laws, that ruling would create a binding precedent that Lewellen's case could not.
“A non-binding Mnemonics from the Department of Justice cannot replace genuine legal certainty,” Lewellen wrote on X after the ruling, adding that his lawyers were XEM all further options.
