A thin DOJ policy memo is no substitute for legal protection
Lewellen argues that DOJ enforcement discretion cannot replace clear legal protection for non-custodial developers
On Monday, Michael Lewellen filed a reply brief [PDF] in an appeal against the Department of Justice (DOJ) in the United States Court of Appeals for the Fifth Circuit, arguing that the district court prematurely dismissed his challenge to the DOJ’s interpretation of 18 U.S.C. § 1960. Lewellen argues that the DOJ’s interpretation of 18 U.S.C. § 1960 exposes him to a credible threat of prosecution if he publishes and operates “Pharos,” a non-custodial cryptocurrency software designed to facilitate crowdfunding. With Congress’s failure to pass the Blockchain Regulatory Certainty Act (BRCA) under the Clarity Act, court decisions like the one sought by Lewellen take on added importance for protecting software developers from wrongful prosecutions.
For background, Lewellen filed a pre-enforcement challenge against the DOJ in the Northern District of Texas, seeking declaratory judgment that publishing non-custodial software does not subject Lewellen to prosecution under the criminal statute for unlicensed money-transmitting, 18 U.S.C. § 1960. After then-Deputy Attorney General Todd Blanche issued a memo about the DOJ’s policy related to cryptocurrency prosecutions, the district court found that there was no credible threat of prosecution from the DOJ, sending the lawsuit to the Fifth Circuit for appeal.
Despite 2019 Guidance from the Financial Crime Enforcement Network (FinCEN) showing that mere software development is not money transmission and that controlling customers’ funds is an essential aspect of money transmission, the DOJ has stuck to its own novel interpretation that contradicts FinCEN’s Guidance and attempts to rewrite the law through criminal prosecutions. Whereas the BRCA could have fixed that, we now must look to cases like Lewellen’s to ensure developers are not targeted with unjustified prosecutions.
Lewellen’s Arguments
Lewellen’s principal argument is that he “faces a credible threat of prosecution if he publishes Pharos” because the DOJ interprets § 1960 broadly enough to classify Pharos as an unlicensed money-transmitting business if he publishes the software and does not register with FinCEN. The brief does so with four key arguments.
First, Lewellen argues that he has standing to sue the DOJ “before any investigation or explicit threat is directed at him.” The DOJ argues that his fear of prosecution is “too generalized” because “he has not alleged a single enforcement or even investigatory action taken against him.” As the brief points out: that is the purpose of a pre-enforcement challenge and why Lewellen seeks declaratory judgment; he does not have to “wait around for the government to investigate or prosecute him” to seek clarification of the law. And at this stage, the Fifth Circuit must accept as true his allegations about what Pharos is and how it will operate—allegations that show the DOJ will consider Pharos a money-transmitting business that the DOJ’s “reading of § 1960 criminalizes.”
Relatedly, Lewellen argues that he did not need to first go to FinCEN for an advisory opinion before taking matters to court and that FinCEN Guidance does not protect him. The DOJ had “rejected FinCEN’s view” when it brought § 1960 charges against the developers of Samourai Wallet despite receiving advice from FinCEN that Samourai Wallet was not a money-services business because the developers did not take custody of users’ assets. The DOJ also declared FinCEN’s 2019 Guidance as having “no authoritative effect” when it was prosecuting the Tornado Cash developers.
Lewellen’s second argument is that the “Tornado Cash and Samourai Wallet prosecutions bolster the credible threat of prosecution.” The DOJ contends that “Lewellen can’t be both a law-abiding citizen and afraid of prosecution under [its] application of § 1960(b)(1) in Tornado Cash and Samourai Wallet,” ignoring the very real possibility that the government can “overread the law.” As Lewellen argues, the DOJ’s reading of § 1960 would criminalize his conduct under § 1960(b)(1)(B)—for failure to register what the DOJ thinks is a money-transmitting business—and he doesn’t need to plan to do the exact same conduct as past prosecutions to face credible threat of enforcement.
The even more important point is that the DOJ’s past prosecutions were premised on the DOJ’s interpretation that those developers were engaged in money transmitting under § 1960(b)(1), which then gave way to specific charges under § 1960(b)(1)(B) and (C). Both of these specific charges require proof that a person was first engaged in “money transmitting” as it is defined in § 1960(b)(2). And the DOJ has stretched its reading of § 1960(b)(1) such that creating and publishing non-custodial cryptocurrency software is somehow equivalent to engaging in a money transmitting business. This means that if Lewellen were to merely publish his non-custodial cryptocurrency software, the DOJ would consider him to be engaging in a money-transmitting business and any specific charges under § 1960 would depend on this conclusion, which is a skewed reading of the law.
The DOJ turns to then-Deputy Attorney General Todd Blanche’s memo—which merely states the DOJ’s enforcement priorities—as an indication that there is no existing threat to Lewellen’s conduct. But the Blanche memo does not eliminate this threat. It’s merely a policy directive that can change at any time. And the memo was issued after Lewellen filed suit and therefore cannot retroactively defeat standing. In any event, it expresses discretionary enforcement priorities rather than changing the government’s interpretation of the law—which is what matters.
Lewellen’s third argument turns to the DOJ’s refusal to “disavow prosecution.” Despite the DOJ reviewing Lewellen’s suit, it has not given any clear assurance that it will not investigate or prosecute him under § 1960. And although the DOJ has stated that “the mere creation and launching of software is not a crime,” creating and publishing non-custodial cryptocurrency software without registering is still a crime under the DOJ’s reading of § 1960(b)(1), which the DOJ has yet to disavow.
Furthermore, even though the DOJ has taken the “litigation position” of not moving forward with charges under § 1960(b)(1)(B) in Tornado Cash and Samourai Wallet, this does not mean it will not prosecute Lewellen under § 1960(b)(1)(B). Indeed, when it dropped the prosecution in the Tornado Cash prosecution the DOJ “stressed that it stood by the original prosecution, even after the Blanche memo.” To disavow prosecution, the DOJ would need to confirm that creating and publishing non-custodial cryptocurrency software does not equate to operating a money-transmitting business, and that this course of conduct does not make Pharos an unlicensed money-transmitting business under § 1960 because Lewellen does not control users’ funds. Until that happens, Lewellen is allowed to bring declaratory judgment action against the DOJ to “know his rights before risking federal prison.”
Lastly, in his fourth argument, Lewellen addresses the district court’s reliance on the Blanche memo more specifically. As previously stated, the DOJ issued the memo after Lewellen sued and “reflects only policy, not a changed view of the law.” The DOJ asserts that because Lewellan does not intend to engage in the specific crimes the memo addresses, Lewellen does not face a threat and his complaint should be dismissed. But the memo does nothing about the DOJ’s “authority to prosecute publishers of non-custodial cryptocurrency software.” And it expressly permits prosecutions for willful failures to satisfy registration requirements, which Lewellen argues t confirms the risk by a developer who knows that the government considers his conduct subject to registration. This is especially true with the DOJ’s continued prosecutions of the Tornado Cash and Samourai Wallet developers.
Road Ahead
Developer protections looked promising with the introduction of the BRCA in the Senate’s Clarity Act, but the Act as a whole failed to move forward. Even so, the last iteration of the BRCA was limited in its protections. As Coin Center pointed out in a recent blog, the last iteration only explicitly protected developers on the regulatory side, not from the criminal statute, 18 U.S.C. § 1960. This protection may have extended to the subsections concerning the failure to register, § 1960(b)(1)(A) and (B), but it would not have protected against subsection (C), which has been the main driver of the DOJ’s prosecutions. Therefore, even with the passage of the last iteration of the BRCA, developer protections were still going to have to be litigated in the courts.
18 U.S.C. § 1960(b)(1) needs to be clarified as applied to non-custodial cryptocurrency software. As both Coin Center and Lewellen have explained, all of its subsections “turn on whether a criminal defendant is operating an ‘unlicensed money transmitting business.’” The DOJ believes non-custodial cryptocurrency software satisfies this statutory requirement based on its continued prosecutions under § 1960(b)(1)(C), but it does not and Lewellen’s suit will set the record straight on the DOJ’s erroneous interpretation of the law.
The United States should be at the forefront of innovation and freedom, but the DOJ has demonstrated a willingness to continue prosecuting those who wish to see this come to reality. Coin Center will continue to support Michael Lewellen’s fight to clarify the law for those like him—Americans who wish to build technology for the people.