Coin Center Fellow Michael Lewellen is suing the DOJ over their criminalization of software development.
Coin Center supports a new lawsuit to oppose legal reasoning that would require just about everyone in crypto get a money transmission license
Today Coin Center Fellow and smart contract security expert Michael Lewellen filed suit against the Department of Justice for their chilling interpretation of the unlicensed money transmission criminal statutes. Coin Center is supporting his case. Michael should be free to build and publish the brilliant software he’s been working on—free from fear of unjust persecution. And the contrary position taken by the Department of Justice (DOJ) in the Tornado Cash and Samourai Wallet prosecutions is unconstitutional and anti-innovation. You can read the filed complaint (link above) and below we will summarize the facts, the law, and why this case is so important for the future of your liberty and privacy as cryptocurrency developers and users.
Michael Lewellen and the Pharos Protocol
Michael is a longtime security expert in the cryptocurrency ecosystem. He’s audited and analyzed smart contracts securing billions of dollars worth of cryptocurrency and has consulted with respected charities and major corporations, assisting them in using these new tools safely. When the Tornado Cash sanctions were announced in August of 2022, he and I happened to be at a Zcash developer conference in Las Vegas. I sought his expertise for a quick explanation of how the Tornado Cash smart contracts actually worked and whether they were truly non-custodial and immutable. In mere hours he had a comprehensive spreadsheet for me detailing all the things we needed to know before commenting on the sanctions. Since then Michael has been an invaluable resource for Coin Center, generously donating his time and knowledge to ensure we can quickly get up to speed on developing matters implicating smart contract design and regulation.
Michael wants to publish a protocol and user-interface, called Pharos, that would enable trust-minimized assurance contracts for public goods fundraising on Ethereum. An assurance contract is a tool for fundraising in which contributors commit money that is released to the planned recipient only if a specified fundraising goal is met by a certain date. Otherwise the money is returned to the would-be contributors. The name, Pharos, means lighthouse—the paradigmatic public good—and is an homage to earlier work by developer Mike Hearn on Lighthouse, a bitcoin-based tool for raising money to fund core protocol development. Coin Center wants to enhance our fundraising efforts with better technology for matching campaigns and donor incentives; and if Michael releases the Pharos protocol we will be one of its first users. But whether he can actually release that protocol without risking unjust federal prosecution is another matter.
The DOJ, Unlicensed Money Transmission, Tornado Cash and Samourai Wallet
The DOJ has prosecuted software developers for unlicensed money transmission, a federal felony with harsh penalties, in two cases: United States v. Storm (targeting the developers of the Tornado Cash protocol) and United States v. Rodriguez (targeting the developers of the Samourai bitcoin wallet). Though unconfirmed, we believe that there are several ongoing investigations seeking to wrongly charge other software developers with these crimes, and under the DOJ’s expansive theory of liability even a mere bitcoin core developer could become a target. Additionally, in US v. Storm, Judge Failla has agreed with the DOJ’s arguments. Taken together, the climate in the US for cryptocurrency software developers is rapidly becoming outright hostile.
We’ve written extensively about the DOJ’s misguided prosecutions including in an amicus brief to the court in US v. Storm. In short, 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. 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 interpretation contradicts FinCEN, the federal regulator for money transmission registration, which only treats cryptocurrency businesses as money transmitters if they have “total independent control” over user funds. In short, these prosecutions are outside of DOJ’s authority under any reasonable reading of the statute. As Lewellen’s excellent complaint puts it:
For example, if someone drives his money from one place to another in a Ford truck, 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.
The DOJ’s persecution of mere developers for unlicensed money transmission is inappropriate, and a disaster for American competitiveness, innovation, and the rule of law. We are so proud that Michael is willing to stand up against these baseless legal theories and to defend in court his rights to build software.
Lewellen’s Claims
Lewellen’s lawsuit makes three claims. First, the Department of Justice lacks the statutory authority to bring a prosecution against him for running an unlicensed “money transmitting” business, as it has done against other software creators. A “money transmitting” business refers to companies like Western Union and Venmo in the sensitive business of holding and moving money on their customers’ behalf. Someone who builds tools that allow others to move cryptocurrency more effectively—but does not himself hold the money—is not a money transmitter, so DOJ has no authority to prosecute him. As FinCEN has explained, to be a money transmitter, a business must have “control” over the money being transmitted. Second, if the DOJ’s position were allowed under the statute, then it would violate the First Amendment. The First Amendment prohibits the DOJ from putting people in prison for writing and publishing code, but that is exactly what DOJ is doing when its prosecutions are based on a software creator’s mere publication of software that others can use. And third, if DOJ’s position were allowed under the statute, then it would violate due process. Due process prohibits the federal government from enforcing laws in an arbitrary or vague manner, but that is what the federal government is doing when it issues repeated guidance saying publishers of non-custodial cryptocurrency software are not money transmitters, then criminally prosecutes publishers of non-custodial cryptocurrency software as money transmitters.
What’s Next?
In the coming months there will be pleadings in Michael’s case; we will continue to support him however we can, and continue to work with Congress and the incoming administration to reverse the DOJ’s course on unlicensed money transmission. America is, as John Adams famously wished, a nation of laws not men, and no one should fear arbitrary prosecution for failure to register when the law clearly excluded them from a registration requirement to begin with. America is also a nation that protects speech, even speech that government officials dislike or fear. No developer should ever be made to seek permission or license before publishing a valuable tool, and while it’s unfortunate that Michael needs to bring a lawsuit before publishing, Coin Center is thrilled he’s ready to do so, and we’re ready to win.
A direct download of this complaint is available here.