The anti-crypto army lost, but developers aren't out of the woods
Despite all the positive vibes, DeFi still faces an "existential" threat.
Happy 2025! Sorry it’s been a while. We’ve been working hard trying to make Project Glitch into a sustainable business (more on that below). We’ve also been trying to make sense of the scene now that America has a “pro-crypto” President. At least one thing hasn’t changed…
This “existential” threat to DeFi didn’t go away when Trump won
Many in crypto have been taking victory laps since Donald Trump ascended to a second term as US President. It’s true: DC’s infamous “anti-crypto army” has retreated and the new President has pledged to make America the “crypto capital of the world.”
On the other hand, the long-running conflict between the crypto world and the US government over novel decentralized systems like Tornado Cash has shown no new signs it might break crypto’s way. In fact, some of the field’s leading legal minds see the government’s argument in this fight as an ongoing, dire threat—not only to crypto-privacy systems but to all of cryptocurrency software innovation.
At the heart of the matter is a legal tussle over a law commonly known as Section 1960, which makes it a crime to run an “unlicensed money transmitting business.” Violators face up to $250,000 in fines and up to five years in prison.
We wrestled with this topic in our last issue. Then last week, I moderated a panel in Washington, DC focused on the implications of Section 1960. The session was the first in a series of live panels and talks that Project Glitch will curate this year in collaboration with Paul Brigner’s PGP* (Pretty Good Policy) for Crypto monthly breakfast event series.
(Sidenote: We see live events as a way to create a sustainable business out of the journalism we love to do. Our first full-day event was the DC Privacy Summit last October—check out a highlight video here. This year we aim to do more, including smaller events like the monthly PGP* for Crypto meeting in DC, where we’ll be curating onstage discussions throughout 2025. The next PGP breakfast meeting is on February 25. RSVP here to attend.)
Okay, back to the fight over Section 1960. The crux is the Department of Justice’s interpretation of the law in the prosecution of Tornado Cash developer Roman Storm, and separately in the prosecution of two developers behind the Bitcoin-based privacy wallet Samourai. The DOJ’s argument in those cases is the “most existential threat to the industry,” the DeFi Education Fund’s chief legal officer Amanda Tuminelli said as we kicked off the panel discussion. “The DOJ’s view of 1960 is so broad that it would sweep in totally benign software development of noncustodial protocols.”
A stunning reversal
The disagreement comes down to control over user funds. The crypto industry has for years operated under the assumption that someone who develops software that operates without its human creator needing to touch the money flowing through it is not a money transmitter. As such, they wouldn’t have to get a license from the federal government and are not required to submit reports to financial regulators the way a traditional financial institution must. This assumption stemmed from a 2019 guidance published by the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The guidance has been widely interpreted by industry lawyers to state that “control” over funds is required to be engaging in money transmitting.
Not so, the DOJ now contends. In the Tornado Cash and Samourai Wallet prosecutions last year, federal prosecutors argued that a developer could be considered a money transmitter under Section 1960 even if they have never taken control of any of their software’s users’ funds.
The conflict intensified in late September when a US district court agreed with the DOJ. Judge Katherine Polk Failla said creators of software protocols that handle money can be considered money transmitters—even if they never take control of any user funds.
The DOJ’s new stance stunned the industry; many feel the government went back on its word. To them, the district court judge agreeing with the DOJ felt hostile.
Failla’s decision inspired Tuminelli, Jake Chervinsky, the chief legal officer at the VC firm Variant, and Daniel Barabander, Variant’s general counsel, to do some research. They believed Failla was “misinterpreting the law,” Chervinsky said during the Project Glitch panel discussion last week. They published their research in a paper late last year, arguing that previous court decisions defined money transmission in a way that disagrees with Failla’s reasoning. Those cases show that to be legally defined as a “money transmitting business” one must “take control” as well as “relinquish” customer funds, Chervinsky said. “In other words, the developer of a noncustodial protocol cannot, by definition, be engaged in money transmitting.”
It’s more than an academic legal dispute. The panelists mentioned ongoing investigations that could lead to additional prosecutions in the vein of Tornado Cash and Samourai. They described a “chilling effect” on crypto development due to the DOJ’s stance. Entrepreneurs are afraid to work in the industry because they don’t want to risk prison time, according to Chervinsky, who works directly with founders of Variant’s portfolio companies. “It’s one thing to tell them they may be in an uncomfortable conversation someday with the SEC about some regulatory registration issue for which there could be a potential fine,” he said. “It’s a very different thing to say to them: ‘The Department of Justice may want to put you in prison for the work you are doing.’”
Lewellen versus the DOJ
One longtime crypto security expert and developer, Michael Lewellen, would rather sue the government for clarity than release the decentralized crowdfunding protocol he’s designed. Lewellen joined us via Zoom for the PGP* for Crypto meeting last week.

Lewellen’s creation is called Pharos—it’s the smart contract-based application reminiscent of Kickstarter. Users pitch the crowd for funding for their project, set a timeframe and a goal, and only collect the money if the fundraising goal is met. All of this would be facilitated via a website that Lewellen would maintain. But he’s designed Pharos so that neither he nor any other third party ever controls user funds. It also uses advanced cryptography to both keep donor identities private and prove that donors aren’t known bad actors or associated with any.
Now, given the way the DOJ has prosecuted Roman Storm and the Samourai developers, Lewellen doesn’t want to release Pharos due to the risk that someday he might be prosecuted as well. Instead, with support from the crypto policy advocacy group Coin Center, he’s taking the DOJ to court.
Lewellen will not register as a federal money transmitter because that wouldn’t make sense, according to the complaint: “He cannot do so because it will be impossible to comply with the reporting requirements that registration would demand, given that he, as a mere publisher of non-custodial software, will not have access to the information about users that compliance would require.”
The lawsuit makes three claims. First, Section 1960 should not be interpreted to require a license “from someone who is just publishing a protocol and a website,” explained Peter Van Valkenburgh, Coin Center’s executive director. Second, if it were to be interpreted that way, “it would be an unconstitutional limit on someone’s speech rights—their ability to express their ideas in code and publish them to a website and to the Ethereum blockchain.”
Third: If the law were to be interpreted to cover those activities, “it cannot be enforced as it is currently being interpreted,” Van Valkenburgh said. “The government has spoken not just ambiguously about whether it includes those activities—they’ve spoken directly contradictorily on whether it covers those activities. FinCEN has said it doesn’t; DOJ has said it does.”
“So due process, and our right to be told what the criminal law is before we’re held liable for it, says that it can’t be enforced in these contexts,” Van Valkenburgh said.
What would a win look like? “Smashing it out of the park would be a robust holding that this is First Amendment activity,” Van Valkenburgh said. “A good win would be for the court to say that the statute doesn’t apply to Michael’s activity and similar activities.”
There’s also a scenario in which Lewellen’s lawsuit becomes moot because the DOJ changes course and stops pursuing its current interpretation of the money transmitter law. Who knows? Anything could be possible in Trump’s new crypto capital of the world.
It’s not at all clear that’s in the cards, however, said Chervinsky. “Unlike some of the other financial markets regulatory issues where we can expect very rapid changes under new SEC and CFTC leadership, when it comes to issues of law enforcement and national security and illicit financial activity it’s really very unclear what the new Department of Justice … will think about this, and if the policy will change or not.”
—Mike Orcutt
Headline Watcher
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