Federal use of 18 U.S.C. Section 1960 against builders of noncustodial, peer-to-peer blockchain software is drawing sharp pushback from within law enforcement, with the District Attorney of Sacramento arguing that prosecuting open-source developers under a statute intended for money-transmitting businesses misapplies the law and chills U.S. Web3 innovation. The critique comes alongside support for an April 2025 U.S. Department of Justice memorandum titled “Ending Regulation-by-Prosecution,” and a call for Congress to pass the Promoting Innovation in Blockchain Development Act to restore Section 1960’s original scope.
Technology Overview
At the center of the dispute is noncustodial, peer-to-peer blockchain technology. Developers in this segment create open-source tools that automate transactions directly between willing parties. Unlike traditional financial intermediaries, these protocols and applications do not hold user assets, do not maintain accounts in the customary sense, and do not exercise the ability to intercept or redirect funds. The software facilitates coordination and record-keeping on a blockchain, but neither the code nor its creators assume custody or control over other people’s money.
This architecture contrasts with custodial systems, where a third party accepts and safeguards client assets and executes transfers on a customer’s behalf. Section 1960 was crafted for that latter world, the District Attorney notes, targeting storefronts, wire services, exchange houses, and similar operations that handle others’ funds while skirting licensing rules designed to prevent money laundering under the Bank Secrecy Act. Applying the same framework to open-source developers who never take possession of user assets, the argument goes, treats fundamentally different activities as though they were the same.
How It Works
Peer-to-peer blockchain tools are generally designed to operate without centralized control. Their purpose is to automate the execution of user-initiated transactions—often by enabling counterparties to discover one another, agree on terms, and settle transfers through code that runs deterministically. Because these tools are noncustodial, there is no third-party gatekeeper receiving deposits or transmitting funds on users’ behalf. The developers do not serve as traditional “money transmitters,” lack the ability to unilaterally intervene in transactions, and do not stand in a customer–service provider relationship of the kind Section 1960 envisions.
That distinction, the District Attorney contends, is not semantic but structural. In a decentralized, noncustodial design, there are no customer balances for a developer to freeze, no omnibus accounts to reconcile, and no off-chain ledgers to manage. The tool’s function is to automate agreed-upon actions between peers; it is not to broker, custody, or intermediate financial flows in the sense targeted by money transmitter licensing regimes.
Industry Impact
Labeling software authors as unlicensed money transmitters has had broad consequences for the Web3 ecosystem, the District Attorney warns. The “regulation-by-prosecution” playbook—treating code-writing as a licensing offense—has, in this view, deterred legitimate open-source work, pushed developers to operate offshore, and eroded U.S. leadership in a strategically important technology stack. The U.S. share of open-source developers is cited as having fallen from 25% in 2021 to 18% in 2025, a shift attributed to ambiguous rules that blur the line between building tools and running financial services.
The public safety costs, the argument continues, are the opposite of what policymakers intend. When compliant developers exit or relocate, critical infrastructure moves beyond domestic oversight. In practice, that leaves fewer builders cooperating with U.S. law enforcement when true crimes occur, and it reduces the nation’s ability to shape norms and standards for responsible blockchain deployment.
Enforcement Boundaries
The District Attorney draws a clear boundary between developers of decentralized, noncustodial software and entities that squarely fit the money-transmitting profile. Section 1960, the statement emphasizes, remains a potent instrument against custodial exchanges that knowingly process criminal proceeds, centralized mixers designed to obscure illicit funds, and platforms that hold customer assets while flouting Financial Crimes Enforcement Network (FinCEN) registration. These are the kinds of intermediaries the statute was built to address—organizations that accept control over other people’s money and therefore fall within licensing and anti–money laundering obligations.
By contrast, treating open-source protocol developers as if they were running custodial services, the District Attorney argues, departs from the statute’s intent. The proper approach is to identify and prosecute actual criminals using digital assets to launder money or defraud victims, rather than to criminalize the tool or its author. As a point of principle, the statement notes, society does not charge email providers with wire fraud when bad actors misuse the medium; similarly, noncustodial protocol developers should not be swept into liability meant for traditional intermediaries.
Policy Shift at DOJ
According to the statement, a federal course correction began in April 2025 when the Department of Justice issued “Ending Regulation-by-Prosecution,” clarifying that the department would not enforce pure regulatory violations under Section 1960. Following the memo, the DOJ indicated it would not approve new Section 1960 charges “where the evidence shows that software is truly decentralized and solely automates peer-to-peer transactions, and where a third party does not have custody and control over user assets.” In essence, that guidance acknowledges the technical and legal difference between custodial money services businesses and decentralized, noncustodial software.
Still, the District Attorney cautions that memos and speeches are not statutes. Administrative guidance can shift with personnel and priorities. For durable clarity that encourages responsible development while preserving robust enforcement, the statement urges Congress to enact the Promoting Innovation in Blockchain Development Act. The proposal is presented as a way to codify Section 1960’s original purpose: protecting the public from unlicensed financial intermediaries without criminalizing the act of writing code that enables direct, peer-to-peer blockchain transactions.
Future Implications
Reaffirming the legal boundaries around noncustodial, peer-to-peer blockchain software would, in this view, allow American innovation to proceed in the open while preserving the government’s ability to target genuine misconduct. Clear rules can keep developers building within U.S. jurisdiction and cooperation channels, rather than forcing talent and infrastructure to migrate overseas. At the same time, Section 1960 would continue to apply where it fits best—against custodial actors who accept and move funds for others without compliance, or who intentionally facilitate the concealment of criminal proceeds.
The District Attorney’s perspective is informed by decades of prosecutorial work, including high-profile, technology-enabled investigations and a wide range of criminal cases. Innovation, the statement suggests, has repeatedly proven vital to solving complex problems—from forensic breakthroughs to financial crime investigations—so long as the law maintains a careful distinction between tools and the criminals who misuse them. In the realm of blockchain and Web3 infrastructure, that means reserving money transmitter enforcement for true intermediaries and letting decentralization function as designed where no custody, control, or customer relationship exists.
The concluding message is straightforward: Section 1960 is a sound law that has been misapplied to developers of truly decentralized finance technology. Fix the application, aim enforcement at actual money transmitters and bad actors, and provide legislative certainty so open-source blockchain development can continue under clear, consistent rules. In the District Attorney’s view, that balance is both a public safety imperative and a precondition for sustained U.S. leadership in Web3 infrastructure.
