DOJ Targets DeFi Developers: Is Crypto Freedom Under Threat?

• Developers warn that misuse of Section 1960 risks broad legal exposure, potentially stifling non-custodial crypto development progress substantially.
• Policymakers must define custody and control in digital assets to prevent liability for decentralized financial protocol tool creators.

The US Department of Justice has recently attracted scrutiny from a crypto advocacy group. The DeFi Education Fund maintains that developers of decentralized finance protocols should not be held liable for users’ actions. Furthermore, the group explains that the relationship between a product’s creator and its user is similar to that between a car manufacturer and a driver.

“The same intuitive principle that governs our understanding of car manufacturer and driver liability should be the foundation of sensible policymaking in the context of decentralized networks and protocols.”

Additionally, they point out that software creators do not manage how individuals operate the technology. Moreover, they stress that legal frameworks should recognize that developers offer neutral tools rather than controlling user behavior.

“Holding people responsible for systems and activities over which they exercise no agency or control leads to perverse outcomes”

Developers argue that holding them accountable for users’ actions under current laws misplaces responsibility. However, they draw an analogy with the automotive sector, where the driver is liable for a traffic violation. Also, they note that a carmaker’s responsibility ends once the vehicle is produced. 

Therefore, developers should not be exposed to liability for misuse of their software. This position underscores that the concept of control must guide regulatory decisions. The analogy with car manufacturing clarifies that legal action should target the individual who uses a tool in the wrong manner rather than the creator of the tool.

Policymakers are urged to review the legal interpretation of control over crypto assets

Furthermore, they emphasize that legislation should differentiate between those who design software and those who exercise control over crypto funds. Likewise, they explain that misallocating legal responsibility may lead to unfavorable legal outcomes. 

Additionally, they argue that broad application of laws, such as Section 1960, may expose many developers to legal risks. This approach, they claim, is comparable to holding a vehicle manufacturer liable for accidents caused by drivers. The call is for clear criteria that define custody and control in digital asset transactions.

“Industry and lawmakers must come together in 2025 to ensure the law properly reflects accurate concepts of custody and control and the responsibilities that flow from it — whether that’s in the context of a market structure bill, broker reporting obligations, or in reforming Section 1960.”

Thus, the industry calls for proper legal definitions that reflect the actual distribution of control. Finally, both developers and policymakers must engage in discussions that align legal standards with operational realities.