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FTC Leads Shutdown of 'Bogus' Bitcoin-Mining Rig Maker Butterfly Labs

A federal court has, upon request by the Federal Trade Commission (FTC), ordered the shutdown of Butterfly Labs, a company that specializes in building hardware for Bitcoin mining. According to a statement by the FTC, it has received complaints against Butterfly Labs and its officers relating to how the computer-maker failed to deliver its paid-for products on time, thereby resulting in these devices being useless due to the fast-changing nature of Bitcoin.

The FTC’s complaint against the company and its corporate officers alleges that Butterfly Labs charged consumers thousands of dollars for its Bitcoin computers, but then failed to provide the computers until they were practically useless, or in many cases, did not provide the computers at all,” says the FTC statement.

The Monarch, Butterfly Labs' 700 GH/s Bitcoin mining card

The Monarch, Butterfly Labs’ 700 GH/s Bitcoin mining card

Useless Bitcoin mining equipment

As a cryptocurrency, Bitcoin does not go through a centralized exchange, but rather, transactions go through a public blockchain, which constitutes encryption and authentication. The virtual currency can either be exchanged as online cash, earned by selling goods, or mined by solving increasingly complex algorithmic formulas. It is through the latter in which companies gain to earn Bitcoins through mining. However, given the computational power required, specialized rigs are needed to mine coins, and the required computing power increases as more Bitcoins are mined.

Based on the complaint, Butterfly Labs started marketing its Bitcoin-mining BitForce computers as early as June 2012, with prices ranging from $149 to $28,899, depending on processing power. In August 2013, the company launched a new product line called Monarch, which retailed from $2,499 to $4,680. However, the complaint has alleged that Butterfly Labs “had delivered few, if any, Monarch computers as of August 2014.”

The nature of Bitcoin mining is that the algorithm becomes more and more difficult with time. With this, delayed delivery of mining rigs has resulted in lost opportunities and potential profits. The FTC cites one of its complainants as comparing Butterfly Labs machines that were delivered late to a being as effective as a “room heater”.

FTC’s war against Bitcoin?

In a September 2013 interview with cryptocurrency-focused publication CoinDesk, Butterfly Labs COO Josh Zerlan cited delays from upstream suppliers as the main cause of production delays and difficulties. Zerlan even went as far as to blame detractors who may actually have vested interest in their competitors canceling orders, because they would profit from the reduced competition from other Bitcoin miners themselves. “That’s really the crux of it: the less people mining, the more money you make as a miner,” he said.

In a statement responding to the court ruling, Butterfly Labs has expressed disappointment in the “heavy-handed actions of the [FTC],” and said the judgment had been rushed. The company is cooperating with its court-appointed receiver, and says it has already shipped $33 million worth of products to consumers and voluntarily refunded $17 million to others.

For the company, the court-ordered closure is considered an act by the FTC against Bitcoin as a whole, in reference to how the commission is seeking to regulate Bitcoin and other cryptocurrencies. “It appears the FTC has decided to go to war on bitcoin overall and is starting with Butterfly Labs.”

Butterfly Labs is not alone in its difficulties, however. Bliss Devices founder Paul Chen writes at Money  & Tech how the mining community has raised concerns on the viability of mining Bitcoin and other cryptocurrencies, especially given the exponentially-increasing difficulty associated with it. “Not only does it now require more upfront investment in hardware and infrastructure to compete, but mining operators also need an edge in terms of minimizing operational costs such as cheap power, low-cost datacenter leases, or natural cooling solutions to remain competitive.”

Case to be decided in court

According to figures cited CoinDesk, customers in 24 countries have lodged 283 complaints against Kansas-based Butterfly Labs since 2012, with 73% of these complainants coming from the US. The FTC says that at least 1,000 customers had been affected by the “bogus Bitcoin mining operation,” which has resulted in losses ranging from $20 to $50 million. This is the first ever Bitcoin-related case that the FTC has pursued, according to Helen Wong, an FTC attorney.

“We often see that when a new and little-understood opportunity like Bitcoin presents itself, scammers will find ways to capitalize on the public’s excitement and interest,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection.

The order requires Butterfly Labs to “immediately stop making misrepresentations about their products and services.” It also places a freeze on the company’s assets. According to the FTC, the commission “files a complaint when it has ‘reason to believe’ that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest.” The actual case will be decided in court.