FTC nails pin in Bitcoin mining rig maker Butterfly Labs

The US Federal Trade Commission has shut down Bitcoin mining equipment vendor Butterfly Labs over allegations that the company accepted as much as $50m in orders from customers but failed to deliver their purchases.

Butterfly purported to sell dedicated Bitcoin mining machines, with its more powerful models carrying price tags of up to $29,899.

But according to an FTC press release on Tuesday, although the company began advertising its wares on June 2012, by September 2013 more than 20,000 customers had reportedly still not received their orders.

Worse, by that time the computers the customers were waiting on were already obsolete. As of August 2013, Butterfly was advertising a second generation of mining machines that was allegedly more powerful than the first.

That left some customers wondering whether they would receive an automatic upgrade to the new model when their orders finally shipped. But according to the FTC complaint, they should have been wondering whether they'd receive their orders at all. By August 2014, the agency claims, "few, if any" of the new machines had shipped, either.

Customers who did have their orders fulfilled reported that the machines were essentially useless upon arrival, because the shipping delay – combined with the ever-increasing difficulty of Bitcoin mining – meant the outdated equipment would no longer be able to generate the amount of virtual cash that Butterfly had initially promised.

Meanwhile, the FTC claims, Butterfly had taken in "at least $20 million, and potentially up to $50 million" in cold, hard US currency.

After receiving more than 300 complaints, the FTC voted 5-0 to file suit against Butterfly in the US District Court of the Western District of Missouri. On September 18, the court granted a temporary restraining order suspending the company's operations and freezing its assets, pending a September 29 hearing.

For its part, Butterfly claims it was in the process of fulfilling its remaining orders and processing requested refunds when the FTC unilaterally shut it down, "contrary to our intended system of governmental checks and balances."

"It appears the FTC has decided to go to war on bitcoin overall and is starting with Butterfly Labs," Butterfly said in a statement on Tuesday. " Butterfly Labs is being portrayed by the FTC as a bogus and fake company. To the contrary, Butterfly Labs is very real."

The company claims that it has already shipped $33m worth of real products to customers and granted $17m in refunds, and it says it has asked to make its case by presenting testimony from key witnesses at the September 29 hearing.

The FTC plans to use the hearing to request a preliminary injunction that will keep Butterfly's doors closed, pending a full trial. If successful, the financial hardship such a move would cause the company will likely be its death knell. ®