The Federal Trade Commission (FTC) shut down a Bitcoin mining company operation this week involving fraudulent sales of bitcoin equipment. BF Labs Inc, the company that does business as Butterfly Labs, in Kansas City, Missouri, claimed they were selling the newest fastest machines with which people could generate the digital currency 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.
The FTC infographic How does mining create new Bitcoins? All Bitcoin transactions from the last 10 minutes are bundled into a 'transaction block'. Bitcoin 'miners' get transaction blocks from a shared log. Using special computer equipment, they race to verify the transaction block by solving a puzzle. The winning miner is awarded 25 newly created bitcoins. End results: transactions from the last 10 minutes are verified. 25 new bitcoins are created and awarded to the winning miner.
A company representative said that the passage of time rendered some of their machines as effective as a “room heater.” The FTC charged that this cost the consumers potentially large sums of money, on top of the amount they had paid to purchase the computers, due to the nature of how Bitcoins are made available to the public.
“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. “We’re pleased the court granted our request to halt this operation, and we look forward to putting the company’s ill-gotten gains back in the hands of consumers.”
The FTC’s complaint alleges that Butterfly Labs marketed Bitcoin mining machines. Starting in June 2012, Butterfly Labs touted the computers, which they called BitForce, as cutting-edge, powerful and efficient. Consumers who bought the computers were required to pay in full, up front. The computers ranged in price from $149 to $29,899 based on the computers’ purported computing power. According to the FTC’s complaint, as of September 2013, more than 20,000 consumers had not received the computers they had purchased.
Despite failing to deliver tens of thousands of BitForce computers, the complaint alleges that Butterfly Labs in August 2013 announced a new, more powerful computer to mine Bitcoins called the Monarch, which was available for sale for $2,499 to $4,680. According to the FTC’s complaint, the company had delivered few, if any, Monarch computers as of August 2014.
Even where Butterfly Labs did deliver a Bitcoin mining computer to a consumer, the complaint notes that because of the unique nature of the Bitcoin system, the outdated computers were useless for their intended purpose. While more Bitcoins are being mined each day, the total number of Bitcoins available to mine is reduced in half each year. Combined with the fact that each new generation of computing technology used to mine Bitcoins renders previous generations essentially obsolete, the delay in delivering computers to consumers meant that the Bitcoin mining computers could never generate the amount of Bitcoins that Butterfly Labs promised consumers.
The court’s order in the case requires the defendants to immediately stop making misrepresentations about their products and services, and places a freeze on their assets.
The defendants in the case are BF Labs, Inc., doing business as Butterfly Labs; Darla Drake; Nasser Ghoseiri and Sonny Vlesides.
The Commission vote authorizing the staff to file the complaint was 5-0. The complaint and request for a temporary restraining order was filed in the U.S. District Court for the Western District of Missouri. The court granted the order on Sept. 18, 2014.
If you've been defrauded by the company, you should get in contact with consumer protection officials right away. You can reach them online at http://www.ftc.gov or by calling 1-877-FTC-HELP (1-877-382-4357).
