FTC Shuts Down Butterfly Labs, Citing Fraud

Butterfly Labs, a manufacturer of Bitcoin mining hardware, was temporarily shut down by the FTC (News - Alert) this week following allegations of fraud and misrepresentation of the company to the public.

The FTC made its move after receiving hundreds of complaints from outraged customers claiming that Butterfly Labs charged them thousands of dollars for a product that was not delivered until it was nearly useless, or in some cases not at all.

Bitcoin, a virtual currency, is not backed by a central bank but is instead mined by computers that solve increasingly complex algorithmic formulas in order to be rewarded with a certain number of Bitcoins. After a while only a dedicated computer with strong processing power could have a chance at solving formulas, which is what Butterfly Labs marketed to consumers.

According to the FTC, over 20,000 Bitcoin miners as of September 2013 who purchased hardware from Butterfly Labs experienced delays or did not receive it at all, despite forking out up to $30,000 at a time. Delays are a big problem for this situation, as many customers did not receive their hardware until it was obsolete for the purpose of Bitcoin mining.

In addition to closing its doors, the FTC has frozen all of Butterfly Labs’ assets for a ten day extendable period.

The company did not respond well to the allegations and closure, claiming that, “In a rush to judgment, the FTC has acted as judge, jury and executioner, contrary to our intended system of governmental checks and balances.”

The company went on to say: “Butterfly Labs is being portrayed by the FTC as a bogus and fake company. To the contrary, Butterfly Labs is very real. As pointed out in court filings Butterfly Labs made last night, Butterfly Labs has shipped more than $33 million in products to customers and voluntarily granted refunds approximating $17 million to customers for cancelled orders.”

FTC attorney Leah Frazier dismissed its response, saying, “We just look at the misrepresentations that the company makes [to] consumers and whether, ultimately, it fulfilled the promises it made. So, whether or not the company is bogus or a scam isn’t the issue. The issue is about whether they accurately represent information that would be material to consumers making decisions.”

Butterfly Labs says it is cooperating with a court-appointed temporary receiver, requesting permission to provide testimony at a court hearing scheduled for Sept. 29.