Bitcoin-mining company Butterfly Labs shut down by FTC

Company marketed specialized computers designed to produce the cryptocurrency but delivered useless machines, according to an FTC complaint.

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A bitcoin-related company that allegedly engaged in deceptive marketing of specialized computers designed to produce the cryptocurrency has been shut down at the request of the US Federal Trade Commission.

In a complaint filed earlier this month, the FTC alleged that the Butterfly Labs charged consumers thousands of dollars for computers that mine Bitcoins but then failed to deliver the machines "until they were practically useless, or in many cases, did not provide the computers at all," the agency said in a statement Tuesday.

"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," Jessica Rich, director of the FTC's Bureau of Consumer Protection, said in a statement. "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."

Bitcoin, which is unregulated and allows for anonymous, untraceable transactions, can be obtained by purchasing it on an exchange or accepting it as payment for goods or services. The peer-to-peer currency can also be generated, or "mined," by solving complex mathematical equations, a process that requires greater computational effort as the pool of possible solutions shrinks. The amount of bitcoins possible is capped at 21 million; there are currently 13.3 million bitcoins in existence.

To perform the arduous mining process, the company marketed what it called a cutting-edge computer for as much as $29,899, the FTC alleged. As of September 2013, more than 20,000 orders for the computer, called BitForce, had not been fulfilled, according to the FTC. The complaint also alleges that Butterfly Labs began marketing a follow-up computer called the Monarch in August 2013 for as much as $4,680 but that by last month few, if any, had been delivered.

"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Bitcoin mining computer to a consumer, the complaint notes that because of the unique nature of the Bitcoin system, the outdated computers were useless for their intended purpose," the FTC said, indicating that a company representative said the passage of time had rendered some machines as effective as a "room heater."

Responding to the FTC's lawsuit, Kansas-based Butterfly Labs said Tuesday it was "disappointed in the heavy-handed actions" of the commission.

"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 said in a statement. "Butterfly Labs is being portrayed by the FTC as a bogus and fake company. To the contrary, Butterfly Labs is very real."

Butterfly Labs said it has shipped more than $33 million in products and granted refunds of about $17 million to customers who canceled orders.

The company said it is cooperating with a court-appointed temporary receiver and has asked for permission to present testimony during a court hearing scheduled for Sept. 29 that will "defend our business and our nascent and promising industry."

The virtual currency sprang up in 2009 but its acceptance has grown dramatically in the past couple of months. Cryptocurrency ATMs have begun to pop up, some casinos have said they would accept digital currency payments, and even eBay has begun allowing for limited sales of Bitcoins on its US and UK sites.

While Bitcoin has gained traction with commercial interests, it has failed to curry much acceptance from government agencies. In May, the US Federal Election Commission unanimously approved a proposal for political action committees to accept donations in the form of Bitcoin. But a day later, the US Securities and Exchange Commission issued an advisory warning investors to be wary of Bitcoin and other virtual-currency related investments, noting that the cryptocurrency is uninsured, unregulated, and volatile.

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