Maker of Bitcoin mining hardware maker Butterfly Labs has been shut down by the FTC following allegations of fraud and company misrepresentation to the public.
Following hundreds of complaints to the FTC, the US Federal Trade Commission (FTC) requested the suspension and closure of Missouri-based Butterfly Labs after the firm allegedly "deceptively marketed specialized computers designed to produce Bitcoin." The request was approved by the US District Court for the Western District of Missouri.
Butterfly Labs charged consumers thousands of dollars for specialized computers designed to mine the cryptocurrency, but the hardware was not provided "until they were practically useless," or in some cases, did not provide the products at all, the FTC claimed in a statement on Tuesday.
Bitcoin, a virtual currency which can be used to purchase items in the physical realm, is at the heart of Butterfly Labs' hardware, BitForce. According to the FTC, as of September 2013, over 20,000 Bitcoin miners who had purchased the hardware suffered delays or did not receive the computers they had purchased -- which cost between $149 and almost $30,000.
The US agency says that tens of thousands of computers in total were not delivered, and even when a system did reach the consumer, the delayed computers became outdated and useless for their intended purposes, and little more useful than a "room heater."
As Bitcoin becomes harder and harder to mine -- and requires better computing power to do so as time wears on -- delays in delivery resulted in fewer Bitcoins being mined by Butterfly Labs' computers than consumers were promised.
In addition, the FTC alleges that the company offered a service where customers paid up front for Bitcoin mining services in exchange for payment for computing time. While the service was launched at the end of December, the US agency says that by August 2014, Bitcoin mining still had not been provided -- despite consumers paying thousands of dollars for the service.
According to the FTC, after failing to deliver products after declaring them shipped over the past two years, Butterfly Labs violated Section 5(a) of the FTC Act by engaging in "unfair or deceptive business practices in or affecting commerce."
Jessica Rich, director of the FTC's Bureau of Consumer Protection said:
"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. 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 court order has not only closed Butterfly Labs' doors, but also frozen the firm's assets.
In response to the allegations, Butterfly Labs released a public statement declaring disappointment in the proceedings and protesting against the "heavy-handed" actions of the FTC. The company said that the US regulator "acted as judge, jury and executioner" contrary to how the government's legal system should operate. Butterfly Labs concluded:
"It appears the FTC has decided to go to war on Bitcoin overall and is starting with Butterfly Labs. 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.
Butterfly Labs intends to defend our business and our nascent and promising industry. The government wants to shut Butterfly Labs down, and we are not going away without a fight to vindicate Bitcoin, our company, and our employees. "
The company says it is cooperating with a court-appointed temporary receiver and has requested permission to provide testimony at a court hearing on 29 September.