Federal Regulators Force Shutdown of Fake Bitcoin-Mining Operation

Dorottya Mathe/Shutterstock.com

At the FTC’s request, a federal court shut down Kansas-based Butterfly Labs, which had charged consumers thousands of dollars for out-of-date bitcoin computers.

A federal court has forced a Kansas-based company to cease selling computers that were marketed as able to produce bitcoin on grounds the company failed to deliver its technology in a timely or effective manner—costing consumers tens of millions of dollars.

The order, filed last week in Missouri, comes at the request of the Federal Trade Commission, a regulatory body that polices against "unfair" or "deceptive" business practices. According to the FTC's complaint, Butterfly Labs slammed consumers with charges into the tens of thousands of dollars for specialized bitcoin computers that either were never delivered or delivered so late as to be "practically useless."

Regulators said the court ruling highlighted the murky, nascent, and often misunderstood world of digital currencies, which can leave consumers vulnerable to scams.

"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 is one of a number of cryptocurrencies that exists entirely online. It is "mined," or created, by computers that churn out unique, identifying numbers for each unit by solving increasingly complex math problems. Bitcoin and its ilk can be exchanged for paper currencies or used at a growing number of participating online vendors and brick-and-mortar retailers, such as Lord & Taylor.

Bitcoin investors see it as a fast, safe, and novel payment method that avoids traditional banking fees. Regulators and financial advisers, however, have been reticent to embrace the technology due to fears it could be used anonymously by criminals and that consumers can be easily scammed with little or no recourse.

The FTC complaint alleges that Butterfly Labs began selling so-called BitForce computers in 2012, and it marketed the technology as capable of mining bitcoin. Customers were required to pay in full and up front for the machines, which ranged in cost from a couple of hundred dollars to nearly $30,000.

But as of September of last year, more than 20,000 consumers had never received their purchased computers, according to the FTC. Despite the backlog, Butterfly Labs began marketing and selling a newer computer dubbed Monarch that was purportedly even more powerful than the never-delivered BitForce. But the company "delivered few, if any" of those machines, either, the FTC said.

When computers were delivered, they were so delayed that they were effectively useless, the complaint alleges. Mining bitcoin requires the solving of increasingly complex math problems by ever-more powerful computers, a trend that renders less high-powered technology largely ineffective.

Butterfly Labs, which faces a number of other lawsuits, has said its problems were due largely to manufacturing delays. The company's woes—including allegations of deception—were first reported on by Ars Technica last year.

As part of the court order, Butterfly Labs' assets have been frozen.

Butterfly Labs did not immediately respond to a request for comment.

(Image via Dorottya Mathe/Shutterstock.com)