A Missouri-based company that claims to manufacture bitcoin mining equipment is going head to head in a legal battle with the Federal Trade Commission (FTC) after the agency has successfully asked the federal court in the Western District of Missouri to shut down the company's operations.
Butterfly Labs has called out the FTC for its "heavy-handed" approach in dealing with customer complaints lodged against the company, which was found by the commission to have been duping thousands of customers of potentially up to $50 million worth of equipment used for accruing virtual bitcoin currency.
Bitcoin is not regulated by a central authority. Instead, it relies on users to run a program that will record transactions and calculate algorithmic formulas to keep things in check. When a user, called a miner, solves a formula, the system cranks out a certain number of bitcoins. With bitcoin rising in popularity, the process of mining soon became expensive, with serious miners laying out money for better graphics cards and even entire computer racks dedicated solely to bitcoin mining.
Butterfly Labs was established in June 2012 amidst the growing popularity of bitcoin and started selling pre-orders for a line of bitcoin mining equipment named BitForce. The BitForce line ranged from chips that cost $149 to high-end computers worth $29,899 and were allegedly based on a new mining technology called application-specific integrated circuits (ASIC) that allows mining to be 1,000 times faster.
However, the FTC says Butterfly Labs never shipped most of the pre-ordered items, and more than 20,000 customers who paid upfront for pre-ordered products never received what they paid for. The few customers who received their orders had machines that were by then obsolete, and the FTC cited a Butterfly Labs employee who allegedly said that the machines were nothing more than expensive "room heaters." Shortly after announcing BitForce, Butterfly Labs also introduced Monarch, which was supposedly more powerful than the first products introduced in 2012.
"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," says FTC's director of the Bureau of Consumer Protection Jessica Rich.
But Butterfly Labs says it is "not going away without a fight" and plans to vindicate the company with testimonies from "key witnesses" for a hearing set on Sept. 29. Butterfly Labs says it is currently in the process of shipping out the remaining orders. It has also sold $33 million worth of bitcoin mining machinery, including services for its BFL Cloud Mining service, and has refunded up to $17 million.
"It appears the FTC has decided to go to war on bitcoin overall and is starting with Butterfly Labs," says Charles Zinkowski, spokesperson for Butterfly Labs. "Butterfly Labs is being portrayed by the FTC as a bogus and fake company. To the contrary, Butterfly Labs is very real."