History buffs – and fans of the series “Deadwood” – know that promises of riches lured many prospectors west. Now imagine if the general store in Deadwood advertised state-of-the-art shovels, pans, and pick axes necessary for mining, but never delivered the gear or delivered it long after others had mined the prime parcels. That’s pretty much what the FTC says Kansas City-based Butterfly Labs is up to, except that what today’s prospectors are mining are bitcoins.
Unlike other forms of currency, people get newly minted bitcoins by solving complicated computational puzzles. But the supply is limited and it’s getting smaller every year. For every four years the Bitcoin network operates, half the number of bitcoins is created compared to the four-year period before. A transaction that earned 50 bitcoins in 2008 yielded 25 in 2012 – and 12.5 by 2016.
As more people have joined the Bitcoin network, the computations have gotten even tougher. Initially, people could just use their PC, but now miners need faster and more advanced equipment. And each new generation of technology renders earlier versions obsolete. To make any money, it’s not enough to keep up with the Bitcoin Jones. You have to stay ahead of them.
Butterfly Labs used Facebook, Twitter, and the company website to tout the speed and efficiency of its bitcoin mining machines, which sold from $150 to nearly $30,000. One persuasive sales tool was a calculator that let people input various figures to determine their return on investment if they used one of Butterfly Lab’s machines.
Beginning in June 2012, the company claimed that a machine containing its “BitForce SC chip” is “now in final state development” with “initial product delivery scheduled for October 2012.” According to the FTC, October came and went without a single BitForce machine delivered to a buyer. As of September 2013, the FTC alleges that Butterfly Labs had failed to ship machines to more than 20,000 paid-in-full customers.
The FTC’s lawsuit charges that was business as usual for Butterfly. In August 2013, the company touted its Monarch machine as the “fastest and most power efficient bitcoin miner yet.” But a year passed and not a single Monarch machine had been shipped.
In December 2013, the company began to offer services that would let consumers “harness the power of the latest Bitcoin mining technology” without any “technical knowledge.” Butterfly Labs told consumers that the service would start generating bitcoins in the “March 2014 time frame.” By August, the company had yet to generate any bitcoins for people who had shelled out thousands of dollars for the service.
Delayed shipments can be a hassle for people eager for their merchandise, but the FTC says the consequences here were especially significant. Many consumers weren’t able to generate bitcoins at all because the company didn’t fulfill orders. Even when the machines eventually arrived, the complaint alleges they were often defective or obsolete, mining far fewer bitcoins than they would have generated had they been shipped when Butterfly Labs promised.
The case against the company and three corporate officers is pending in federal court in Missouri, where a judge has entered an order freezing their assets. But even at this stage, marketers can pan for some compliance nuggets.
First, regardless of what you sell, don’t represent expressly or by implication that you’ll deliver products in a timely fashion if you don’t have a reasonable basis for making that claim. It’s a mistake to accept customers’ orders and then leave them hanging on indefinitely waiting for shipment.
Second, consider the ante upped when timely delivery is an important part of the overall transaction. The FTC says that Butterfly Labs represented that buyers would be able to use its machines or services to generate a substantial number of bitcoins. But due to the company’s delays, consumers couldn’t generate bitcoins at all or mined only a fraction of what Butterfly Labs represented.
Want to stay current on Bitcoin and other cryptocurrencies? Consider the facts first. FTC staff will answer questions about the Butterfly Labs case on Twitter at 3:00 ET today. Follow @FTC and tweet questions with the hashtag #AskFTC.