Who’s mining the store? FTC sues company selling bitcoin mining equipment

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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 firstFTC 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.

 

Comments

Leslie, great article. So are the allegations that the defendant violated the mailbox rule or is this a straightforward unfair and deceptive trade practices case? It seems to me that the timing issue is not dissimilar to crowd funding campaigns where companies promise product or merchandise in exchange for deposits (and don't deliver). Also, if the product doesn't work as advertised, would it have worked appropriately if they released the product in time? This case raises interesting issues. If they took the full purchase price from consumers at the time if sale, that would be one thing...however if they took deposits instead, (ie similar to what many companies do when they launch a brand new product and take preorders), would that have made a difference? You may not be able to respond because the case is pending, but these are very interesting issues to follow.
"BFL assests are frozen" Not all. BFL owns and runs Eclipse Mining Mining Consortium which is still able to sent bitcoins out.
i totally agree u have done a wonderful job !!137

What this? FTC Trying to Sue a company that is merely just giving people bitcoins?!? I think you should reconsider. Heres the statement from Butterfly labs:
"Butterfly Labs is disappointed in the heavy-handed actions of the Federal Trade 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 FTC's current actions are negatively impacting our thousands of customers and our dozens of employees. Their current media campaign should only further alarm a knowing citizenry and raise questions as to why the FTC wouldn't simply let this case play out through the judicial system. That is what Butterfly Labs intends to do.
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 was literally is in the midst of shipping out completed products to fulfill the remaining millions of dollars of orders on our books and issuing requested refunds, when the FTC effectively closed the doors of Butterfly Labs without any chance to be heard in court.
At this time, Butterfly Labs is cooperating fully with the Temporary Receiver appointed by the Court. A hearing is set for September 29 and Butterfly Labs has asked the Court to allow it to present testimony from key witnesses for the company. 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. Our continued focus is our customers and finding a way to continue to deliver products and processing refunds for those who have requested them."

Now want hear something? EVERYONE IS USING BITCOINS! Even Dell themselves! Also, US Citzens and most people CANT be trusted. They lie about something all day long just to get what they want. Besides im one of those people who can isuse a take down request and if they need it, motivate them to do it and say "Everyone has the free will to do what they want." and in the end take them down. I suggest that you take out the lawsuit or many people will go to war with you.

Fred3232

P.S. For the sake of privacy, DO NOT STORE MY COMMENT AND NAME IN THE DATABASE! I would like to stay unknown. Nothing is hack-proof and i will stay out of it!

what does a person need to do if they are still scammed by Butterfly Labs? They owe me money and have never refunded it and I cant get any responses from them. Please let me know what I can do. Thanks.

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