US regulators are seeking to shut down Butterfly Labs, a Missouri-based company they allege deceptively marketed specialised computers designed to produce the virtual currency bitcoins.
According to the Federal Trade Commission (FTC), the company charged thousands of consumers a total of between $20m and $50m for its bitcoin mining computers and services, but then failed to provide the computers until they were practically useless - and in many cases, did not provide the computers at all.
Bitcoins are not distributed by a central bank, but instead are “mined” using increasingly complex algorithmic formulas. Solving a formula leads to the bitcoin system, which is run by a worldwide group of volunteers’ computers, awarding a set number of bitcoins.
Butterfly purported to sell dedicated bitcoin mining machines, with its more powerful models costing up to $29,899. But according to the FTC, Butterfly employees said some of their machines were only useful as a “room heater”.
Last August, Butterfly announced it was selling the “Monarch” mining machines, a machine the company called the “fastest and most power-efficient bitcoin miner yet.” Consumers were asked to pay between $2,499 and $4,680 upfront to purchase the machines.
Getting more powerful computers has become increasingly important for professional bitcoin “miners”: as the number of people using bitcoin systems grows, it becomes harder to “mine” each new coin, leading to an arms race in which the amount of computer power used has risen exponentially.
That has raised the pressure to deliver high-powered systems quickly to meet user demand. But Butterfly Labs has yet to provide consumers with a single Monarch machine, “despite defendants’ representation that the machines should be delivered by the ‘end of the year’ ,” the FTC said in court documents.
“We often see that when a new and little-understood opportunity like bitcoin presents itself, scammers will find ways to capitalise on the public’s excitement and interest,” said Jessica Rich, director of the FTC’s bureau of consumer protection. “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.
In a statement Butterfly Labs said it was “disappointed in the heavy-handed actions of the FTC and its “rush to judgment”.
The statement said: “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 $33m in products to customers and voluntarily granted refunds approximating $17m to customers for cancelled orders.”
The company said it was “literally 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.”
A court hearing is set for 29 September and Butterfly Labs said it would “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.”
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