FTC shuts down Butterfly Labs,

The mining equipment company failed to deliver tens of thousands of computers, and delivered others so late they were obsolete

There was skepticism around Butterfly Labs from the beginning.

Like most bitcoin companies, the Missouri-based startup sprang up out of nowhere. In late 2011, there were rumors of a leap in the technology for mining bitcoin. This technological leap had the potential to create massive profits for miners, as well as massive profits for those selling the new equipment to miners. It was the old selling-pickaxes-during-the-Gold-Rush strategy.

Except Butterfly Labs added a twist. They didn’t sell pickaxes. They sold preorders for pickaxes.

BUTTERFLY LABS PROMISED ITS TECHNOLOGY COULD MINE BITCOINS 1,000 TIMES FASTER

Mining is an essential part of bitcoin. It rewards people for using their own computer power to maintain the network. Since Bitcoin has no central processing authority, it relies on the crowd to record transactions, check each others’ math, and keep things secure. This is all built into the bitcoin software: miners don’t have to actually do anything other than set up a computer and run the program.

Back in 2009 when bitcoin first appeared, anyone could run the mining software on an ordinary laptop and crank out 50 bitcoins in a day. As bitcoin became more popular, mining got more competitive. Soon miners started using more powerful graphics cards to mine bitcoin. Then serious miners began to devote racks of computers, like small personal data centers. Because there were so many miners chasing after the same bitcoins, mining got more and more expensive and the returns on investment got smaller and smaller. The bitcoin protocol is also designed to increase the difficulty of mining as time goes on, which further cut into miners’ profits.

In June of 2012, Butterfly Labs became one of the first pop-up companies to announce a breakthrough in mining technology: application-specific integrated circuits, or “ASICs,” designed specifically to mine bitcoin 1,000 times faster. At least two other companies cropped up, promising similar machines. Miners rushed to place preorders. Some became loyal to certain sellers; others hedged their bets by ordering from all three. Whoever got their machines first would reap a windfall in mining profits before the rest of the mining world caught up.

Butterfly Labs promised their customers that preorders would ship as soon as possible. But they soon became evasive, issuing a series of shifting dates. At the time, the company told The Vergethat the first ASICs would ship by December. Instead, by most accounts, the first shipments started trickling out in April.

MORE THAN 20,000 CUSTOMERS WHO PAID IN FULL HAVEN’T RECEIVED THEIR ORDERS

While some customers received their ASICs — Wired magazine got one — many more started complaining about delayed shipments. Some wondered if the products really existed. Others suspected Butterfly Labs had decided to use the machines to mine bitcoins for themselves. Some forum users claimed to have received their orders; others accused them of being paid by Butterfly Labs. It came out that one of the company’s alleged cofounders was on probation after pleading guilty to mail fraud in a lottery scam.

Soon, Butterfly Labs was arguably the most controversial company in the bitcoin world after Mt. Gox, the bitcoin exchange that filed for bankruptcy. But while Mt. Gox was merely incompetent, Butterfly Labs may have been malicious. (Plus, they were dicks.) Customers all over the world began lodging complaints with the US Federal Trade Commission.

According to the FTC, more than 20,000 customers had received nothing by September 2013 — more than a year after customers’ placed their first orders — despite paying upfront for products that ranged from $149 chips to $29,899 machines. That means customers were ripped off for at least $3 million, and that’s a low, low estimate, since many customers reported buying the more expensive units, and more orders were placed after September 2013. Update: In total, Butterfly Labs collected between $20 million and $50 million in pre-orders, according to the FTC.

Customers who did receive their orders found they were obsolete. A Butterfly Labs representative said the delayed machines were only useful as a “room heater,” according to the FTC.

THE MACHINES WERE ONLY USEFUL AS A “ROOM HEATER,” SAID ONE COMPANY REP

Despite widespread failure to deliver, Butterfly Labs began offering new products and services in 2013: an even more powerful bitcoin miner and a remote mining service. The FTC says the company failed to deliver those, too.

Butterfly Labs did not immediately respond to a request for comment. In the past, the company has said delays were due to various manufacturing complications.

The company has now been shut down pending a court case. “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,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a statement today.

UPDATE, 4:12PM: Butterfly Labs has released a statement:

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.