A federal judge recently granted the Federal Trade Commission’s request to shut down the operations of Butterfly Labs, Inc., a company that makes ASIC Bitcoin mining gear, over suspicions of fraud. It came after the FTC received around 300 complaints regarding Butterfly Labs not delivering gear to customers as promised. At the time, some brushed it off as a classic startup mistake of over promising and under delivering, but clearly, that wasn’t the case.

Butterfly Labs’ customers were left unable to mine Bitcoins because the mining rigs were never delivered. And for the few who did receive their equipment, it was often far too late in the day – by the time they were ready to mine, the Bitcoin hashing algorithm had gotten far more complex, meaning that the gear was no longer powerful enough to turn out a profit.

Shipping used mining rigs

Now, new evidence released by the FTC alleges that Butterfly Labs was in fact using the equipment promised to its customers to mine Bitcoins for itself – in short, they used their customers’ money to build the mining rigs, used them for their own benefit, and when they became useless shipped them to their unwitting customers.

According to a former Butterfly Labs employee, the company used the mining gear to ‘test’ or ‘burn them in’ to make sure that the rigs functioned well before shipping, but the FTC’s evidence showed that the company ‘burned in’ the mining gears for two days, instead of just testing them for 10-30 minutes. Also, the rigs were not shipped to consumers immediately after the ‘burn in’ process, but only when there were new rigs to be tested.

The FTC believes there was no need to test the rigs as Butterfly Labs could have used a testnet block chain without actually running the miners. A former employee of Butterfly Labs asked the management why they weren’t using the testnet block chain, and claims he was told that method was unprofitable for the company.

Butterfly Labs’ unpopularity was demonstrated in court when the FTC’s attorney showed judges a foam torch, an item that resembles a foam finger used at sporting events, with the words “BFL is late!” and “Y U NO SHIP!” emblazoned on it. The foam torch was said to have been taken from Butterfly Labs’ headquarters – it’s alleged the company used corporate funding to have them made for the sole purpose of mocking their jaded customers.

U.S. District Judge Brian C. Wimes extended his temporary order that prevents Butterfly Labs from operating.  The judge has ordered the FTC and Butterfly Labs, along with the appointed receiver for the case, to come up with an amicable plan so they can all move forward.

Butterfly Labs wasn’t too keen on working with the FTC after it was labelled as a “scammer” and “bogus,” but the company is said to be willing to cooperate so it can move on and serve its customers.

Question now is, will consumers ever be able to trust Butterfly Labs again?

Almost duped

David Gewirtz of ZDNet almost became a victim of Butterfly Labs after doing the math and calculating he could make a decent profit in a short space of time. But he changed his mind after realizing the long waiting time to recieve the rigs.

He did the numbers and found out that if he got the gear within two weeks, he would be able to mine for the cost of the rig and make a profit. The problem was, Butterfly Labs’ rigs were not shipping in two weeks – instead, it was taking around two to six months. He figured that by the time he got the mining rig, the computational requirement to mint Bitcoins would have increased, which meant that the mining gear would not have enough power to mine coins as quickly as it could at the present time.

Gewirtz noticed a number of red flags with Butterfly Labs’ operations, and was smart enough to walk away. “I’m glad I didn’t get caught in this scam. This deal smelled like a rat, and I didn’t bite,” he wrote. “Now it’s time for the FTC to put everything Butterfly Labs has done through the magnifying glass and then burn the wings off those bastards.”

photo credit: btckeychain via photopin cc