FTC Reports Butterfly Labs Mined on Customers’ Bitcoin Miners

Jonathan Saewitz @SuperCryptoGuy
September 30, 2014 01:30 UTC

A week ago, the Federal Trade Commission (FTC) shut down Butterfly Labs (BFL), one of the reasons for this being that “consumers who have purchased the machines or services cannot use them to generate Bitcoins because Defendants [Butterfly Labs] never provide them with the machines or services.” The FTC released new court filings today for its Butterfly Labs case. The most recent report by the FTC against Butterfly Labs is that they mined for bitcoins on their customers’ miners before shipping them (if they even shipped them at all), and didn’t tell the customer: Fraud.

New Evidence Against Butterfly Labs

BFL spent their customers’ money on these styrofoam pitchforks. Why weren’t they spending it on shipping out miners to customers?

The document, newly released by the FTC, explains that a former Butterfly Labs employee claims that BFL mined bitcoins on their customers’ miners to ‘burn [the miners] in’, another way of saying that they were making sure the miners were working. This might be a normal practice, except that they allegedly did it for two days when they only needed to do it for 10 to 30 minutes. Furthermore, ‘burned’ and ‘tested’ miners weren’t shipped to customers until new miners were ready for use, so that these new miners could be used by BFL to ‘burn in’ in their place. In fact, the FTC believes that new miners didn’t even need to be tested as the miners could be run on a testnet block chain without actually running the miners. One employee reportedly asked BFL management why they weren’t using the testnet, and they were told that BFL wouldn’t make money using it. On an FAQ page for one of Butterfly Labs’ products, one question asks, “Why don’t you guys mine?”. BFL responds, “This is a popular question. The answer is pretty simple. Hardware is the focus of our passion. We’re hardware designers.” This is a lie, however, as BFL does mine.

[divider]CCN[/divider]

Begin the Mob!

Butterfly Labs apparently also “used corporate funds to make and mass order red foam torches mocking their own customers, emblazoned with the words, ‘Y U NO SHIP – BFL IS LATE!'”. This shows that BFL went out of their way to cause further disappointment for their customers. The money that was spent on these foam torches could have been used to ship miners to customers, but clearly BFL didn’t have their priorities straight.

Also included in the FTC document is a report that Butterfly Labs miscalculated the profitability of their miners, and that they potentially advertised better statistics for their miners than what was actually true. The FTC also claims that BFL was incorrect when they said that they notified all of their customers that the shipping time for their products was two months or longer. For BitForce orders in June 2012, this notification was not present on the order forms, however it was added in March 2013. The FTC further reports that BFL did not have a reasonable basis for their products’ projected delivery dates. However, this is irrelevant, because the “law is well settled that the FTC need not prove that Defendants acted with intent to defraud”.

The Monarch miner by Butterfly Labs.

Further Reports

Butterfly Labs understands that Bitcoin mining gets more difficult over time, so shipping miners out on time is vital. However, they still took an extremely long amount of time to ship their miners; sometimes miners would be shipped a year late. BFL claims that they’ve sent either a refund or shipped the product for every order from August 9th to November 9th, 2013. However, one customer claims that they haven’t received a refund or the product, even after numerous requests to BFL. The FTC believes that BFL’s illegal practices continue and they do not see any change in these practices in the future. The FTC concludes that Butterfly Labs “should not be able to continue to operate [at their customer’s expense] because they have taken superficial steps after two years of illegal operations to remedy their flawed business model.”

I was impressed by the FTC’s thorough understanding of Bitcoin in general, but specifically Bitcoin mining. They hit the nail on the head: Bitcoin mining gets more difficult over time, it’s vital that mining equipment arrives on time, and it’s unfair to the customer to send them used equipment that is reportedly new. CCN will continue to update you on the latest Butterfly Labs news.

All quotations from the Federal Trade Commission’s reports unless otherwise noted.
Foam torch images from the Federal Trade Commission. Monarch miner image from Butterfly Labs. Other images from Shutterstock.

Last modified: September 30, 2014 22:33 UTC