Bitcoin Bruiser: Feds Shut Down Butterfly Labs As PayPal Realizes It Shouldn't ...

Bitcoin mining equipment maker Butterfly Labs is closed for business, after the FTC asked a federal court for a temporary restraining order

There have long been online complaints about Butterfly Labs, a Missouri-based maker of Bitcoin mining equipment that started operations in 2010. People complained in Bitcoin forums that the company charged them in advance for high-speed encryption machines that arrived months late, damaged or not at all. Some angry customers sued, as documented by Ars Technica in an article that contained disturbing information about Butterfly Labs' cocoon. In the same year it was founded, one of the founders, Sonny Vlesides, pled guilty to mail fraud for his 'involvement in an international, multi-million dollar lottery scam.' After getting hundreds of complaints about the company, the Federal Trade Commission investigated and announced Tuesday that it got a temporary restraining order from a federal court to shut the company down and freeze its assets. The FTC alleges that Butterfly Labs collected between $20 million and $50 million from customers, charging thousands of dollars for computing equipment that either never arrived or was useless by the time it did. Meanwhile, according to FTC attorney Helen Wong, the company's owners were using company credit cards for personal shopping outings at Nordstroms and Bed, Bath & Beyond; to get massages; go to saunas; and to buy guns. That last one could only be a business expense if the owners were preparing for customers descending on them with pitchforks.

In response, Butterfly Labs claims that its business is ' very real,' that it has shipped $33 million worth of equipment to customers and refunded $17 million worth, and that it looks forward to defending itself in court. The FTC claims Butterfly Labs put 'Bitforce' mining machines up for sale on its website in June 2012 for $149 - nearly $30,000 each, promising an October 2012 delivery date. They should have been called Bitfarce machines. Over 20,000 customers ordered them but none had received them over a year later, according to the FTC complaint. In November 2013, Butterfly Labs claimed all the Bitforce machines had shipped but 'consumers continued to file complaints about not receiving their prepaid BitForce mining machine,' says the FTC. In August 2013, Butterfly offered up the Monarch machine and asked people to pay thousands for it upfront, promising delivery by April. 'As of August 2014, Defendants had yet to ship a single Monarch machine,' says the FTC.

In many cases, the customers had paid for the machines with real money. 'For all orders, [Butterfly Labs] required consumers to pay up-front by PayPal, Bitcoins, or bank wire transfer the entire amount of an order at the time the order is placed,' says the complaint.

Moving forward, PayPal, for one, is going to make it harder for Bitcoin enthusiasts to be fleeced. The same day the FTC announced its crackdown on Butterfly Labs, PayPal announced plans to partner with Bitcoin payment processors Coinbase, Bitpay and GoCoin so that merchants using PayPal can start accepting Bitcoin... but only for digital goods such as ringtones and games. In its blog post about it, PayPal's senior director of corporate strategy Scott Ellison offhandedly mentioned news directly relevant to the Butterfly Labs crackdown:

For some time now, we've helped merchants selling Bitcoin mining equipment to accept PayPal payments. This will continue. But to safeguard customers, we've decided not to work with merchants who pre-sell these products. This is consistent with our approach to pre-sales of other goods; we hold off anytime we determine that pre-selling may not provide a good buyer experience.

As first reported by Ars Technica, PayPal allegedly smelled something afoul at Butterfly Labs a while ago. According to the probation officer for the Butterfly Labs founder with the mail fraud conviction, 'Chad Williams, a PayPal global asset protection officer, told her that as of September 2013, PayPal froze Butterfly Labs' account containing $11 million and that PayPal received 6,000 complaints in total.' According to the officer, PayPal had banned Butterfly Labs from its platform by December 2013. If you try to order a product from Butterfly Labs now, the only payment option is Bitcoin, but an error message pops up if you try to place an order.