Feds halt bitcoin mining scam that sold machines like a “room heater”

Another day, another bitcoin scam. This time the culprit is an outfit called Butterfly Labs that charged would-be bitcoin miners $149 to $29,899 for mining rigs — specialized computer equipment set up to harvest bitcoin — but then delivered worthless machines late or not at all.

The details of the caper are set out in an announcement from the Federal Trade Commission in which the agency says it obtained a court order to shut down the Butterfly gang, who apparently fleeced nearly 20,000 customers, and spent much of their money on guns and saunas.

As the FTC explains, [company]Butterfly Labs[/company] promised to deliver special “Bitforce” computers for mining bitcoins. Unfortunately for the customers, “the passage of time rendered some of their machines as effective as a ‘room heater’” (perhaps giving new meaning to the term “boiler room“).

If you’re unfamiliar with the digital currency known as bitcoin, the “coins” are created by solving math problems that get progressively harder. While it was once possible to “mine” the coins with a desktop computer, it is now all but necessary to use specialized chips and lots of processing power to obtain a bitcoin.

As the FTC’s complaint explains, demand for special mining machines coincided with bitcoin’s rapid increase in value last year (it briefly topped $1,200), which led many people to place orders with Butterfly Labs.

In some cases, Butterfly Labs did not deliver the machines at all and, on many occasions, “Defendants eventually delivered a BitForce that was either defective, obsolete, or mining far less Bitcoins.”

Now, Butterfly Labs has been shut down as a result of the FTC’s court order, which was issued by a federal judge in Missouri. The order also requires the company to comply with all FTC requests, including demands for financial information as the agency seeks to obtain restitution for fleeced customers.

As for Butterfly Labs, its Twitter account suggests it believed nothing was amiss. Recent tweets tout stories that suggest bitcoins for Native Indians and as an alternative currency for Scotland.

Update: Butterfly Labs has issued a statement, accusing the government of overreach. It reads in part:  “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.”

Featured image courtesy of Pond5/arinahabich.