September 23, 2014 / 7:36 PM / 4 years ago

UPDATE 1-U.S. court halts bitcoin mining operation Butterfly Labs -FTC

(Adds company comment, court date, more details of Butterfly Labs products)

By Ros Krasny

WASHINGTON, Sept 23 (Reuters) - A U.S. court has temporarily shut down Butterfly Labs, a Missouri company the Federal Trade Commission alleges deceptively marketed computers designed to produce bitcoins, the “virtual currency” payment system.

The FTC’s complaint against Butterfly and its corporate officers alleges that the company charged consumers thousands of dollars for its bitcoin computers, called BitForce, but then failed to ship the computers until they were almost obsolete, or in many cases did not provide the computers at all.

In an emailed statement on Tuesday, Butterfly Labs said the commission had overreached with “heavy-handed actions.”

“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 company said. “It appears the FTC has decided to go to war on bitcoin overall, and is starting with Butterfly Labs.”

Unlike traditional currency, bitcoins are not distributed by a central bank or backed by physical assets like gold, but are “mined” by users who use computers to calculate increasingly complex algorithmic formulas.

When a user solves a formula, the bitcoin system awards that user a set number of bitcoins. As time passes and more bitcoins are mined, mining becomes more difficult. The codes become more complex and require more powerful computers to solve them.

“We often see that when a new and little-understood opportunity like Bitcoin presents itself, scammers will find ways to capitalize on the public’s excitement and interest,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said on Tuesday.

Butterfly sold its computers from $149 to $29,899 based on the machines’ purported computing power. The FTC said that more than 20,000 consumers had not received the computers they purchased as of September 2013.

A more powerful computer, the Monarch, was launched in August 2013 for sale between $2,499 and $4,680, but few of the machines had been delivered, the FTC said.

“Butterfly Labs was literally in the midst of shipping out completed products to fulfill the remaining millions of dollars of orders on our books and issuing requested refunds,” the company said.

The defendants in the case are BF Labs, Inc, doing business as Butterfly Labs, and company officers Darla Drake, Nasser Ghoseiri and Sonny Vlesides, the FTC said.

The court’s preliminary ban on Butterfly Labs will be considered at a hearing scheduled for Monday.

The case is 4:14-cv-00815-BCW in U.S. District Court for the Western District of Missouri. (Reporting by Ros Krasny; Editing by Peter Cooney)

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