The Butterfly Labs conundrum – did the bitcoin startup profit from its customers?

Yesterday the Federal Trade Commission released new court documents for its Butterfly Labs case – the bitcoin hardware startup closed down by the FTC a week ago for failing to send customers the bitcoin miners they had paid for on time. The new report suggests that the long wait was partly because Butterfly Labs actually mined for bitcoins on their customers’ miners before shipping them – if they were even shipped at all – without their knowledge.

It might be normal practice to ‘burn miners in’ – essentially check if they are working – a process that ordinarily takes around 10 to 20 minutes. But the FTC explains that according to a former employee, Butterfly Labs allegedly ran new miners for two days.  In fact, the FTC believes that new miners don’t even need to be tested in this way – the miners could be run on a testnet block chain without actually running properly. 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.

Sending bitcoin hardware on time is vital, notes the FTC, as bitcoin mining becomes more difficult over time. BFL were aware of this, but still took much too long to ship their miners – sometimes up to a year. 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 in the report that they haven’t received a refund or the product, even after numerous requests to BFL.

“Once Defendants got around to producing Bitcoin mining machines using what were essentially interest-free loans from consumers, their first actions were not to benefit their long-suffering customers, but to pad their own bottom line,” Helen Wong, an FTC attorney, wrote to the court.

She added: “Further demonstrating Defendants’ disregard for their customers, they used corporate funds to make and mass order red foam pitchforks mocking their own customers, emblazoned with the words, “Y U NO SHIP – BFL IS LATE!”

Butterfly Labs have returned with a statement claiming that the FTC has inflated an issue that was already close to being rectified with local authorities:

The Johnson County DA and BF Labs were incredibly close to resolving their negotiations and finding an acceptable compromise. There was no threat of shutting the business down to protect the public, no need at any point in the negotiations to worry about secretion of assets. Yet the FTC rides into town in the name of consumer rights waving the banners of dissipation of assets and a manufactured fraud that needed to be ended to protect an unwitting public (in a way that perversely comes at the expense of the alleged victims).

The full FTC document includes some convincing testimonies from former BFL employees, that suggests that the temporary restraining order might be extended permanently. The charge for mining bitcoins on customer machines came from Samuel Johnston, the firm’s former head burn-in technician, who held that position from June 2013 until November 2013.

Ultimately, whether or not the issue could have been concluded on a local level, waving comedy pitchforks is highly unlikely to win anyone much sympathy.

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