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The FTC says this Bitcoin company is bogus

A company that was accused of deceiving consumers into believing its computers could produce Bitcoins was shut down by a federal judge at the request of the Federal Trade Commission, the agency said on Tuesday.

Missouri-based Butterfly Labs sold the computers for thousands of dollars, the FTC said, but either did not deliver them or provided machines that barely worked. Victims were deceived, in part, because of confusion about virtual currencies like Bitcoin. More than 20,000 people paid for "BitForce" and "Monarch" computers from Butterfly Labs, the FTC said.

"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 in a statement. "We're pleased the court granted our request to halt this operation, and we look forward to putting the company's ill-gotten gains back in the hands of consumers."

Such virtual currencies can be used like money, whether to buy things or to trade for traditional government-backed currencies, but their value tends to be extremely volatile. This summer, federal officials warned of the sometimes dramatic fluctuations in this new type of currency.

The FTC explained that "Bitcoins are not distributed by a central bank, but instead 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 court order, in addition to stopping Butterfly Labs' practices, freezes its assets.

Butterfly Labs issued a statement objecting to the FTC action:

"It appears the FTC has decided to go to war on Bitcoin overall and is starting with Butterfly Labs. Butterfly Labs is being portrayed by the FTC as a bogus and fake company," the company's statement said. "To the contrary, Butterfly Labs is very real. As pointed out in court filings Butterfly Labs made last night, Butterfly Labs has shipped more than $33 million in products to customers and voluntarily granted refunds approximating $17 million to customers for cancelled orders. 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 when the FTC effectively closed the doors of Butterfly Labs without any chance to be heard in court."

Coincidentally, PayPal (EBAY) announced on Tuesday that it would expand the ability of its merchants to accept Bitcoins as payment.

Both announcements were welcomed by Tyler Roye, founder and CEO of eGifter, a social gifting company that accepts alternative, or "cryptocurrencies," as payment for retailers' digital gift cards.

"PayPal's adoption of Bitcoin, as well as the move from the FTC to regulate Bitcoin fraud, are two additional milestones in the push for mass adoption of cryptocurrencies, and Bitcoin in particular," he said. "As businesses continue to find more secure ways to accept cryptocurrencies, users will continue to feel more confident spending them for goods and services, and PayPal's adoption could be a key part of this network effect."

Mitch Lipka

Mitch Lipka is an award-winning consumer columnist. He was in charge of consumer news for AOL's personal finance site and was a senior editor at Consumer Reports. He was also a reporter for The Philadelphia Inquirer and the South Florida Sun-Sentinel, among other publications.

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