Butterfly Labs Accused Of Fraud
The Federal Trade Commission filed a complaint this week against bitcoin mining hardware seller Butterfly Labs, providing yet another high profile example of why the cryptocurrency community needs regulator involvement. The complaint, which alleges that the company collected between $20 and $50 million from customers while delivering hardly anything in return, cited hundreds of consumer complaints that the agency received prior to taking action.
Even casual followers of cryptocurrency news have probably heard about problems at Butterfly Labs over the past two years. They have been sued before. One would be hard pressed to identify a satisfied customer. Nevertheless, consumers have continued to place orders and the company has continued to accept them.
The Butterfly Labs case is a good example of the difficulty of proving fraud in court. For a private company, neither incompetence nor financial mismanagement are unlawful, per se. Unless a plaintiff can prove that a company never intended to deliver, the best that he can usually hope for is a refund. In the absence of a smoking gun, Butterfly Labs has probably delivered just enough to create reasonable doubt as to the company’s criminality. They may be out of business, but it is unlikely that anyone will be convicted of a crime.
The digital currency community insists that decentralization and self regulation are both possible and desirable. However, the Butterfly Labs case is the latest in a long line of thefts and frauds that suggest otherwise. How long would the company have continued to stumble along had the US government failed to take action? Why didn’t the community shame and shun them out of business?
Affluence does not beget financial sophistication. Bitcoiners are just as susceptible to criminal schemes as other consumers; perhaps even more so, given the absence of most meaningful regulation. No one wins when governments get involved, but someone had to do something.
UPDATE 10/02/2014: The FTC has granted Butterfly Labs permission to resume limited business operations on condition that it accept no new orders from customers. As I predicted, the company seems to have done just enough to escape permanent closure as a criminal enterprise for the time being.
