On September 18, 2014, a federal trial court in Missouri granted the Federal Trade Commission’s ex parte motion for a temporary restraining order, asset freeze, and appointment of a receiver for Butterfly Labs.  Butterfly Labs made claims on its web site and on social media that its computers enabled consumers to “mine” a type of cryptocurrency known as Bitcoins.  According to the court order, Butterfly Labs charged consumers between $149 and $29,899—payable upfront via PayPal, wire transfer and, yes, Bitcoins—for these computers but never delivered them or else delayed delivery so substantially as to render the computers obsolete for the purposes of “mining” Bitcoins.

By way of background, cryptocurrencies, sometimes called digital currencies or virtual currencies, do not exist in tangible form, but rather are purely digital.  Users transfer them from an encrypted computer file known as a “wallet” either directly to merchants and other third parties, or by way of third party exchanges.  Virtual currencies are not issued or backed by any government.  Their value is determined from online exchanges and can fluctuate significantly.  The best known example of a cryptocurrency is called a Bitcoin, which was created in 2009.  Bitcoins are “mined” by individuals solving computational puzzles and, once verified, the Bitcoin network awards a specific number of Bitcoins to the successful “miners.”

The court order pointed out that, with respect to Bitcoins, time is of the essence because fewer Bitcoins are available and computations are harder:  “For example, a miner solving the computational puzzle could earn a reward of 50 Bitcoins in 2008, but that reward halved in 2012 to 25 Bitcoins, and it will drop to 12.5 Bitcoins in 2016.”  The computations to “mine” Bitcoins are becoming increasingly difficult so that “obtaining the most cutting edge technology in a timely manner is paramount for any consumer to successfully make a profit by mining for Bitcoin.”  Therefore, with “each new generation of mining technology, previous generations become effectively obsolete and worthless.”

As a result, the FTC alleged that Butterfly Labs violated Section 5 of the Federal Trade Commission Act not only by falsely stating that consumers would be able to use the computers to ”mine” Bitcoins, but also that the machines would be delivered in a timely fashion.

The hearing on the FTC’s motion for a permanent injunction and consumer redress occurred on September 29, 2014, but no decision has yet been made.