OpEd: In Butterfly Labs Case, FTC Shows Little Regard For Bitcoiners

Last month, news came out [via CoinDesk and ArsTechnica] that the FTC had settled its case against Butterfly Labs and co-founder Sonny Vleisides for a largely symbolic combined fine of $19,000 ($4,000 for Vleisides and $15,000 for the Butterfly Labs itself). Meanwhile, the customers who were burned by Butterfly Labs are left wondering where their justice is.

According to the FTC accusations, which remain unproven, Butterfly Labs continually deceived customers. They used customer equipment to mine their own bitcoin, spent pre-order funds on saunas and guns, used hardware to mine their own bitcoins before sending them out and a variety of other things that didn’t contribute towards fulfilling their customer’s orders. Particularly damning was the report that they had ordered custom giant foam fingers, which they used to mock dissatisfied customers.

While Butterfly Labs is forbidden from lying to customers about future hardware releases, that was presumably already illegal. There is only condition with any teeth at all. Unless they are able to deliver the hardware within 30 days, Butterfly Labs has been banned from taking pre-orders.

That will be of little condolence to customers who have already fallen victim to Butterfly Labs. While their reputation is irrevocably damaged, they will be permitted to take on new customers and release new hardware and, for the most part, continue on with business as usual.

Butterfly Labs was accused of fleecing up to $50 million from its customers. A fine that amounts to less than $20,000 is an ineffective deterrent for future bitcoin based businesses who see an opportunity in breaking promises to their customers.

Butterfly Labs says it is continuing to process customer refunds, but there is no mention of the settlement being voided if they don’t make a good faith effort in fulfilling them.

Regulators and those who welcome them have sold regulation as something that will protect customers and help build Bitcoin’s reputation. If the regulators are going to allow one of Bitcoin’s worst offenders and most hated businesses off with a simple slap on the wrist, what is the lesson we are supposed to learn here?

LocalBitcoin traders have been arrested for acting as a money transfer business without a license, meanwhile companies like Butterfly Labs, and its owners are let off with symbolic fines. Yes, if Butterfly Labs breaks the terms of its probation, its owners will be responsible for the full amount of the far more significant fine. What about customers who already threw their money into the BFL blackhole?

In the end, it’s the customer reaction, not the regulators, that will have the largest effect on Butterfly Labs. Their online reviews and reputation is not favorable. That will likely affect them more than the FTC’s slap on the wrist.

Part of the reason the FTC agreed to settle with Butterfly Labs, according to the CoinDesk article, was because the court decided the defendants would be unable to pay the entirety of the fine. That is a reasonable action to take when the court is dealing with a small time offender who may have accidentally overstepped some legal bounds.

It is worth reiterating that Butterfly Labs allegedly spent customer funds on giant foam fingers to taunt their customers. They also allegedly ran their customers’ machines for their own gain rather than shipping them on time. If those allegations are true, then the actions of Butterfly labs were not that of a company that accidentally fell on the wrong side of the legal line, but a factory dedicated to fleecing the money out of unsuspecting bitcoin miners.

Perhaps Butterfly Labs’ claim they are still trying to process customer refunds played into the FTC’s decision, but few customers seem optimistic about receiving their refund.

With regulation coming to bitcoin, whether we like it or not, it doesn’t seem unreasonable to ask: Will the FTC and the other three letter regulatory bodies that are pushing their way into Bitcoin actually work to clean up the industry, or will they selectively enforce their regulations when it is convenient?

Their track record so far doesn’t bode well.