FTC Shuts Down Bitcoin Miner While PayPal Embraces the Cryptocurrency

The Federal Trade Commission takes aim at Bitcoin mining company Butterfly Labs, while PayPal embraces the emerging cryptography.


A pair of recent incidents show how much the Bitcoin environment has changed from a hobbyist activity to something significantly more serious. The U.S. Federal Trade Commission is now responding to complaints about Bitcoin vendor claims while PayPal, itself an innovator in online payments, is now embracing Bitcoin as well.

In the early days of Bitcoin, it wasn't terribly difficult for an individual to build their own system to mine for coins. Bitcoin, which is an emerging digital form of currency, is created through the action of individuals using computational power to "mine" for Bitcoins. As the number of miners increased and more Bitcoins were created, the computational complexity also increased.

That complexity led to the emergence of dedicated hardware systems, often built with ASICs (application-specific integrated circuits) to expedite and optimize the mining process. One of the hardware vendors building Bitcoin mining machines is Butterfly Labs. The FTC was able to persuade the U.S. District Court for the Western District of Missouri to shut down Butterfly Labs on Sept. 23. The FTC action came after it had received consumer complaints about the Butterfly Labs Bitcoin miner.

"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."

For its part, Butterfly Labs has issued its own statement denying allegations made by the FTC.

"It appears the FTC has decided to go to war on bitcoin overall and is starting with Butterfly Labs," the company stated. "Butterfly Labs is being portrayed by the FTC as a bogus and fake company. To the contrary, Butterfly Labs is very real."

According to Butterfly Labs, the company shipped more than $33 million worth of products to customers. The Butterfly Labs Bitcoin miner technology was sold in multiple places, including popular online retailer TigerDirect.com. TigerDirect currently lists the Butterfly Labs Bitcoin miner as being out of stock.

One of the comments made on the TigerDirect site about the Bitcoin miner is particularly telling.

"Unfortunate as it is this is NOT going to get you a profit on bitcoin mining based on its cost and current network difficulty," one reviewer wrote on March 25.


Although it's not as easy as it once was to create new Bitcoins, it's now getting easier to spend them. On Sept. 23, PayPal announced that it now has multiple partnerships in the Bitcoin payment processing space to enable consumer transactions.

"PayPal has entered into agreements with leading Bitcoin payment processors BitPay, Coinbase and GoCoin," Scott Ellison, senior director of Corporate Strategy at PayPal, wrote in a blog post. "Starting today, these agreements let PayPal digital goods merchants accept Bitcoin with a simple integration through the PayPal Payments Hub."

Bitcoin is still in its early stages of market adoption. The FTC action clearly shows that the government is going to be actively engaged in protecting consumers. In contrast, PayPal's actions shows that it wants to actively engage consumers who want to spend their Bitcoins no matter how they were mined or obtained.

Sean Michael Kerner is a senior editor at eWEEK and InternetNews.com. Follow him on Twitter @TechJournalist.

Sean Michael Kerner

Sean Michael Kerner

Sean Michael Kerner is an Internet consultant, strategist, and contributor to several leading IT business web sites.