Bitcoin, the controversial virtual currency that exists only as computer data, is involved in its first case with the federal government--and things aren't looking too good for the Bitcoin side.
At the request of the Federal Trade Commission, a U.S. court has shut down Butterfly Labs, a Missouri-based company that allegedly took millions of dollars from customers and didn't follow through with specialty bitcoin-mining computers.
The FTC's pursuit of Butterfly Labs marks the first time that the commission has gone after a Bitcoin case, the Washington Post reported.
According to the FTC complaint, the Missouri firm took "tens of millions of dollars" from its customers for bitcoin computers and then didn't actually ship the devices to customers until they were almost obsolete if ever.
"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," said Jessica Rich, director of the FTC's Bureau of Consumer Protection, as quoted by Reuters and other media.
Federal regulators believe that Butterfly Labs board members, which include Jody Drake (aka Darla Drake), Nasser Ghoseiri and Sonny Vleisides, spent millions of dollars taken from trusting customers on saunas, guns and other purchases instead of attending to computer orders.
"The FTC alleges that one corporate defendant and three individual defendants have taken in over $50 million by operating a scheme that required consumers to pre-pay for machines that would allow consumers to 'mine' for Bitcoins, a new virtual currency," said the FTC complaint, as quoted by Ars Technica.
As of September 2013, more than 20,000 customers had not received their computers, which Butterfly Labs sold for $149 to $29,899 depending on purported capability.
Bitcoins are created through "mining," which is when a computer is used to calculate an algorithmic formula. Users are awarded a certain number of bitcoins. As more currency is gained, mining for bitcoins becomes progressively more difficult.
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