Butterfly Labs can't afford the $39M fine to settle charges it duped bitcoin hopefuls

On Thursday, U.S. regulators said Butterfly Labs and two employees have settled charges accusing them of deceiving thousands of people by keeping payments for bitcoin mining systems that were never delivered.

They also settled charges that they used the machines to mine bitcoin for themselves before sending them to customers, when they sent them at all.

The deal includes a judgment of $38.6 million against Butterfly Labs and its part-owner and vice president of product development, Sonny Vleisides, and a judgment of $136,000 against general manager Darla Drake, the Federal Trade Commission said.

The judgments are suspended, however, because of the defendants' "inability to pay," the FTC said. Drake's judgment will be suspended when she turns over the cash value of the bitcoins generated using the company machines.

The defendants are also barred from misleading people in future about whether a product can generate bitcoins and when it will be delivered.

Neither Vleisides nor Drake could immediately be reached for comment. 

Bitcoin is a digital currency that can be used to buy and sell goods over the Web while largely bypassing the traditional banking system. New bitcoins can be generated, or mined, by people who use powerful computers to solve complex hashing algorithms.

As more people raced to solve those algorithms, they needed increasingly powerful computers to do so. Butterfly and a few other companies built hardware with specialized chips that could plow through those algorithms quickly. Nowadays, most of the mining is done by large collectives.

Butterfly was swamped with orders and fielded a ton of complaints from people waiting to receive their hardware, but it continued taking new orders. In late 2013, it took a single downpayment of $1 million for machines.

“Even in the fast-moving world of virtual currencies like bitcoin, companies can’t deceive people about their products,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a statement. “These settlements will prevent the defendants from misleading consumers.”

The proposed settlements must be approved by a district court judge.