Breaking out of the bank with Bitcoin
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In recent years, the Bitcoin community has collectively developed an open source platform that allows for the mining of the Bitcoin currency as well as instant global peer-to-peer payments and ...

In recent years, the Bitcoin community has collectively developed an open source platform that allows for the mining of the Bitcoin currency as well as instant global peer-to-peer payments and financial transactions using Bitcoins - without any central authority. With its theoretical roots in the Austrian School of Economics, the community can be seen as a potential threat to the mega financial institutions and governments in Europe and across the globe as the Bitcoin currency and its underlying principles challenge the long-standing fiat money system. Designed and implemented in only 2009, Bitcoin has rapidly grown from being an idea in the head of a “Japanese programmer” to becoming a legitimate currency as Bitcoin-Central was awarded an International Bank ID number and became a Payment Services Provider equal to organizations such as PayPal. However, perhaps due to its rapid growth during the past four years and the fact that the currency is primarily a virtual one, the Bitcoin community has been subject to external threats such as fraud, hacker attacks, and a lawsuit. Despite this, the community has shown significant resilience and has even shown continued exponential growth in recent months. As such, our research purpose is to investigate the process through which the Bitcoin community acts as an institutional entrepreneur. As a first step in fulfilling our research purpose, we conduct an exploratory analysis in this research-in-progress paper of the formal and informal “organizations” of Bitcoin as well as of the topical network structure of the Bitcoin community using secondary sources and the complete archive of 1.15 million English posts written by 21,903 members between 2009 and 2013. Some preliminary results and findings as well as future steps are discussed.

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Breaking out of the bank with Bitcoin Document Transcript

  • 1. Breaking Out of the Bank in Europe---Exploring Collective Emergent Institutional Entrepreneurshipthrough BitcoinResearch-in-progressRobin TeiglandDepartment of Marketing and StrategyStockholm School of Economicsrobin.teigland@hhs.seZeynep YetisDepartment of Marketing and StrategyStockholm School of Economicszeynep.yetis@hhs.seTomas LarssonKairos Futuretomas.larsson@kairosfuture.comFor presentation at 15th Annual SNEE Conference 2013The  Swedish  Network  for  European  Studies  in  Economics  and  BusinessMölle, SwedenMay 2013
  • 2. Breaking  out  of  the  Bank  –  Research-in-progress     2  Breaking Out of the Bank in Europe:Exploring Collective Emergent Institutional Entrepreneurshipthrough BitcoinAbstractIn recent years, the Bitcoin community has collectively developed an open sourceplatform that allows for the mining of the Bitcoin currency as well as instant globalpeer-to-peer payments and financial transactions using Bitcoins - without any centralauthority. With its theoretical roots in the Austrian School of Economics, thecommunity can be seen as a potential threat to the mega financial institutions andgovernments in Europe and across the globe as the Bitcoin currency and itsunderlying principles challenge the long-standing fiat money system. Designed andimplemented in only 2009, Bitcoin has rapidly grown from being an idea in the headof a “Japanese programmer” to becoming a legitimate currency as Bitcoin-Centralwas awarded an International Bank ID number and became a Payment ServicesProvider equal to organizations such as PayPal. However, perhaps due to its rapidgrowth during the past four years and the fact that the currency is primarily a virtualone, the Bitcoin community has been subject to external threats such as fraud, hackerattacks, and a lawsuit. Despite this, the community has shown significant resilienceand has even shown continued exponential growth in recent months. As such, ourresearch purpose is to investigate the process through which the Bitcoin communityacts as an institutional entrepreneur. As a first step in fulfilling our research purpose,we conduct an exploratory analysis in this research-in-progress paper of the formaland informal “organizations” of Bitcoin as well as of the topical network structure ofthe Bitcoin community using secondary sources and the complete archive of 1.15million English posts written by 21,903 members between 2009 and 2013. Somepreliminary results and findings as well as future steps are discussed.Keywords: institutional entrepreneurship, open source, semantic analysis, socialnetwork analysis, Bitcoin, banking
  • 3. Breaking  out  of  the  Bank  –  Research-in-progress     3  Breaking Out of the Bank in Europe: Exploring Collective EmergentInstitutional Entrepreneurship through BitcoinIntroductionOver the past two decades, the wide adoption of the Internet and developments ininformation and communication technologies (ICT) have greatly boosted thedevelopment of online knowledge creation communities, with some of thesecollective and emergent environments now disrupting and transforming industries.For example, open source software (OSS) communities (e.g., LINUX, MySQL)demonstrate how a globally dispersed group of strangers self-organize online tochallenge and disrupt the software industry’s established norms for innovation andvalue creation. Money as a social institution has also been affected by thedevelopments in Internet and ICT and has evolved to adapt to the online economy. Inrecent years, we have seen the rapid spread of online banking, new payment servicessuch as PayPal and mobile payments, and even new virtual currencies such as LindenDollars and Project Entropia Dollars. These virtual currencies are used by virtualcommunities to exchange goods and services within the community and even withothers outside the community, thereby providing a medium of exchange and a unit ofaccount for that particular virtual community (ECB, 2012).The emergence of Bitcoin, a peer-to-peer (P2P) network virtual currencyscheme based on a collectively developed and maintained open source softwareplatform, should therefore come as no surprise. What distinguishes Bitcoin fromtraditional currencies is that it does not have any central authority in charge of themoney supply or a central clearing house (ECB, 2012). There are no financialinstitutions involved in the transactions; community members themselves perform allthese tasks. Bitcoin’s exchange rate is determined by supply and demand, and it ispossible to spend Bitcoins on both virtual and real goods and services. Designed andimplemented in 2009, Bitcoin has rapidly grown from being an idea to becoming alegitimate currency with more than USD 1 billion in bitcoins in circulation1. A deal inDecember 2012 with French financial firms Aqoba and Credit Mutuel led to Bitcoin-Central, a currency exchange, being awarded an International Bank ID number andbecoming a Payment Services Provider equal to services such as PayPal.2With its theoretical roots in the Austrian School of Economics (ECB, 2012),the Bitcoin community is seen as a threat by many of the mega financial institutionsand governments in Europe and across the globe as the Bitcoin currency and itsunderlying principles challenge the long-standing fiat money system. As such, Bitcoinhas created quite some controversy, with opponents claiming that it allowsanonymous buyers to purchase any number of illicit items from anonymous sellers(Forbes, 2013), and it is for this reason that some worry that the currency is becominga viable alternative for drug dealing and money laundering. However, the currency isalso increasingly used by legitimate merchants and employers worldwide. Thecurrency seems to be gaining momentum, and several leading U.S. Bitcoin startupshave expressed their commitment to preventing illicit activity by registering with thefinancial crimes enforcement network agency of the U.S. Federal Government(Forbes, 2013). Thus, it appears that despite going against the entrenched institutionsof fiat currency and the global banking system and even while facing fraud schemes,                                                                                                                1http://bitcoinwatch.com/2http://www.bbc.co.uk/news/technology-20641465
  • 4. Breaking  out  of  the  Bank  –  Research-in-progress     4  the Bitcoin community has shown significant resilience to survive and perhaps, somewould even say, thrive.Thus, the purpose of this research-in-progress paper is an empiricalexploration of the Bitcoin community in order to better understand how this emergent,self-organizing online collective is acting as a game changer within the globalfinancial industry. To do so, we turn to the literature on institutional entrepreneurship,which has been defined as the “activities of actors who have an interest in particularinstitutional arrangements and who leverage resources to create new institutions or totransform existing ones” (Maguire et al., 2004: 657). The process of institutionalentrepreneurship is a complex one involving many different actors, e.g., individuals,groups/communities, organizations.To fulfill our exploratory research purpose, our first step has been to conductsocial network and semantic analyses of the Bitcoin community. Using onlinesecondary sources and the complete archive of 1.15 million English posts written byalmost 22,000 members between November 2009 and January 2013, we investigatethe social and cognitive structures of the Bitcoin community through the relationsamong its as well as the discussions to which they contribute.This paper is structured as follows. We begin with a brief review of therelevant institutional theory and open source literatures. We then turn to a descriptionof the Bitcoin currency scheme and community before discussing our methodology.We then present some preliminary results from our analysis as well as a briefdiscussion of the findings and our next steps.Theoretical Background and Research PurposeInstitutional Environments and Institutional EntrepreneurshipSet within a cultural or political system, an institutional environment establishessocial norms and expectations of legitimate behavior based on an “elaboration of rulesand requirements to which individual organizations must conform in order to receivelegitimacy and support" (Scott, 1992: 132). The environment channels theperformance of its actors depending on restrictions imposed by laws and other socialstructures (Hassebroek, 2007). This shows the restricting nature of an institutionalenvironment, in which “institutionalization places limitations on the process ofrational choice” (Zucker, 1987). Therefore, Hassebroek (2007: 64) suggests, “Eventhough many aspects of organizing are the result of rational decisions, these decisionsare embedded in an institutional environment, i.e., within symbolic and behavioralstructures that define common ways of thinking and doing—sometimes channelingdecisions and actions out of the reach of maximizing performance.”Changes in institutions are the result of processes driven by institutionalentrepreneurs within an institutional field made up of actors that can be organizationsor groups of organizations (Garud et al., 2002; Greenwood et al., 2002) or individualsor groups of individuals (Fligstein, 1997; Maguire et al., 2004). To be considered aninstitutional entrepreneur, an actor should fulfill two conditions: 1) initiates divergentchanges and 2) actively participates in the implementation of these changes (Battilanaet al., 2009). However, institutional entrepreneurship may even be distributed acrossnumerous actors Battilana et al., 2009; Canales, 2008; Lounsbury & Crumley, 2007;Rao et al., 2000) with different kinds and levels of resources. Therefore institutionalchange may occur from spatially dispersed activity (Lounsbury & Crumley, 2007) byactors who act in either a coordinated or uncoordinated way (Battilana et al., 2009).Dorado (2005) suggests that institutional change results from the autonomous actionsof countless agents converging over time; therefore, it is the collective and not a
  • 5. Breaking  out  of  the  Bank  –  Research-in-progress     5  single individual or organization that is responsible for the change. Dorado (2005)’sexplanation of change brought in by actors to the organizational fields is similar tochange brought about through innovation by the uncoordinated actions of thecollective (Van de Ven and Garud 1989, 1993, 1994; Van de Ven et al. 1999).As for the process, early studies have suggested that institutional entrepreneursdeliberately develop strategies aimed at changing the institutional environmentswithin which they are embedded (Colomy, 1998; Colomy & Rhoades, 1994) whilemore recent studies suggest that intentions and narratives evolve over time throughthe change process (Child et al., 2007). Efforts by institutional entrepreneurs are notalways successful, and while failures are suggested to be common (DiMaggio, 1988),few are subsequently reported in the literature (Battilana et al., 2009; Greenwood etal., 2002).While research on institutional entrepreneurship has been rapidly growing inrecent years, there are still many areas of limited research (see Battilana et al., 2009for a discussion). As noted above, the process of institutional entrepreneurship is acomplex one that involves many different actors, e.g., individuals,groups/communities, and organizations. Thus, one area that holds great promise ismulti-level research that would enable a more fine-grained understanding of theinstitutional entrepreneurship processes through examining how individual actors areembedded in organizations that are embedded not only in organizational fields butalso in local geographic communities (Battilana et al., 2009).The Open Source Community as an Institutional ActorOpen source communities emerge when strangers from across the globe cometogether online to self-organize around a shared interest and to create value throughsharing knowledge and innovating. Some scholars propose that these communities arechallenging the firm-based approach to knowledge creation as the primary mechanismfor innovation. For example, Benkler (2002) referred to this type of value creation asthe commons-based peer production and argued that it is the third mode of organizingeconomic activity and production, along with the two modes of traditional productionconducted by firms or through market transactions. The non-property and noncontract-based nature of this third mode of production sets it aside from firms andmarkets since participants who contribute to this type of production follow a diverseset of motivations and social signals rather than either market prices or managerialcommands (ibid.).Similar to traditional organizations, open source communities are embedded inbroader social and professional networks and draw on such networks to establish theirlegitimacy. Therefore, the relationship of an open source community with externalstakeholders can enable a community to attract developer effort and user attention(Grewal et al., 2006; Hahn et al., 2008). Given this background, a new open sourceproject is said to be susceptible to the liability of newness and therefore perceived byexternal stakeholders as less legitimate (Chengalur-Smith et al., 2010). Inorganizational ecology, Stinchcombe (1965) refers to the "liability of newness" as thehigher risk of failure for young organizations compared with old ones. Due simply tothe fact that a community has recently emerged, the community may possess weakertrust and control structures since it has not had time to develop the appropriatemechanisms.Considering that younger organizations spend significant amounts of time andeffort coordinating new roles for their members and spend more time on conflictresolution (Schweik & Semenov, 2003), they may be less efficient than established
  • 6. Breaking  out  of  the  Bank  –  Research-in-progress     6  organizations that possess clear governance procedures. Additionally, as thecommunity and its software are relatively nascent, the community may not havedeveloped ideas for new features or identified and corrected bugs in the application.These problems may be compounded by the fact that when the project is new, usersmay suspect that the application is less reliable (Chengalur-Smith et al., 2010). In thisrespect, younger projects lack bases of influence and stable relationships with externalconstituencies and hence lack legitimacy (Baum, 1996) leading to difficulties inattracting and retaining resources. On the other hand, well-established communitiesare likely to have strong social networks that make them more resilient to variations intheir environment.The question also arises as to whether and how open source communities, asthey gain access to resources and legitimacy through their actions, may act asinstitutional entrepreneurs. However, as both institutional entrepreneurship and opensource communities are relatively young fields, there is quite a dearth of research onthe process through which an open source community might act an institutionalentrepreneur. Thus, the purpose of our research is to investigate the process throughwhich an open source community acts as an institutional entrepreneur.MethodologyTo address our research purpose, we have adopted a case research approach to theempirical investigation because of the importance of studying the phenomenon in itsreal-life context (Yin, 1989). This approach was particularly important given ouremphasis on studying the actual dynamics related to the institutional entrepreneurshipprocess driven by an open source community since case studies are appropriate whenthere is a need to focus on contemporary events in their natural settings (Benbasat etal., 1987; Yin, 1994). A secondary reason for choosing a case study approach was thatwe were of the opinion that the existing literature did not adequately describe thephenomenon under investigation. As stated by Eisenhardt (1989:548): “There aretimes when little is known about a phenomenon, current perspectives seem inadequatebecause they have little empirical substantiation, or they conflict with each other orcommon sense. In these situations, theory building from case study research isparticularly appropriate.”As we are only at the very beginning of our research - both theoretically andmethodologically - this paper is very much research-in-progress; however, we do planto conduct a multi-method case study of the Bitcoin community. We have chosenBitcoin because the Bitcoin community appears to have shown significant resiliency,despite several threats since its inception, thus offering a fascinating research site forour research purpose.Research Setting - BitcoinA cloud of uncertainty surrounds the origin of Bitcoin. Satoshi Nakamoto, believed tobe a pseudonym for a person or group of people, has been identified as the creator ofthe original Bitcoin scheme3. Despite the fact that Satoshi Nakamoto claimed to be a36-year old Japanese male at the time, there are no public records of the real identityof this person and he has supposedly not been heard from since April 2011 despiteefforts to expose his identity (Davis, 2011). Nakamoto first described Bitcoin in hisself-published paper in October 2008. An open-source project was then registered on                                                                                                                3https://en.bitcoin.it/wiki/Satoshi_Nakamoto
  • 7. Breaking  out  of  the  Bank  –  Research-in-progress     7  sourceforge, and during January 2009 the genesis block was established and theproject was announced on the Cryptography mailing list (Barber et al., 2012).Since then the project has grown with surprisingly swiftness to the point thatas noted earlier, in December 2012 Bitcoin Central became a Payment ServicesProvider (PSP) under European laws, with an International Bank ID number and thusable to issue debit cards, conduct real-time transfers to other banks, and accepttransfers into its own coffers.4Today there are more than USD 1 billion in bitcoinscirculating with around 51,000 transactions occurring daily in just about everycountry across the globe5. Individuals may buy a wide range of online and offlineservices (e.g., internet, professional, travel services) and digital and physical goods(e.g., clothing, accessories, electronics, books).6Bitcoins are divisible to eightdecimal places, which enables their use in micropayments, and recently SC5, aFinnish HTML5 software developer run by a former Bitcoin core developer, hasoffered its employees the option to have part of their salary paid in Bitcoin instead ofEuros.7Bitcoins can now be exchanged for more than 30 “traditional” currencies,(e.g., EUR, USD, CAD, GBP, PLN, JPY, HKD, SEK, AUD, CHF) through any of thesome 18 Bitcoin exchange services.8The most widely used currency exchangeplatform is Mt.Gox, located in Japan, with around USD 400,000 in daily transactions,or more than 65% of the total Bitcoin exchange volume9. As bitcoins are not peggedto any real-world currency, the exchange rate is determined by supply and demand inthe market. The USD Bitcoin exchange rate has fluctuated wildly with a recent spikefrom under USD 20 per bitcoin in January 2013 to more than USD 260 per bitcoin inApril 2013,10while the 30 day weighted average rate of around USD 113 per bitcoinat the time of writing.11The Bitcoin system has been viewed as demonstrating a surprising amount ofingenuity and sophistication despite it not employing any fancy cryptography (Barberet al., 2012), and it has been included in course material taught in several universitiesdue to its technical aspects. Bitcoin is based on a peer-to-peer network similar toBitTorrent, the protocol for sharing files, such as films, games and music, over theInternet (ECB). Satoshi (2008: 1) described it in the following way: “The scheme isbased on cryptographic proof instead of trust so two willing parties can transactdirectly without the need for a trusted third party.” As such, there is no centralclearing house nor are any financial or other institutions involved in the transactions.A detailed technical explanation of how Bitcoin functions goes beyond the scope ofthis manuscript, and there are several published explanations online (see e.g.,http://bitcoin.org/en/how-it-works). However, an in-depth technical understanding isnot necessary to start using Bitcoin. In fact, anyone can choose and install a Bitcoinwallet on his/her computer or mobile phone for free. Once installed, the new Bitcoinuser is assigned a Bitcoin address that is used to both send and receive payments,similar to an email address sending and receiving emails. When a Bitcoin user thendecides to make a transaction, a secret piece of data for each Bitcoin address knownas a key that is kept in the user’s wallet is used to sign the transaction. This private                                                                                                                4http://www.bbc.co.uk/news/technology-206414655http://bitcoincharts.com/bitcoin/6Database of product and service providers accepting Bitcoins: https://en.bitcoin.it/wiki/Trade7http://thenextweb.com/eu/2013/03/15/finnish-software-company-offers-employees-to-pay-part-of-their-salary-in-bitcoin/8https://en.bitcoin.it/wiki/Trade#Currency_exchanges9http://bitcoincharts.com/charts/volumepie/10http://bitcoincharts.com/charts/mtgoxUSD#tgSzm1g10zm2g2511http://bitcoincharts.com/markets/
  • 8. Breaking  out  of  the  Bank  –  Research-in-progress     8  key provides a mathematical proof that the transaction has come from the user’saddress, and the accompanying signature is also used to prevent the transaction frombeing altered once it has been processed. Each transaction is then broadcast betweenthe users and confirmed by the network within a few minutes through a process calledmining. Basically mining is a distributed consensus system that protects the network’sneutrality by allowing different computers to agree on the state of the system.12The Bitcoin community and its dispersed set of actors have developedSatoshi’s initial open source project to the point where there are indications that thescheme is initiating and implementing substantial changes in the financial institutionsthat are deeply entrenched globally. A recent report by PARC questions why Bitcoinin its few short years has been able to achieve such swift success compared to themany unsuccessful attempts to develop e-cash during the thirty years of research bythe security and cryptographic community (Barber et al., 2012). One reason putforward is that Bitcoin breaks the norms of relying on a central point of trust, such asa centralized bank, to oversee e-cash issuance and double-spending detection (ibid.).Bitcoin is able to operate outside the legal frameworks of traditional fiat currenciesand as such is independent of any national central bank and its monetary policy.Based on Satoshi’s original technical scheme, the Bitcoin money supply is predictedto geometrically increase until it reaches a finite limit of 21 million bitcoins as usersmine the bitcoins through solving increasingly complex algorithms. According toBitcoin supporters, this implies in theory that the system will avoid inflation as wellas business cycles stemming from excessive money creation (FBI, 2012). As a result,Bitcoin is not subject to the typical financial sector regulation and supervisionarrangements.Interest in Bitcoin has grown substantially within the global media and hasbeen the subject of various numerous media channels of late, e.g., Economist, Forbes,New York Times, CNET, BBC (figure 1). One area of interest is the range of start-upsentering the Bitcoin ecosystem. For example, BitPay, an electronic paymentprocessing system for the Bitcoin currency, enables merchants to accept bitcoins as aform of payment. Coinbase, a San Francisco start-up founded in June 2012, provides aBitcoin transaction platform for merchants and consumers and charges a one percentfee on top of each transaction. However, most of its revenue comes from letting usersbuy and sell bitcoins directly from and to Coinbase. Today Coinbase has around40,000 users performing 30,000 transactions per month (Ludwig, 2013). Finally,Coinsetter, a Bitcoin Forex trading platform, provides traders with leveraged tradingand the possibility to short the digital currency (Finberg, 2013).Figure 1. Interest over time for “Bitcoin” (Google Trends)                                                                                                                12http://bitcoin.org/en/how-it-works    
  • 9. Breaking  out  of  the  Bank  –  Research-in-progress     9  Due to its swift growth, government officials worldwide are now monitoringBitcoin. For example, the FBI has written a criminal and cyber intelligence reportassessing how Bitcoin’s “unique features present distinct challenges for deterringillicit activity” (FBI, 2012:1). Furthermore, the European Central Bank stated in itsreport on virtual currency schemes that 1) two US senators had expressed theirworries to the US Attorney General and the US Drug Enforcement Administrationabout Bitcoin and its use for illegal purposes, 2) the CIA has asked the lead developerof the virtual currency project, Gavin Andresen, to report on this virtual currencyscheme, and 3) that further regulatory investigations were to be expected (ECB,2012).Data Collection and AnalysisTo proceed with our study, we set out to gain a better understanding of three areas: 1)the Bitcoin community formal organization, 2) the Bitcoin community informal actorswho have been most instrumental to date, and 3) the areas of discussion that haveraised the most attention within the Bitcoin Community.We collected and analyzed two sources of data. First we accessed extensiveBitcoin secondary sources, e.g., the Bitcoin forum, wiki, in addition to other onlineresources such as social networking sites (LinkedIn, Facebook, Google+, etc.), blogs,corporate websites, legal documents. Second, we scraped all of the English messagesposted on the online Bitcoin forum (https://bitcointalk.org) between November 22,2009, when the forums first message was posted, and January 3, 2013. The number ofEnglish posts was 1,153,831, or 85.2% of the total number of posts in all languages,and these English posts were written by 21,903 people of a total of 24,512 peopleposting on the forum in any language (figures 2 and 3). The average number of wordsper post was 63.18.Figure 2. Number of new Bitcoin forum members per month0200040006000800010000120001400016000Oct/05Dec/05Feb/06Apr/06Jun/06Aug/06Oct/06Dec/06Feb/07Apr/07Jun/07Aug/07Oct/07Dec/07Feb/08Apr/08Jun/08Aug/08Oct/08
  • 10. Breaking  out  of  the  Bank  –  Research-in-progress     10  Figure 3. Number of Bitcoin forum posts per month (English language only)Bitcoin Formal OrganizationThe Bitcoin Foundation was founded by seven of the community’s most instrumentalindividuals, such as Gavin Andresen – a core Bitcoin developer (table 1). The BitcoinFoundation has been registered under section 501c of the US Internal Revenue Codein Washington, D.C., and its bylaws were effective as of July 23, 2012. 13TheFoundation is governed by a board with five seats split by membership class.14Twoseats elected by the Individual member class (annual membership costs .23 BTC), twoseats by the Corporate member class (five different levels from 9.4 BTC forcompanies younger than two years and with less than 25 employees to 935.4 BTC forPlatinum companies), and one seat by the Founding member class.15The Individualmember class currently has 426 members (of which 68 are anonymous) while theCorporate member class comprises two platinum and eight silver members (table 2).16The Board has established the following requirements for its board members: 1) anIndividual member in good standing, 2) any business is conducted openly using theirreal identity, and 3) they pass a background check for felony conviction.17                                                                                                                13https://github.com/pmlaw/The-Bitcoin-Foundation-Legal-Repo/blob/master/Bylaws/Bylaws_of_The_Bitcoin_Foundation.md14Ibid15https://bitcoinfoundation.org/about/governance16Ibid17https://bitcoinfoundation.org/about/governance020000400006000080000100000120000140000160000
  • 11. Breaking  out  of  the  Bank  –  Research-in-progress     11  Table 1. Founding and Board Members of the Bitcoin FoundationFoundingmemberBoardmemberName Position and locationX X Gavin Andresen Bitcoin Developer in MA, USAX X Peter Vessenes CEO of CoinLab in WA, USAX X Charles Shrem CEO of BitInstant in NY, USAX Roger Ver CEO of MemoryDealers in CA, USAX Patrick Murck Principal at Engage Legal, PLLC in Washington, DC,USAX X Mark Karpeles CEO of MtGox.com in Tokyo, JapanX SatoshiNakamotoAuthor of “Bitcoin: A Peer-to-Peer Electronic CashSystem” published on http://bitcoin.org and owner ofPGP Public Key with fingerprint: 5EC948A1 atsatoshin@gmx.comX Jon Matonis e-Money research and author of The Monetary Future atForbesTable 2. Corporate members of the Bitcoin FoundationMembersDateStartedLocation Business InfoMt.Gox 2010Tokyo,JapanBitcoinexchangeWorlds largest bitcoin exchange.Handles about 63% of all bitcointransactions as of April 2013.18bitcoinstore 2012 USAElectronicswebsite thatonly acceptsBitcoinElectronics retailer in Bitcoincommunity, offering more than halfmillion products.19bitinstant 2011New YorkCity, USAwith UKofficeBitcoin paymentprovideOffers service allowing customers toquickly and easily transfer funds intoonline exchange account.20CoinLab 2012 Seattle, WABitcoinexchangeEnables game makers to offer theirusers chance to voluntarily installprogram to make their idle computingresources available to Bitcoin networkfor Bitcoin mining in exchange for in-game virtual goods and points.21zipbit 2012NewZealandBitcoinMerchantPlatformSpecializes on use of Bitcoin bymerchants.22eCardOne 2006CzechRepublicE-currencyexchangeproviderOffers fluctuation rates in automateddigital currency exchange. Providescustomers with option to exchangecurrencies instantly.23                                                                                                                18http://en.wikipedia.org/wiki/Mt.Gox19https://en.bitcoin.it/wiki/BitcoinStore20https://www.bitinstant.com/aboutus21http://www.geekwire.com/2013/bitcoin-seattles-coinlab-files-75m-suit-mt-gox-exchange-alleges-breach-contract/22https://zipbit.co/about-us23https://ecardone.com/about-us.php
  • 12. Breaking  out  of  the  Bank  –  Research-in-progress     12  BITHOC 2013Florida,USACharityCharity feeds homeless people withBitcoin donations.24Cryptex N/AKansas,USACryptocurrencyexchangeN/ATheNewportBeachCompany2007 USAStart-upIncubation andConsultingDevelops business strategies for,provides seed capital to, participates inoperations of early stage start-upcompanies.25Bitcoin Informal OrganizationTo determine which individuals were the most active in the community since 2009and potentially have the most informal power due to their centrality, we conducted anout-degree social network analysis of the Bitcoin forum data. After identifying the top10 individuals in terms of forum posting activity, we then investigated their profiles todetermine such things as organizational affiliation, interest, and demographicinformation. This identification process using secondary Internet sources took onaverage 15 to 20 minutes for each individual. Table 3 provides a selection of theprofile information.This identification process proved to be a difficult task. Of the 10 most activeindividuals, we could find information for only five of them, leaving the other fiveanonymous. However, the five we did identify appear to be active entrepreneurs, i.e.,self-employed or a founder of their own firm. For example, Phinnaeus Gage has beenthe most active developer in the Bitcoin Forum since its launch. He founded and stillmaintains Bitcoin 100, a kickstarter for non-profits that implement a Bitcoin donationoption onto their websites. He is also actively involved in creating awareness aboutBitcoin. The other four entrepreneurs we identified specialize in different applicationsand uses of Bitcoin. Two entrepreneurs develop applications of Bitcoin for onlinegaming and gambling while the third works with hardware applications related tomining performance. Of the five anonymous individuals, we could only findinformation related to one of them: he works on hardware applications related tomining performance. It should also be noted that the 10 most active individuals haveeclectic background interests that span a broad range of areas, such as politics,taxation, education, and engineering.Table 3. Ten most active Bitcoin Forum members# M/F Age Country OccupationBitcoinPositionFirstforumpost# PostsBitcoin communityactivities1 M 53 USA EntrepreneurHeroMemberJun11 9898Founded and maintainsBitcoin 100, a kickstarter fornon-profits who implement aBitcoin donation option ontotheir websites.2 M N/A N/A N/A Donator Sep11 8697Interested in hardware,mining related discussions3 N/A N/A N/A N/AHeromemberApr11 7488 N/A                                                                                                                24https://www.smore.com/fpa7-sean-s-outpost  25http://thenewportbeachcompany.com
  • 13. Breaking  out  of  the  Bank  –  Research-in-progress     13  4 M N/A USA EntrepreneurHeromemberNov10 6748 N/A5 N/A N/A N/A N/AHeromemberFeb11 6459 N/A6 N/A 43 N/A EntrepreneurHeromemberJul10 6388Owns online gamblingwebsite in which balancesare denominated in bitcoinsand all cash-ins and cash-outs are done via Bitcoin.7 N/A N/A Thailand N/A VIP Oct11 6052 N/A8 M N/ASouthKoreaEntrepreneurHeromemberJun11 5958Head of Bitcoin magazine.Owns several companiesaround Bitcoin applications.Co-owner of DialCoin,founder of Smallpla.net andfounder of the (codename)BitDex (world’s firstdedicated handheld bitcointransaction device).9 N/A N/A N/A N/AHeromemberOkt11 5793 N/A10 M 26 N/A EntrepreneurHeromemberApr11 5738Webmaster ofbitcoinfeedback.com, siteAdmin & Server Owner.Involved in Bitcoinapplication development foronline gamingBitcoin Discussion TopicsSimilar to the second analysis, the third analysis also involved using the Bitcoinforum data. For this we used the bottom-up approach of semantic analysis wherebythe relationship between each Bitcoin forum users posts and the proper nouns theycontain are analyzed. This enables the identification of the topics that people fromdifferent parts of the world have discussed within the Bitcoin community during itsfirst four years. The Stanford Log-linear Part-of-Speech Tagger (Toutanova et al.,2003) was used to automatically assign parts of speech, such as noun, proper nounand verb, to each word in the posts. We then extracted a word list of all the propernouns posted on the Bitcoin forum.The next step was to conduct a network analysis to map the relations betweenthe proper nouns, which enabled us to determine the social distance between words.To explain, two words have a short social distance if they are often used in postswritten by the same individuals, and a long social distance if they are mainly used inposts written by different individuals. In this manner, we were able to determine thedistribution of topics across the community or, in other words, the social structure ofthe discussion in the community (appendix 1).We also conducted a factor analysis to analyze the variation over time amongour observed variables, namely the word frequencies of proper nouns. All propernouns with a frequency of 40 mentions or more in the entire database, totaling 3,296,were used in the analysis. Factor analysis is a statistical method for analyzinginterrelationships among observed variables in order to reduce them to a smaller set ofunderlying variables. In our case, the variation over time of the 3,296 proper nounshides a lower number of underlying variations. For example, the words "Zhou Tong","AurumXChange", "Bitcoinica" and several other words related to an investigationinto the hackings of Bitcoin trading platforms rose in tandem in July and August2012, a discussion that is captured by one of the factors. In other words, each factorcan be interpreted as a topic discussed by the community and which distribution overtime can be examined.
  • 14. Breaking  out  of  the  Bank  –  Research-in-progress     14  We analyzed the 50 factors that explained most of the variance, both in termsof the words that loaded strongly on them and their time profiles to provide anoverview of the most important topics discussed on the Bitcoin forum over time. Inother words, each date is assigned a value for each factor based on how active thefactor is on that date. A high value on a certain date results when there is a highfrequency of use on that date of the words that load strongly onto that factor. Thedistribution for each factor over time sums to zero, meaning that the number on thevertical axes in figures x and y are relative values. Hence the values can be comparedacross dates within a factor but not between factors. An initial investigation of these50 factors revealed that 42 (82%) were topics that had a limited degree of activityduring a very short time, i.e., led to a sharp spike in activity (e.g., figure 4). However,eight of the 50 (18%) factors were active topics for longer than three months (e.g.,figure 5).Figure 4. Example of topic with limited spiked activity in community discussionFigure 5. Example of topic with extended activity in community discussion-­‐5  0  5  10  15  20  25  30  35  11/22/2009   11/22/2010   11/22/2011   11/22/2012  -­‐6  -­‐4  -­‐2  0  2  4  6  8  10  
  • 15. Breaking  out  of  the  Bank  –  Research-in-progress     15  We conducted an analysis of the eight relatively active factors through readingthe posts on the forum as well as related sites to provide more context and to revealthe main topic of each cluster. We found three topics of a more technical naturerelated to setting up the Bitcoin mining hardware and software, two topics related tothe actual trading of bitcoins, and three related to legal issues (table 4). Thus, whiletopics at the beginning of the Bitcoin community’s activity focused on moreoperational issues such as installing and running the software and then payments andtransactions, three of the more recent topics deal with threats to the currency schemeand its community.Table 4. Most discussed topics 22 November 2009 to 3 January 2013Most activeperiod startMost activeperiod endTopic Description of topicNov 2009 Jan 2013 Technical Installing and running bitcoin miningOct 2011 May 2012 Technical Payment transaction systemsJul 2011 Jan 2013 Exchanges Dwolla, Paxum, Tradehill exchangesMay 2011 Sep 2011 Exchanges Metacoi.in, Tradehill, dwolla, shippingJun 2011 Jan 2013 Legal Pirate/Trendon Shavers virtual hedge fundscheme that turned out to be a scamJan 2012 Jun 2012 Technical Mining boards and mining softwareApril 2012 Jan 2013 Legal Bitcoinica hackings and lawsuitMay 2012 Oct 2012 Legal Butterflylabs and whether it was a scam ornot. Recent discussion in April 2013 suggeststhat Butterflylabs is producing a legitimateproduct.We then conducted a further investigation of the Bitcoinica legal issuesrevealed in this analysis. We found that the Bitcoin community, led by one HeroMember, keeps careful track of all the major heists, thefts, hacks, scams, and lossesover one thousand bitcoins, of which there are some 25 incidents.26As the Bitcoinicahackings are the most substantial of these, we decided to investigate this one furtherthrough reading numerous related posts and documents online, In 2011, ZhouTong, supposedly a 17-year-old entrepreneur from Singapore, created a Bitcointrading platform called Bitcoinica, which within six months amassed trading assets ofmore than USD 1 million in bitcoins.27However, in March 2012, the web hostingprovider used by Bitcoinica, Linode, was hacked and 43,554 Bitcoins or around USD220,000 were stolen.28Shortly thereafter, Tong announced that he had sold Bitcoinicato Intersango. In May 2012, just 18 days after the Bitcoinica deal was sealed,29Bitcoinica was hacked a second time – this time through a compromised emailaccount, for 18,547 bitcoins or around USD 90,00030. Bitcoinica was then unable tocontinue its operations and took the site offline, never to go online again.31Then inJuly 2012, the Mt.Gox account holding the remaining Bitcoinica users’ funds was                                                                                                                26https://bitcointalk.org/index.php?topic=83794.msg923918#msg92391827http://coinabul.tumblr.com/post/24022841613/10qs-zhou-tong-bitcoinica28http://bitcoinmagazine.com/bitcoinica-stolen-from-again/29http://www.theverge.com/2012/8/10/3233711/second-bitcoin-lawsuit-is-filed-in-california30https://bitcointalk.org/index.php?topic=83794.031http://bitcoinmagazine.com/bitcoinica-stolen-from-again/
  • 16. Breaking  out  of  the  Bank  –  Research-in-progress     16  hacked, and the thief got away with 40,000 bitcoins or USD 40,000, bringing the totalof these three hacks to USD 350,000.32In August 2012, four users of Bitcoinica, amidst speculation that Tong himselfwas responsible for some of this foul play, filed a complaint in San Francisco againstBitcoinica LP and other involved parties. The plaintiffs claimed that Bitcoinica was inbreach of their contract by failing to, among other things, “keep said monies in a safeand secure manner, consistent with fiduciary obligations commonly imposed uponfinancial services providers”, and that as a result, owed them just over USD 460,000in lost deposits and damages. It is unclear whether there has been a settlement or if theparties are still in talks. An alleged draft settlement agreement, dated interestinglyJuly 9, 2012 – before the complaint was filed – has been posted online.33Moreover,two of the three defendants are in liquidation. Bitcoinica LP, registered in NewZealand, has been in the process of liquidation since November 201234whileBitcoinica Consultancy Ltd, also based in New Zealand, was liquidated in January2013. However, Intersango Ltd is still trading and registered in the UK.35Discussion and ConclusionThe purpose of this research-in-progress paper was to begin to explore the processthrough which the Bitcoin open source community acts as an institutionalentrepreneur. Institutional entrepreneurship deals with how an actor initiates andactively participates in the implementation of divergent changes (Battilana et al.,2009), and our first step to explore the formal and informal organizations behindBitcoin as well as the topics that interested the community has led to somepreliminary findings.First, we find support for distributed institutional entrepreneurship in whichinstitutional change results from the autonomous actions of countless agentsconverging over time (Dorado, 2005). With Bitcoin, we find that it is the collectiveand not a single individual or organization that is responsible for initiating andimplementing the changes. While Nakamoto initiated the Bitcoin scheme in early2009, his launching of the project on sourceforge has led to the growth of a globalcommunity of individuals interacting online. Our analysis revealed that there iscohesion around a number of topics on the forum, with the community first self-organizing to solve many of the technical issues related to mining before turning topayment transactions and then to legal ones. Thus, the activities of the community’sindividual members related to bitcoin mining and transaction activities has led to USD1.5 billion worth of bitcoins in circulation.Second, we found that there is a high level of anonymity in this institutionalprocess. Among the most influential individuals in the Bitcoin community are themysterious founder, Nakamoto, and the five influential individuals in the community,for whom we could not find any identifying information on the Internet. It seems thatan individual’s “real world” identity is not required to take an active role in theinformal organization of Bitcoin. This finding might not be so surprising taken in lightof one of the underlying drivers of Bitcoin – to enable financial transactions betweenindividuals without knowing each other’s identity. Yet when we look at the formalorganization, one requirement to become a Bitcoin Foundation board member is thatany business conducted must be done openly using the person’s real identity.                                                                                                                32ibid33https://docs.google.com/file/d/0B_ECG6JRZs-7SXFtdG1QXy1uSnM/edit34http://www.pkfcr.co.nz/services/services_header35https://intersango.com/about-us.php
  • 17. Breaking  out  of  the  Bank  –  Research-in-progress     17  Third, as the community has grown, an ecosystem of entrepreneurs and start-ups supporting the currency scheme has developed. Examining the BitcoinFoundation and the results of the most active members on the Bitcoin forum revealthat entrepreneurs developing their business based on Bitcoin are an extremely activegroup within both the formal and informal organization of Bitcoin. Just within thepast two to three years there has been a surge in entrepreneurs who are basing theirstart-ups on leveraging Bitcoin in some way. These entrepreneurs support one anotherthrough their communications on the forum as well as through driving thedevelopment of the Bitcoin technical platform, surrounding infrastructure, andcommercial applications.Fourth, we find that the more substantial threats to the growth and legitimacyof Bitcoin have primarily come from one or a small group of individuals interested inhacking or creating fraud in the system as opposed to from institutionalized financialmarkets and governments. During the past two years, the forum discussionssurrounding these issues have risen significantly, and Bitcoin, despite being a highlyflexible platform that provides privacy for its users, is seen by some as highly risky.There are serious concerns by established institutional actors regarding the legal statusand security of the system as well as the finality and irrevocability of the transactions(ECB, 2012). Legal uncertainties and lack of close oversight make the Bitcoinplatform a high-risk system for its users from a financial perspective (ibid.). Inresponse to these threats, it appears that several transaction and trading platformsstart-ups, such as BitPay, Coinbase and Coinsetter, have been established to help theBitcoin community to gain legitimacy and stability. These businesses highlight thesecurity they provide for their customers and their fight against fraud related toBitcoin. Several of these entrepreneurs, despite being competitors, even collaborate inthese efforts as noted by this post by a forum member: “It’s good to see the exchangesco-operating with each other for the benefit of the community.”36However, just priorto this writing, CoinLab filed a USD 75 million lawsuit against Mt.Gox.37A more organized effort to strengthen Bitcoin’s legitimacy occurred when sixindividuals became founding members of the Bitcoin Foundation, which wasregistered as a legal entity in July 2012. The Executive Director Peter Vessenes notesthat legitimacy is one of the primary goals that the Foundation hopes to accomplish.Vessenes writes, “There’s a lot to love in Bitcoin-land, and a lot to be concernedabout, too. There are botnet operators, hackers, and ponzi-scheme runners floatingaround our space. We occasionally hear threatening statements from governmentrepresentatives that don’t seem to understand the law, much less how great Bitcoinsare for the world. Our forums and community interaction have a certain unevenquality to them at times. Gavin, the current leader of the core client dev team,maintains the software and manages the core team without any compensation—or dayjob—beyond the joy of Bitcoin programming. There are legal questions to beanswered about Bitcoins, different ones in different jurisdictions….. We can helpsolve or mitigate these problems as a community. My hope is that the BitcoinFoundation will be the organization that focuses and unlocks all of your energy andtalents towards promoting Bitcoins, protecting them, and increasing their legitimacythrough standardization.”38This effort is further supported when taking note of therequirements to become a Board Member: 1) an Individual member in good standing,2) any business is conducted openly using their real identity, and 3) they pass a                                                                                                                36July 26, 2012, 05:01:54 AM, Re: Public Statement regarding Bitcoinica account hack at Mt.Gox.37http://forexmagnates.com/coinlab-files-75-million-lawsuit-against-mtgox/38https://bitcoinfoundation.org/about/letter
  • 18. Breaking  out  of  the  Bank  –  Research-in-progress     18  background check for felony conviction. 39Thus, it seems that these threats have mobilized the community to self-organize and bring the community together around a common purpose. Durkheim(cited in Dirkley, 1997) suggested that norms, beliefs and values, which he callscollective consciousness, are elements that hold society together, and that institutionsare reinforced once they are challenged. He gave the example of protesters(institutional entrepreneurs) hung in public as a result of their endeavor to overthrowthe king, and how their efforts actually reinforced the authority (institution) of theking. He suggested that, institutions are reinforced and kept alive once they arechallenged. A similar case can be made for the Bitcoin community; when thecommunity is challenged and still absorbs the shock, the community appears to bestrengthened rather than damaged. Therefore, we propose that these instances offraud, by bonding the community and by flourishing safe businesses around Bitcoin,actually increase Bitcoin’s institutional entrepreneurship potential.In conclusion, our intention with this paper was to document the initial stagesof our exploration of the Bitcoin community and its development as an institutionalentrepreneur. It appears that despite going against the entrenched institutions of fiatcurrency and the global banking system and even experiencing fraud and hacking, theBitcoin community has shown significant resilience to survive and perhaps, somewould even say, thrive. The question remains, however, whether Bitcoin will one daybe “on the gallows” as the “King” strikes back. In the meantime, there is significantpotential for future research in this area. We intend to continue our study, and ournext step will be to develop our study both theoretically and methodologically. Weintend to do a more fine-grained analysis of the forum messages and combine themwith social network analysis of the individual members in order to better understandthe dynamics of the Bitcoin community. One area to explore relates to the motives ofthe individual actors for participating in Bitcoin and how their actions drive thedevelopment of the intentions and narratives of the community. A recent survey byLui Smyth of 1000 Bitcoin users indicated that some participants contribute to anduse bitcoins for political reasons, i.e., to bring about change to the financial markets,while others participate merely for the curiosity and challenge.40As highlighted byscholars studying institutional entrepreneurship (Battilana et al., 2009; Dorado, 2005;Lounsbury & Crumley, 2007; Rao et al., 2000), some actors drive institutional changethrough their conscious actions; however, the collective efforts of others, whileunaware of their contributions, may be just as much of a driving force.Acknowledgements. We greatly appreciate the help on this paper from Claire Ingram,a PhD student at the Stockholm School of Economics.                                                                                                                39https://bitcoinfoundation.org/about/governance40https://docs.google.com/spreadsheet/ccc?key=0Avvn4_NlztWedDh0bDEwbXFFOHBTOXhLZlNpVmhKWWc#gid=6
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  • 21. Breaking  out  of  the  Bank  –  Research-in-progress     21  Appendix 1. Word cloud of Bitcoin Proper Nouns, November 2009 – January 2013