breaking out of the bank with bitcoin

Breaking Out of the Bank in Europe

--- Exploring Collective Emergent Institutional Entrepreneurship

through Bitcoin

Research-in-progress

Robin Teigland Department of Marketing and Strategy

Stockholm School of Economics [email protected]

Zeynep Yetis Department of Marketing and Strategy

Stockholm School of Economics [email protected]

Tomas Larsson Kairos Future

[email protected]

For presentation at 15th Annual SNEE Conference 2013 The Swedish Network for European Studies in Economics and Business

Mölle, Sweden May 2013

Breaking out of the Bank – Research-in-progress

2

Breaking Out of the Bank in Europe: Exploring Collective Emergent Institutional Entrepreneurship

through Bitcoin Abstract

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.

Keywords: institutional entrepreneurship, open source, semantic analysis, social network analysis, Bitcoin, banking


3

Breaking Out of the Bank in Europe: Exploring Collective Emergent Institutional Entrepreneurship through Bitcoin

Introduction

Over the past two decades, the wide adoption of the Internet and developments in information and communication technologies (ICT) have greatly boosted the development of online knowledge creation communities, with some of these collective 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 to challenge and disrupt the software industry’s established norms for innovation and value creation. Money as a social institution has also been affected by the developments in Internet and ICT and has evolved to adapt to the online economy. In recent years, we have seen the rapid spread of online banking, new payment services such as PayPal and mobile payments, and even new virtual currencies such as Linden Dollars and Project Entropia Dollars. These virtual currencies are used by virtual communities to exchange goods and services within the community and even with others outside the community, thereby providing a medium of exchange and a unit of account for that particular virtual community (ECB, 2012).

The emergence of Bitcoin, a peer-to-peer (P2P) network virtual currency scheme based on a collectively developed and maintained open source software platform, should therefore come as no surprise. What distinguishes Bitcoin from traditional currencies is that it does not have any central authority in charge of the money supply or a central clearing house (ECB, 2012). There are no financial institutions involved in the transactions; community members themselves perform all these tasks. Bitcoin’s exchange rate is determined by supply and demand, and it is possible to spend Bitcoins on both virtual and real goods and services. Designed and implemented in 2009, Bitcoin has rapidly grown from being an idea to becoming a legitimate currency with more than USD 1 billion in bitcoins in circulation1. A deal in December 2012 with French financial firms Aqoba and Credit Mutuel led to Bitcoin-Central, a currency exchange, being awarded an International Bank ID number and becoming a Payment Services Provider equal to services such as PayPal.2

With 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 institutions and governments in Europe and across the globe as the Bitcoin currency and its underlying principles challenge the long-standing fiat money system. As such, Bitcoin has created quite some controversy, with opponents claiming that it allows anonymous 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 becoming a viable alternative for drug dealing and money laundering. However, the currency is also increasingly used by legitimate merchants and employers worldwide. The currency seems to be gaining momentum, and several leading U.S. Bitcoin startups have expressed their commitment to preventing illicit activity by registering with the financial crimes enforcement network agency of the U.S. Federal Government (Forbes, 2013). Thus, it appears that despite going against the entrenched institutions of fiat currency and the global banking system and even while facing fraud schemes,

1 http://bitcoinwatch.com/ 2 http://www.bbc.co.uk/news/technology-20641465


4

the Bitcoin community has shown significant resilience to survive and perhaps, some would even say, thrive.

Thus, the purpose of this research-in-progress paper is an empirical exploration of the Bitcoin community in order to better understand how this emergent, self-organizing online collective is acting as a game changer within the global financial 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 particular institutional arrangements and who leverage resources to create new institutions or to transform existing ones” (Maguire et al., 2004: 657). The process of institutional entrepreneurship 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 conduct social network and semantic analyses of the Bitcoin community. Using online secondary sources and the complete archive of 1.15 million English posts written by almost 22,000 members between November 2009 and January 2013, we investigate the social and cognitive structures of the Bitcoin community through the relations among its as well as the discussions to which they contribute.

This paper is structured as follows. We begin with a brief review of the relevant institutional theory and open source literatures. We then turn to a description of the Bitcoin currency scheme and community before discussing our methodology. We then present some preliminary results from our analysis as well as a brief discussion of the findings and our next steps.

Theoretical Background and Research Purpose Institutional Environments and Institutional Entrepreneurship Set within a cultural or political system, an institutional environment establishes social norms and expectations of legitimate behavior based on an “elaboration of rules and requirements to which individual organizations must conform in order to receive legitimacy and support" (Scott, 1992: 132). The environment channels the performance of its actors depending on restrictions imposed by laws and other social structures (Hassebroek, 2007). This shows the restricting nature of an institutional environment, in which “institutionalization places limitations on the process of rational choice” (Zucker, 1987). Therefore, Hassebroek (2007: 64) suggests, “Even though many aspects of organizing are the result of rational decisions, these decisions are embedded in an institutional environment, i.e., within symbolic and behavioral structures that define common ways of thinking and doing—sometimes channeling decisions and actions out of the reach of maximizing performance.”

Changes in institutions are the result of processes driven by institutional entrepreneurs within an institutional field made up of actors that can be organizations or groups of organizations (Garud et al., 2002; Greenwood et al., 2002) or individuals or groups of individuals (Fligstein, 1997; Maguire et al., 2004). To be considered an institutional entrepreneur, an actor should fulfill two conditions: 1) initiates divergent changes and 2) actively participates in the implementation of these changes (Battilana et al., 2009). However, institutional entrepreneurship may even be distributed across numerous actors Battilana et al., 2009; Canales, 2008; Lounsbury & Crumley, 2007; Rao et al., 2000) with different kinds and levels of resources. Therefore institutional change may occur from spatially dispersed activity (Lounsbury & Crumley, 2007) by actors who act in either a coordinated or uncoordinated way (Battilana et al., 2009). Dorado (2005) suggests that institutional change results from the autonomous actions of countless agents converging over time; therefore, it is the collective and not a


5

single individual or organization that is responsible for the change. Dorado (2005)’s explanation of change brought in by actors to the organizational fields is similar to change brought about through innovation by the uncoordinated actions of the collective (Van de Ven and Garud 1989, 1993, 1994; Van de Ven et al. 1999).

As for the process, early studies have suggested that institutional entrepreneurs deliberately develop strategies aimed at changing the institutional environments within which they are embedded (Colomy, 1998; Colomy & Rhoades, 1994) while more recent studies suggest that intentions and narratives evolve over time through the change process (Child et al., 2007). Efforts by institutional entrepreneurs are not always successful, and while failures are suggested to be common (DiMaggio, 1988), few are subsequently reported in the literature (Battilana et al., 2009; Greenwood et al., 2002).

While research on institutional entrepreneurship has been rapidly growing in recent years, there are still many areas of limited research (see Battilana et al., 2009 for a discussion). As noted above, the process of institutional entrepreneurship is a complex one that involves many different actors, e.g., individuals, groups/communities, and organizations. Thus, one area that holds great promise is multi-level research that would enable a more fine-grained understanding of the institutional entrepreneurship processes through examining how individual actors are embedded in organizations that are embedded not only in organizational fields but also in local geographic communities (Battilana et al., 2009). The Open Source Community as an Institutional Actor Open source communities emerge when strangers from across the globe come together online to self-organize around a shared interest and to create value through sharing knowledge and innovating. Some scholars propose that these communities are challenging the firm-based approach to knowledge creation as the primary mechanism for innovation. For example, Benkler (2002) referred to this type of value creation as the commons-based peer production and argued that it is the third mode of organizing economic activity and production, along with the two modes of traditional production conducted by firms or through market transactions. The non-property and non contract-based nature of this third mode of production sets it aside from firms and markets since participants who contribute to this type of production follow a diverse set of motivations and social signals rather than either market prices or managerial commands (ibid.).

Similar to traditional organizations, open source communities are embedded in broader social and professional networks and draw on such networks to establish their legitimacy. Therefore, the relationship of an open source community with external stakeholders 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 source project is said to be susceptible to the liability of newness and therefore perceived by external stakeholders as less legitimate (Chengalur-Smith et al., 2010). In organizational ecology, Stinchcombe (1965) refers to the "liability of newness" as the higher risk of failure for young organizations compared with old ones. Due simply to the fact that a community has recently emerged, the community may possess weaker trust and control structures since it has not had time to develop the appropriate mechanisms.

Considering that younger organizations spend significant amounts of time and effort coordinating new roles for their members and spend more time on conflict resolution (Schweik & Semenov, 2003), they may be less efficient than established


6

organizations that possess clear governance procedures. Additionally, as the community and its software are relatively nascent, the community may not have developed 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, users may suspect that the application is less reliable (Chengalur-Smith et al., 2010). In this respect, younger projects lack bases of influence and stable relationships with external constituencies and hence lack legitimacy (Baum, 1996) leading to difficulties in attracting and retaining resources. On the other hand, well-established communities are likely to have strong social networks that make them more resilient to variations in their environment.

The question also arises as to whether and how open source communities, as they gain access to resources and legitimacy through their actions, may act as institutional entrepreneurs. However, as both institutional entrepreneurship and open source communities are relatively young fields, there is quite a dearth of research on the process through which an open source community might act an institutional entrepreneur. Thus, the purpose of our research is to investigate the process through which an open source community acts as an institutional entrepreneur. Methodology To address our research purpose, we have adopted a case research approach to the empirical investigation because of the importance of studying the phenomenon in its real-life context (Yin, 1989). This approach was particularly important given our emphasis on studying the actual dynamics related to the institutional entrepreneurship process driven by an open source community since case studies are appropriate when there is a need to focus on contemporary events in their natural settings (Benbasat et al., 1987; Yin, 1994). A secondary reason for choosing a case study approach was that we were of the opinion that the existing literature did not adequately describe the phenomenon under investigation. As stated by Eisenhardt (1989:548): “There are times when little is known about a phenomenon, current perspectives seem inadequate because they have little empirical substantiation, or they conflict with each other or common sense. In these situations, theory building from case study research is particularly appropriate.”

As we are only at the very beginning of our research - both theoretically and methodologically - this paper is very much research-in-progress; however, we do plan to conduct a multi-method case study of the Bitcoin community. We have chosen Bitcoin because the Bitcoin community appears to have shown significant resiliency, despite several threats since its inception, thus offering a fascinating research site for our research purpose.

Research Setting - Bitcoin A cloud of uncertainty surrounds the origin of Bitcoin. Satoshi Nakamoto, believed to be a pseudonym for a person or group of people, has been identified as the creator of the original Bitcoin scheme3. Despite the fact that Satoshi Nakamoto claimed to be a 36-year old Japanese male at the time, there are no public records of the real identity of this person and he has supposedly not been heard from since April 2011 despite efforts to expose his identity (Davis, 2011). Nakamoto first described Bitcoin in his self-published paper in October 2008. An open-source project was then registered on

3 https://en.bitcoin.it/wiki/Satoshi_Nakamoto


7

sourceforge, and during January 2009 the genesis block was established and the project was announced on the Cryptography mailing list (Barber et al., 2012).

Since then the project has grown with surprisingly swiftness to the point that as noted earlier, in December 2012 Bitcoin Central became a Payment Services Provider (PSP) under European laws, with an International Bank ID number and thus able to issue debit cards, conduct real-time transfers to other banks, and accept transfers into its own coffers.4 Today there are more than USD 1 billion in bitcoins circulating with around 51,000 transactions occurring daily in just about every country across the globe5. Individuals may buy a wide range of online and offline services (e.g., internet, professional, travel services) and digital and physical goods (e.g., clothing, accessories, electronics, books). 6 Bitcoins are divisible to eight decimal places, which enables their use in micropayments, and recently SC5, a Finnish HTML5 software developer run by a former Bitcoin core developer, has offered its employees the option to have part of their salary paid in Bitcoin instead of Euros.7 Bitcoins 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 the some 18 Bitcoin exchange services.8 The most widely used currency exchange platform 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 pegged to any real-world currency, the exchange rate is determined by supply and demand in the market. The USD Bitcoin exchange rate has fluctuated wildly with a recent spike from under USD 20 per bitcoin in January 2013 to more than USD 260 per bitcoin in April 2013,10 while the 30 day weighted average rate of around USD 113 per bitcoin at the time of writing.11

The Bitcoin system has been viewed as demonstrating a surprising amount of ingenuity and sophistication despite it not employing any fancy cryptography (Barber et al., 2012), and it has been included in course material taught in several universities due to its technical aspects. Bitcoin is based on a peer-to-peer network similar to BitTorrent, the protocol for sharing files, such as films, games and music, over the Internet (ECB). Satoshi (2008: 1) described it in the following way: “The scheme is based on cryptographic proof instead of trust so two willing parties can transact directly without the need for a trusted third party.” As such, there is no central clearing house nor are any financial or other institutions involved in the transactions. A detailed technical explanation of how Bitcoin functions goes beyond the scope of this manuscript, and there are several published explanations online (see e.g., http://bitcoin.org/en/how-it-works). However, an in-depth technical understanding is not necessary to start using Bitcoin. In fact, anyone can choose and install a Bitcoin wallet on his/her computer or mobile phone for free. Once installed, the new Bitcoin user 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 then decides to make a transaction, a secret piece of data for each Bitcoin address known as a key that is kept in the user’s wallet is used to sign the transaction. This private 4 http://www.bbc.co.uk/news/technology-20641465 5 http://bitcoincharts.com/bitcoin/ 6 Database of product and service providers accepting Bitcoins: https://en.bitcoin.it/wiki/Trade 7 http://thenextweb.com/eu/2013/03/15/finnish-software-company-offers-employees-to-pay-part-of-their-salary-in-bitcoin/ 8 https://en.bitcoin.it/wiki/Trade#Currency_exchanges 9 http://bitcoincharts.com/charts/volumepie/ 10http://bitcoincharts.com/charts/mtgoxUSD#tgSzm1g10zm2g25 11 http://bitcoincharts.com/markets/


8

key provides a mathematical proof that the transaction has come from the user’s address, and the accompanying signature is also used to prevent the transaction from being altered once it has been processed. Each transaction is then broadcast between the users and confirmed by the network within a few minutes through a process called mining. Basically mining is a distributed consensus system that protects the network’s neutrality by allowing different computers to agree on the state of the system.12

The Bitcoin community and its dispersed set of actors have developed Satoshi’s initial open source project to the point where there are indications that the scheme is initiating and implementing substantial changes in the financial institutions that are deeply entrenched globally. A recent report by PARC questions why Bitcoin in its few short years has been able to achieve such swift success compared to the many unsuccessful attempts to develop e-cash during the thirty years of research by the security and cryptographic community (Barber et al., 2012). One reason put forward is that Bitcoin breaks the norms of relying on a central point of trust, such as a centralized bank, to oversee e-cash issuance and double-spending detection (ibid.). Bitcoin is able to operate outside the legal frameworks of traditional fiat currencies and 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 predicted to geometrically increase until it reaches a finite limit of 21 million bitcoins as users mine the bitcoins through solving increasingly complex algorithms. According to Bitcoin supporters, this implies in theory that the system will avoid inflation as well as business cycles stemming from excessive money creation (FBI, 2012). As a result, Bitcoin is not subject to the typical financial sector regulation and supervision arrangements.

Interest in Bitcoin has grown substantially within the global media and has been 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-ups entering the Bitcoin ecosystem. For example, BitPay, an electronic payment processing system for the Bitcoin currency, enables merchants to accept bitcoins as a form of payment. Coinbase, a San Francisco start-up founded in June 2012, provides a Bitcoin transaction platform for merchants and consumers and charges a one percent fee on top of each transaction. However, most of its revenue comes from letting users buy and sell bitcoins directly from and to Coinbase. Today Coinbase has around 40,000 users performing 30,000 transactions per month (Ludwig, 2013). Finally, Coinsetter, a Bitcoin Forex trading platform, provides traders with leveraged trading and the possibility to short the digital currency (Finberg, 2013). Figure 1. Interest over time for “Bitcoin” (Google Trends)

12 http://bitcoin.org/en/how-it-works


9

Due to its swift growth, government officials worldwide are now monitoring

Bitcoin. For example, the FBI has written a criminal and cyber intelligence report assessing how Bitcoin’s “unique features present distinct challenges for deterring illicit activity” (FBI, 2012:1). Furthermore, the European Central Bank stated in its report on virtual currency schemes that 1) two US senators had expressed their worries to the US Attorney General and the US Drug Enforcement Administration about Bitcoin and its use for illegal purposes, 2) the CIA has asked the lead developer of the virtual currency project, Gavin Andresen, to report on this virtual currency scheme, and 3) that further regulatory investigations were to be expected (ECB, 2012).

Data Collection and Analysis To 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 actors who have been most instrumental to date, and 3) the areas of discussion that have raised the most attention within the Bitcoin Community.

We collected and analyzed two sources of data. First we accessed extensive Bitcoin secondary sources, e.g., the Bitcoin forum, wiki, in addition to other online resources such as social networking sites (LinkedIn, Facebook, Google+, etc.), blogs, corporate websites, legal documents. Second, we scraped all of the English messages posted on the online Bitcoin forum (https://bitcointalk.org) between November 22, 2009, when the forum's first message was posted, and January 3, 2013. The number of English 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 people posting on the forum in any language (figures 2 and 3). The average number of words per post was 63.18. Figure 2. Number of new Bitcoin forum members per month

0

2000

4000

6000

8000

10000

12000

14000

16000

Oct

/05

Dec

/05

Feb/

06

Apr

/06

Jun/

06

Aug

/06

Oct

/06

Dec

/06

Feb/

07

Apr

/07

Jun/

07

Aug

/07

Oct

/07

Dec

/07

Feb/

08

Apr

/08

Jun/

08

Aug

/08

Oct

/08


10

Figure 3. Number of Bitcoin forum posts per month (English language only)

Bitcoin Formal Organization The Bitcoin Foundation was founded by seven of the community’s most instrumental individuals, such as Gavin Andresen – a core Bitcoin developer (table 1). The Bitcoin Foundation has been registered under section 501c of the US Internal Revenue Code in Washington, D.C., and its bylaws were effective as of July 23, 2012. 13 The Foundation is governed by a board with five seats split by membership class.14 Two seats elected by the Individual member class (annual membership costs .23 BTC), two seats by the Corporate member class (five different levels from 9.4 BTC for companies younger than two years and with less than 25 employees to 935.4 BTC for Platinum companies), and one seat by the Founding member class.15 The Individual member class currently has 426 members (of which 68 are anonymous) while the Corporate member class comprises two platinum and eight silver members (table 2).16 The Board has established the following requirements for its board members: 1) an Individual member in good standing, 2) any business is conducted openly using their real identity, and 3) they pass a background check for felony conviction.17

13 https://github.com/pmlaw/The-Bitcoin-Foundation-Legal-Repo/blob/master/Bylaws/Bylaws_of_The_Bitcoin_Foundation.md 14Ibid 15 https://bitcoinfoundation.org/about/governance 16 Ibid 17 https://bitcoinfoundation.org/about/governance

0

20000

40000

60000

80000

100000

120000

140000

160000


11

Table 1. Founding and Board Members of the Bitcoin Foundation Founding member

Board member

Name Position and location

X X Gavin Andresen Bitcoin Developer in MA, USA X X Peter Vessenes CEO of CoinLab in WA, USA X X Charles Shrem CEO of BitInstant in NY, USA X Roger Ver CEO of MemoryDealers in CA, USA X Patrick Murck Principal at Engage Legal, PLLC in Washington, DC,

USA X X Mark Karpeles CEO of MtGox.com in Tokyo, Japan X Satoshi

Nakamoto Author of “Bitcoin: A Peer-to-Peer Electronic Cash System” published on http://bitcoin.org and owner of PGP Public Key with fingerprint: 5EC948A1 at [email protected]

X Jon Matonis e-Money research and author of The Monetary Future at Forbes

Table 2. Corporate members of the Bitcoin Foundation

Members Date Started Location Business Info

Mt.Gox 2010 Tokyo, Japan

Bitcoin exchange

World's largest bitcoin exchange. Handles about 63% of all bitcoin transactions as of April 2013.18

bitcoinstore 2012 USA

Electronics website that only accepts

Bitcoin

Electronics retailer in Bitcoin community, offering more than half

million products.19

bitinstant 2011

New York City, USA with UK

office

Bitcoin payment provide

Offers service allowing customers to quickly and easily transfer funds into

online exchange account.20

CoinLab 2012 Seattle, WA Bitcoin exchange

Enables game makers to offer their users chance to voluntarily install

program to make their idle computing resources available to Bitcoin network for Bitcoin mining in exchange for in-

game virtual goods and points.21

zipbit 2012 New Zealand

Bitcoin Merchant Platform

Specializes on use of Bitcoin by merchants.22

eCardOne 2006 Czech Republic

E-currency exchange provider

Offers fluctuation rates in automated digital currency exchange. Provides customers with option to exchange

currencies instantly.23

18 http://en.wikipedia.org/wiki/Mt.Gox 19 https://en.bitcoin.it/wiki/BitcoinStore 20 https://www.bitinstant.com/aboutus 21 http://www.geekwire.com/2013/bitcoin-seattles-coinlab-files-75m-suit-mt-gox-exchange-alleges-breach-contract/ 22 https://zipbit.co/about-us 23 https://ecardone.com/about-us.php


12

BITHOC 2013 Florida, USA Charity Charity feeds homeless people with

Bitcoin donations.24

Cryptex N/A Kansas, USA

Cryptocurrency exchange N/A

The Newport

Beach Company

2007 USA Start-up

Incubation and Consulting

Develops business strategies for, provides seed capital to, participates in

operations of early stage start-up companies.25

Bitcoin Informal Organization To determine which individuals were the most active in the community since 2009 and potentially have the most informal power due to their centrality, we conducted an out-degree social network analysis of the Bitcoin forum data. After identifying the top 10 individuals in terms of forum posting activity, we then investigated their profiles to determine such things as organizational affiliation, interest, and demographic information. This identification process using secondary Internet sources took on average 15 to 20 minutes for each individual. Table 3 provides a selection of the profile information.

This identification process proved to be a difficult task. Of the 10 most active individuals, we could find information for only five of them, leaving the other five anonymous. 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 been the most active developer in the Bitcoin Forum since its launch. He founded and still maintains Bitcoin 100, a kickstarter for non-profits that implement a Bitcoin donation option onto their websites. He is also actively involved in creating awareness about Bitcoin. The other four entrepreneurs we identified specialize in different applications and uses of Bitcoin. Two entrepreneurs develop applications of Bitcoin for online gaming and gambling while the third works with hardware applications related to mining performance. Of the five anonymous individuals, we could only find information related to one of them: he works on hardware applications related to mining performance. It should also be noted that the 10 most active individuals have eclectic 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 Occupation Bitcoin Position

First forum post

# Posts Bitcoin community activities

1 M 53 USA Entrepreneur Hero Member Jun11 9898

Founded and maintains Bitcoin 100, a kickstarter for non-profits who implement a Bitcoin donation option onto

their websites.

2 M N/A N/A N/A Donator Sep11 8697 Interested in hardware, mining related discussions

3 N/A N/A N/A N/A Hero member Apr11 7488 N/A

24 https://www.smore.com/fpa7-sean-s-outpost 25 http://thenewportbeachcompany.com


13

4 M N/A USA Entrepreneur Hero member Nov10 6748 N/A

5 N/A N/A N/A N/A Hero member Feb11 6459 N/A

6 N/A 43 N/A Entrepreneur Hero member Jul10 6388

Owns online gambling website in which balances

are denominated in bitcoins and all cash-ins and cash-outs are done via Bitcoin.

7 N/A N/A Thailand N/A VIP Oct11 6052 N/A

8 M N/A South Korea Entrepreneur Hero

member Jun11 5958

Head of Bitcoin magazine. Owns several companies

around Bitcoin applications. Co-owner of DialCoin,

founder of Smallpla.net and founder of the (codename)

BitDex (world’s first dedicated handheld bitcoin

transaction device).

9 N/A N/A N/A N/A Hero member Okt11 5793 N/A

10 M 26 N/A Entrepreneur Hero member Apr11 5738

Webmaster of bitcoinfeedback.com, site Admin & Server Owner.

Involved in Bitcoin application development for

online gaming

Bitcoin Discussion Topics Similar to the second analysis, the third analysis also involved using the Bitcoin forum data. For this we used the bottom-up approach of semantic analysis whereby the relationship between each Bitcoin forum user's posts and the proper nouns they contain are analyzed. This enables the identification of the topics that people from different parts of the world have discussed within the Bitcoin community during its first 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 noun and verb, to each word in the posts. We then extracted a word list of all the proper nouns posted on the Bitcoin forum.

The next step was to conduct a network analysis to map the relations between the 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 posts written by the same individuals, and a long social distance if they are mainly used in posts written by different individuals. In this manner, we were able to determine the distribution of topics across the community or, in other words, the social structure of the discussion in the community (appendix 1).

We also conducted a factor analysis to analyze the variation over time among our observed variables, namely the word frequencies of proper nouns. All proper nouns 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 analyzing interrelationships among observed variables in order to reduce them to a smaller set of underlying variables. In our case, the variation over time of the 3,296 proper nouns hides a lower number of underlying variations. For example, the words "Zhou Tong", "AurumXChange", "Bitcoinica" and several other words related to an investigation into the hackings of Bitcoin trading platforms rose in tandem in July and August 2012, a discussion that is captured by one of the factors. In other words, each factor can be interpreted as a topic discussed by the community and which distribution over time can be examined.


14

We analyzed the 50 factors that explained most of the variance, both in terms of the words that loaded strongly on them and their time profiles to provide an overview of the most important topics discussed on the Bitcoin forum over time. In other words, each date is assigned a value for each factor based on how active the factor is on that date. A high value on a certain date results when there is a high frequency of use on that date of the words that load strongly onto that factor. The distribution for each factor over time sums to zero, meaning that the number on the vertical axes in figures x and y are relative values. Hence the values can be compared across dates within a factor but not between factors. An initial investigation of these 50 factors revealed that 42 (82%) were topics that had a limited degree of activity during 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 discussion

Figure 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

We conducted an analysis of the eight relatively active factors through reading

the posts on the forum as well as related sites to provide more context and to reveal the main topic of each cluster. We found three topics of a more technical nature related to setting up the Bitcoin mining hardware and software, two topics related to the actual trading of bitcoins, and three related to legal issues (table 4). Thus, while topics at the beginning of the Bitcoin community’s activity focused on more operational issues such as installing and running the software and then payments and transactions, three of the more recent topics deal with threats to the currency scheme and its community.

Table 4. Most discussed topics 22 November 2009 to 3 January 2013 Most active period start

Most active period end

Topic Description of topic

Nov 2009 Jan 2013 Technical Installing and running bitcoin mining Oct 2011 May 2012 Technical Payment transaction systems Jul 2011 Jan 2013 Exchanges Dwolla, Paxum, Tradehill exchanges May 2011 Sep 2011 Exchanges Metacoi.in, Tradehill, dwolla, shipping Jun 2011 Jan 2013 Legal Pirate/Trendon Shavers virtual hedge fund

scheme that turned out to be a scam Jan 2012 Jun 2012 Technical Mining boards and mining software April 2012 Jan 2013 Legal Bitcoinica hackings and lawsuit May 2012 Oct 2012 Legal Butterflylabs and whether it was a scam or

not. Recent discussion in April 2013 suggests that Butterflylabs is producing a legitimate product.

We then conducted a further investigation of the Bitcoinica legal issues

revealed in this analysis. We found that the Bitcoin community, led by one Hero Member, keeps careful track of all the major heists, thefts, hacks, scams, and losses over one thousand bitcoins, of which there are some 25 incidents.26 As the Bitcoinica hackings are the most substantial of these, we decided to investigate this one further through reading numerous related posts and documents online, In 2011, Zhou Tong, supposedly a 17-year-old entrepreneur from Singapore, created a Bitcoin trading platform called Bitcoinica, which within six months amassed trading assets of more than USD 1 million in bitcoins.27 However, in March 2012, the web hosting provider used by Bitcoinica, Linode, was hacked and 43,554 Bitcoins or around USD 220,000 were stolen.28 Shortly thereafter, Tong announced that he had sold Bitcoinica to Intersango. In May 2012, just 18 days after the Bitcoinica deal was sealed,29 Bitcoinica was hacked a second time – this time through a compromised email account, for 18,547 bitcoins or around USD 90,00030. Bitcoinica was then unable to continue its operations and took the site offline, never to go online again.31 Then in July 2012, the Mt.Gox account holding the remaining Bitcoinica users’ funds was

26 https://bitcointalk.org/index.php?topic=83794.msg923918#msg923918 27 http://coinabul.tumblr.com/post/24022841613/10qs-zhou-tong-bitcoinica 28 http://bitcoinmagazine.com/bitcoinica-stolen-from-again/ 29 http://www.theverge.com/2012/8/10/3233711/second-bitcoin-lawsuit-is-filed-in-california 30 https://bitcointalk.org/index.php?topic=83794.0 31 http://bitcoinmagazine.com/bitcoinica-stolen-from-again/


16

hacked, and the thief got away with 40,000 bitcoins or USD 40,000, bringing the total of these three hacks to USD 350,000.32

In August 2012, four users of Bitcoinica, amidst speculation that Tong himself was responsible for some of this foul play, filed a complaint in San Francisco against Bitcoinica LP and other involved parties. The plaintiffs claimed that Bitcoinica was in breach of their contract by failing to, among other things, “keep said monies in a safe and secure manner, consistent with fiduciary obligations commonly imposed upon financial services providers”, and that as a result, owed them just over USD 460,000 in lost deposits and damages. It is unclear whether there has been a settlement or if the parties are still in talks. An alleged draft settlement agreement, dated interestingly July 9, 2012 – before the complaint was filed – has been posted online.33 Moreover, two of the three defendants are in liquidation. Bitcoinica LP, registered in New Zealand, has been in the process of liquidation since November 2012 34 while Bitcoinica Consultancy Ltd, also based in New Zealand, was liquidated in January 2013. However, Intersango Ltd is still trading and registered in the UK.35 Discussion and Conclusion The purpose of this research-in-progress paper was to begin to explore the process through which the Bitcoin open source community acts as an institutional entrepreneur. Institutional entrepreneurship deals with how an actor initiates and actively participates in the implementation of divergent changes (Battilana et al., 2009), and our first step to explore the formal and informal organizations behind Bitcoin as well as the topics that interested the community has led to some preliminary findings.

First, we find support for distributed institutional entrepreneurship in which institutional change results from the autonomous actions of countless agents converging over time (Dorado, 2005). With Bitcoin, we find that it is the collective and not a single individual or organization that is responsible for initiating and implementing the changes. While Nakamoto initiated the Bitcoin scheme in early 2009, his launching of the project on sourceforge has led to the growth of a global community of individuals interacting online. Our analysis revealed that there is cohesion 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 to payment transactions and then to legal ones. Thus, the activities of the community’s individual members related to bitcoin mining and transaction activities has led to USD 1.5 billion worth of bitcoins in circulation.

Second, we found that there is a high level of anonymity in this institutional process. Among the most influential individuals in the Bitcoin community are the mysterious founder, Nakamoto, and the five influential individuals in the community, for whom we could not find any identifying information on the Internet. It seems that an individual’s “real world” identity is not required to take an active role in the informal organization of Bitcoin. This finding might not be so surprising taken in light of one of the underlying drivers of Bitcoin – to enable financial transactions between individuals without knowing each other’s identity. Yet when we look at the formal organization, one requirement to become a Bitcoin Foundation board member is that any business conducted must be done openly using the person’s real identity. 32 ibid 33 https://docs.google.com/file/d/0B_ECG6JRZs-7SXFtdG1QXy1uSnM/edit 34 http://www.pkfcr.co.nz/services/services_header 35 https://intersango.com/about-us.php


17

Third, as the community has grown, an ecosystem of entrepreneurs and start-ups supporting the currency scheme has developed. Examining the Bitcoin Foundation and the results of the most active members on the Bitcoin forum reveal that entrepreneurs developing their business based on Bitcoin are an extremely active group within both the formal and informal organization of Bitcoin. Just within the past two to three years there has been a surge in entrepreneurs who are basing their start-ups on leveraging Bitcoin in some way. These entrepreneurs support one another through their communications on the forum as well as through driving the development of the Bitcoin technical platform, surrounding infrastructure, and commercial applications.

Fourth, we find that the more substantial threats to the growth and legitimacy of Bitcoin have primarily come from one or a small group of individuals interested in hacking or creating fraud in the system as opposed to from institutionalized financial markets and governments. During the past two years, the forum discussions surrounding these issues have risen significantly, and Bitcoin, despite being a highly flexible 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 status and 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 Bitcoin platform a high-risk system for its users from a financial perspective (ibid.). In response to these threats, it appears that several transaction and trading platforms start-ups, such as BitPay, Coinbase and Coinsetter, have been established to help the Bitcoin community to gain legitimacy and stability. These businesses highlight the security they provide for their customers and their fight against fraud related to Bitcoin. Several of these entrepreneurs, despite being competitors, even collaborate in these efforts as noted by this post by a forum member: “It’s good to see the exchanges co-operating with each other for the benefit of the community.”36 However, just prior to this writing, CoinLab filed a USD 75 million lawsuit against Mt.Gox.37

A more organized effort to strengthen Bitcoin’s legitimacy occurred when six individuals became founding members of the Bitcoin Foundation, which was registered as a legal entity in July 2012. The Executive Director Peter Vessenes notes that 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 concerned about, too. There are botnet operators, hackers, and ponzi-scheme runners floating around our space. We occasionally hear threatening statements from government representatives that don’t seem to understand the law, much less how great Bitcoins are for the world. Our forums and community interaction have a certain uneven quality 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 day job—beyond the joy of Bitcoin programming. There are legal questions to be answered about Bitcoins, different ones in different jurisdictions….. We can help solve or mitigate these problems as a community. My hope is that the Bitcoin Foundation will be the organization that focuses and unlocks all of your energy and talents towards promoting Bitcoins, protecting them, and increasing their legitimacy through standardization.”38 This effort is further supported when taking note of the requirements 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 36 July 26, 2012, 05:01:54 AM, Re: Public Statement regarding Bitcoinica account hack at Mt.Gox. 37 http://forexmagnates.com/coinlab-files-75-million-lawsuit-against-mtgox/ 38 https://bitcoinfoundation.org/about/letter


18

background check for felony conviction. 39 Thus, 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 calls collective consciousness, are elements that hold society together, and that institutions are reinforced once they are challenged. He gave the example of protesters (institutional entrepreneurs) hung in public as a result of their endeavor to overthrow the king, and how their efforts actually reinforced the authority (institution) of the king. He suggested that, institutions are reinforced and kept alive once they are challenged. A similar case can be made for the Bitcoin community; when the community is challenged and still absorbs the shock, the community appears to be strengthened rather than damaged. Therefore, we propose that these instances of fraud, 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 stages of our exploration of the Bitcoin community and its development as an institutional entrepreneur. It appears that despite going against the entrenched institutions of fiat currency and the global banking system and even experiencing fraud and hacking, the Bitcoin community has shown significant resilience to survive and perhaps, some would even say, thrive. The question remains, however, whether Bitcoin will one day be “on the gallows” as the “King” strikes back. In the meantime, there is significant potential for future research in this area. We intend to continue our study, and our next step will be to develop our study both theoretically and methodologically. We intend to do a more fine-grained analysis of the forum messages and combine them with social network analysis of the individual members in order to better understand the dynamics of the Bitcoin community. One area to explore relates to the motives of the individual actors for participating in Bitcoin and how their actions drive the development of the intentions and narratives of the community. A recent survey by Lui Smyth of 1000 Bitcoin users indicated that some participants contribute to and use bitcoins for political reasons, i.e., to bring about change to the financial markets, while others participate merely for the curiosity and challenge.40 As highlighted by scholars studying institutional entrepreneurship (Battilana et al., 2009; Dorado, 2005; Lounsbury & Crumley, 2007; Rao et al., 2000), some actors drive institutional change through their conscious actions; however, the collective efforts of others, while unaware 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.

39 https://bitcoinfoundation.org/about/governance 40 https://docs.google.com/spreadsheet/ccc?key=0Avvn4_NlztWedDh0bDEwbXFFOHBTOXhLZlNpVmhKWWc#gid=6


19

References Barber, S, Boyen, X., Shi, E., & Uzun, E. (2012). Bitter to Better — How to Make

Bitcoin a Better Currency. Financial Cryptography (FC 2012), Lecture Notes in Computer Science, vol 7397, 399-414.

Battilana, J., Leca, B., & Boxembaum, E. (2009). How actors change institutions: Towards a theory of institutional entrepreneurship. The Academy of Management Annals: 65-107.

Baum, J. A. C. (1996). Organizational ecology. In S. R. Clegg and C. Hardy (eds) Handbook of Organizational Studies, Thousand Oaks, CA: Sage.

Benbasat, I., & Goldstein, D.K. & Mead, M. (1987). The case research strategy in studies of information systems. MIS Quarterly. 369-386.

Benkler, Y. (2002). Coase's penguin, or Linux and the nature of the firm. Yale Law Journal, 112, 367-445.

Chengalur–Smith, I., Sidorova, A., & Daniel, S. (2010). Sustainability of free/libre open source projects: A longitudinal study. Journal of the Association for Information Systems, 11, 11.

Child, J., Lua, Y., & Tsai, T. (2007). Institutional entrepreneurship in building an environmental protection system for the People’s Republic of China. Organization Studies, 28, 7, 1013–1034.

Colomy, P. (1998). Neofunctionalism and neoinstitutionalism: Human agency and interest in institutional change. Sociological Forum, 13, 2, 265–300.

Colomy, P., & Rhoades, G. (1994). Toward a micro corrective of structural differentiation theory. Sociological Perspectives, 37, 4, 547–583.

Davis, J. (2011, October 10). The Crypto-Currency: Bitcoin and its mysterious inventor. The New Yorker. Retrieved from http://www.newyorker.com/reporting/2011/10/10/111010fa_fact_davis DiMaggio, P.J. (1988). Interest and agency in institutional theory. In L. Zucker (ed.)

Institutional Patterns and Organizations, Cambridge, MA: Ballinger, 3–22. Dingley, J. C. (1997). Durkheim, Mayo, morality and management. Journal of

Business Ethics, 16(11), 1117-1129. Eisenhardt, K.M. (1989). Building theories from case study research. Academy of

Management Review, 14, 532-550. European Central Bank. (2012). Virtual Currency Schemes. Frankfurt am Main,

Germany. Federal Bureau of Investigation. (2012). Bitcoin Virtual Currency: Unique Features

Present Distinct Challenges for Deterring Illicit Activity. Directorate of Intelligence. Retrieved from http://www.wired.com/images_blogs/threatlevel/2012/05/Bitcoin-‐FBI.pdf.

Finberg, (2013, April 26). A Closer Look at Coinsetter and its Bitcoin ECN Trading Platform. ForexMagnates. Retrieved from http://forexmagnates.com/a-‐closer-‐look-‐at-‐coinsetter-‐and-‐its-‐bitcoin-‐ecn-‐trading-‐platform/.

Fligstein, N. (1997). Social skill and institutional theory. American Behavioral Scientist, 40, 4, 397–405.

Garud, R., Jain, S., & Kumaraswamy, A. (2002). Institutional entrepreneurship in the sponsorship of common technological standards: The case of Sun Microsystems and Java. Academy of Management Journal, 45, 1, 196–214.

Geuss, M. (2012, August 12). Bitcoinica users sue for $460k in lost Bitcoins. Arstechnica. Retrieved from http://arstechnica.com/tech-‐policy/2012/08/bitcoinica-‐users-‐sue-‐for-‐460k-‐in-‐lost-‐bitcoins/


20

Greenwood, R., Suddaby, R., & Hinings, C.R. (2002). Theorizing change: The role of professional associations in the transformation of institutionalized fields. Academy of Management Journal, 45, 1, 58–80.

Grewal, R., Lilien, G. L., Mallapragada, G. (2006). Location, location, location: How network embeddedness affects project success in open source systems. Management Science, 52, 7, 1043-1056.

Hahn, J., Moon, J.Y., Zhang, C. (2008). Emergence of new project teams from open source software developer networks: Impact of prior collaboration ties. Information Systems Research, 19, 3, 369-391.

Hassebroek, P. G. B. (2007). Institutionalized environments and information security management: Learning from Y2K: A comparative study in a critical sector organization. Dissertation, Georgia Institute of Technology.

Ludwig, S. (2013, February 8). Y Combinator-backed Coinbase now selling over $1M Bitcoins per month. VentureBeat. Retrieved from http://venturebeat.com/2013/02/08/coinbase-bitcoin/.

Maguire, S., Hardy, C., & Lawrence, T.B. (2004). Institutional entrepreneurship in emerging fields: HIV/AIDS treatment advocacy in Canada. Academy of Management Journal, 47, 5, 657–679.

Nakamoto. S. (2008). Bitcoin: A peer-to-peer electronic cash system. www.bitcoin.org.

N/A. (2013, April 15). Bitcoin and the future of money. Forbes. Retrieved from http://www.forbes.com/sites/groupthink/2013/04/15/bitcoin-‐and-‐the-‐future-‐of-‐money/

Schweik, C. M., & Semenov, A. (2003). The institutional design of "Open Source" programming: Implications for addressing complex public policy and management problems. First Monday, 8, 1.

Scott, W. R. (1992). Organizations: Rational, natural and open systems (3rd ed.). Englewood Cliffs, NJ: Prentice Hall.

Stinchcombe, A. (1965). Social structure and organizations. In J. March (ed.), Handbook of Organizations, Chicago: Rand McNally, 260-290.

Toutanova, K., Klein, D., Manning, C. & Singer, Y. (2003). Feature-rich part-of-speech tagging with a cyclic dependency network. In Proceedings of HLT-NAACL 2003, 252-259.

Yin, R.K. (1994). Case Study Research: Design and Methods. Sage, London. Zucker, L. G. (1987). Institutional theories of organization. Annual Review of

Sociology, 13, 443-464.


21

Appendix 1. Word cloud of Bitcoin Proper Nouns, November 2009 – January 2013

breaking out of the bank with bitcoin

Business

bitcoin currency

emergence of bitcoin

bank research

currency exchange

transactions community

alegitimate currency

new virtual currencies

strategystockholm school