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Cryptocurrencies. An exploratory study of cryptocurrencies and the drivers impacting its diffusion. Casper Fosvang 21-03- 1986- xxxx Daniel Varberg 06-04- 1987- xxxx IT- University of Copenhagen Cand.it (EBUSS) 2. June 2014 MASTER THESIS Supervisor: Stefan Henningsson 180.023 characters 1

Abstrakt Denne research har til hensigt at tage det først skridt i identificeringen og forståelsen af begrebet cryptocurrencies samt at undersøge, hvilke drivere der påvirker diffusionen og adoptionen - research som hidtil er ukendt på den akademiske scene. Dette gøres gennem en generel gennemgang af cryptocurrencies baseret på Bitcoin, hvor en kvalitativ metode i samspil med sekundært litteratur danner fundamentet for en dybere forståelse. Cryptocurrencies dækker over en decentraliseret valuta og et betalingsnetværk, der som fænomen opstod tilbage i 2009 med udgivelsen af Bitcoin. Det er baseret på open source princippet og teknikken for kryptografi. Vores research viser, at der er visse begrænsninger ved valutaen, som kun accepteres få steder som betalingsmiddel og desuden er forholdsvis volatil. På trods af dette viser betalingsnetværket tydelige tegn på potentiale med lave transaktionsomkostninger, hurtige overførsler på tværs af landegrænser, øget anonymitet samt en forbedret model til at undgå traditionel svindel med online betalinger. Ulempen ved dette er, at det potentielt kan facilitere sortbørs aktiviteter, da området overordnet set mangler reel regulering. Herudover stilles der krav til brugeren om sikker og forsvarlig opbevaring af cryptocurrencies. Som innovation bevæger cryptocurrencies sig i det finansielle, politiske og teknologiske spændingsfelt og kan derfor betegnes som en kompleks innovation. Der er derfor også mange forskellige drivere, der påvirker adoptionen, hvorfor disse med rette kan deles op i eksterne og interne. Eksterne dækker over udefrakommende kræfter som politiske, økonomiske, sociale og teknologiske, hvor interne dækker over individets opfattelse af innovationen og innovationens karakteristika. Regulering, betalingsinfrastruktur, samfundets karakteristika og teknologisk modenhed blev alle identificeret til at være eksterne drivere, der har indflydelse på diffusionen og adoptionen af cryptocurrencies. Cryptocurrency økosystemets natur har også indflydelse, da det er de individuelle services baseret på crypocurrencies, som økosystemets aktører faciliterer, der skal udbredes til forbrugerne. Økonomisk gevinst, lave investeringsomkostninger, tidsbesparing og mindre ubehag blev identificeret som værende relative fordele og derfor have en positiv indflydelse på adoptionsraten. Høj kompatibilitet grundet det værende open source har også en positiv indflydelse. Inkompatibilitet med kultur og vaner relateret til finansielle innovationer, høj teknologisk kompleksitet og lav observerbarhed blev identificeret som værende negativt relateret til adoptionsraten. Det er tydeligt, at der er et behov for cryptocurrencies, men et behov er ikke nok til at garantere en udbredelse og dermed gøre innovationen mainstream. Det er derfor nødvendigt at undersøge, hvilke drivere der har indflydelse på dets udbredelse. Keywords: Cryptocurrencies, Bitcoin, Payment Protocols, Diffusion and Adoption Theory, Diffusion of Innovations, 2

Table of content Preface: the start of a new paradigm? 7 Chapter 1 - Setting the stage 9 1.1 Problem statement 11 1.2 Delimitation 11 1.3 Disposition 12 Chapter 2 - Research Methodology 13 2. 1 Research Approach 13 2.2 Literature 15 2.3 Empirics and analysis 16 2.3.1 Expert interview 16 2.3.2 Survey 17 2.3.3 Participant observation 17 2.4 Reliability and validity 18 Chapter 3 - Theory 20 3.1 Diffusion of innovations 20 3.1.1 Rate of adoption 22 3.1.2 Innovation characteristics 24 3.2 Hofstede's cultural dimensions theory 26 Chapter 4 - Introduction of cryptocurrencies 28 4.1 Definition of cryptocurrencies 30 4.1.1 Extracting the currency aspect of cryptocurrencies 31 4.2 The Bitcoin Protocol - How a transaction works 32 4.2.1 Creating a new address 34 4.2.2 Submitting a payment 34 4.2.3 Verifying the transaction (mining) 34 4.2.4 Transaction verified 35 3

4.3 The Bitcoin Protocol and Traditional Electronic Payment Systems. 36 4.3.1 Challenges for Traditional Electronic Payment Systems 36 4.3.2 Comparing Bitcoin with Traditional Payment Systems 40 4.3.3 Security 40 4.3.4 Decentralized payment protocols 41 4.3.5 The technical breakthrough 42 4.4 A potential remedy for International transfers, remittance and the unbanked 44 4.4.1 The unbanked & developing countries 46 4.4.2 A political statement 47 4.5 Volatility 48 4.6 The black market and Bitcoin 49 4.7 Regulation of technology 50 4.6.1 Taxation 53 4.6.2 Legality 54 4.7 Summary 56 Chapter 5 - The cryptocurrency ecosystem 59 Chapter 6 Drivers impacting diffusion and adoption 64 6.1 Externalities and adoption readiness 64 6.1.1 Introduction to the Philippines 66 6.1.2 Political / Regulation 66 6.1.3 Economic factors 69 6.1.3.1 The poor and unbanked 70 6.1.3.2 Remittance 75 6.1.4 Social and Cultural 76 6.1.4.1 Demographic of the Philippines 76 6.1.4.2 Cultural 78 6.1.4.2.1 Individualism 79 6.1.4.2.2 Uncertainty avoidance 80 4

6.1.5 Technology infrastructure 81 6.1.5.1 Internet 81 6.1.5.2 Mobile phones 82 6.1.6 Summary 83 6.2 Diffusion of Bitcoin in the Philippines 85 6.3 User characteristics 85 6.4 Innovation characteristics 86 6.4.1 Relative advantage 86 6.4.2 Compatibility 88 6.4.3 Complexity 90 6.4.4 Trialability 91 6.4.5 Observability 91 Chapter 7 - Conclusion and Discussion 93 7.1 Findings and contribution 93 7.2 Limitations 96 7.3 Conclusion 97 7.5 Suggestions for further research 99 References 100 Appendix 109 5

Figures: Figure 3.1 - Source: Rogers, 2003 - Diffusion of innovation (Page 22) Figure 4.1 - Source: Coindesk, 2014 - Cryptocurrencies domains (Page 30) Figure 4.2 - Source En.bitcoin.it, 2014 - Transaction signatures (Page 33) Figure 4.3 - Source Tanaka, 1996 - Credit Card Type (Page 37) Figure 4.4 - Source Tanaka, 1996. - Check Type (Page 38) Figure 4.5 - Source Tanaka, 1996 - Cash Type (Page 39) Figure 4.6 - Source Coinbase, 2014 - Bitcoin exchange rate (Page 48) Figure 4.7 - Source Bitlegal.com, 14/3 2014 - Legal status of Bitcoin (Page 55) Figure 5.1 - Source own production - The four steps of Bitcoin (Page 60) Figure 6.1 - Source TWE, 2012 - Mobile financial service development (Page 68) Figure 6.2 - Source TWE, 2012 - Institutional and market environment (Page 68) Figure 6.3 - Source FIDWG - Banking overview (Page 72) Figure 6.4 - Source Pickens, 2009 - Mobile Money (Page 74) Figure 6.5 - Source Hofstede, 2010 - Cultural dimensions (Page 79) Tables: Table 2.1 Source own production - Empirics (Page 16) Table 4.1 Sourcce En.bitcoin.it, 2014 - Altcoins (Page 29) Table 4.2 Source Bitcoin Faktafolder, 2014 - International bank transfers (Page 45) Table 4.3 Source own production - Advantages and disadvantages for Bitcoin as an innovation (Page 58) Table 5.1 Source own production - Cryptocurrency ecosystem (Page 62) Table 6.1 Source own production - Different types of relative advantage for cryptocurrencies (Page 87) Table 7.1 Source own production - Effects on the rate of adoption (Page 92) 6

Preface: the start of a new paradigm? One may consider what implications a new groundbreaking innovation possibly could have on the world. Throughout history, several technical innovations have proven to revolutionize societies and create norms, thereby breaking with old habits and creating new ones. Some examples include electricity, the telephone, the Internet and so on. These inventions created a foundation for further development and innovativeness, thus they contributed and shaped the society we live in today. Addressing the Internet in this context is a great example of an innovation that has created an enormous industry, fostering innovation around the world. A great example of an innovation that was built on top of the Internet is cryptocurrencies Bitcoin is commonly interpreted as a virtual currency, which is partly right depending on the contexts it s evaluated in. Despite this, Bitcoin brings something truly more revolutionizing, which does not directly have to do with the currency. That is the underlying system also referred to as the Bitcoin Protocol, that basically creates an open financial platform where low- cost transactions can be made. (Antonopoulos, 2014). It therefore advocate great potential in the financial sector by introducing a new and more cost effective system for handling and transferring funds digitally. Despite its great potential, cryptocurrencies has yet to become mainstream. Its usage as a payment solution is still limited to relatively few merchants, and only a relatively small group of users has adopted the innovation. If cryptocurrencies is to impact the way we do financial transaction and relieve its potential, it s essential that people start using it. Understanding the drivers that are affecting the diffusion and adoption of cryptocurrencies is therefore important in order to understand how cryptocurrencies can become mainstream. It is important to point out that cryptocurrencies like Bitcoin as an innovation and technology is still in its developing phase. Predicting the outcome of Bitcoin is extremely 7

difficult and complex. This thesis aims to evaluate Bitcoin in terms of technicality and ecosystem along with identifying possible advantages and drawbacks allocated with the innovation by addressing the attributes for possible adoption. This thesis is aimed towards individuals and businesses interested in phenomena of cryptocurrencies and adoption theory from an innovations point of view. The thesis is trying to bridge the gap between academic ideas and practical usage. 8

Chapter 1 - Setting the stage Virtual currency schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers. This was concluded by The European Central Bank in an extensive report on virtual currency schemes in 2012 (European Central Bank, 2012). Ever since the release of the first cryptocurrency in 2009, the interest has been growing. Despite the increasing interest, the area has only received little academic attention, where mostly is strictly technical. Knowledge derived from this area may therefore sometimes be more or less consistent, thus resulting in uncertainty adding an extra layer of complexity to the understanding of cryptocurrencies. A greater consistent academic knowledge may lead to demystification and discourage of the general misunderstandings surrounding the area and accelerating the adoption and diffusion among users. This research does not focus on the exchange rate of cryptocurrencies or as an isolated currency. It defines cryptocurrencies as an innovation that could yield great opportunities to the established norm with its innovative system, especially for developing countries (A10:B10). Some may describe cryptocurrencies as virtual or digital currency, which is partly true, but the underlying protocol could be far more disruptive and revolutionising than the currency aspective (Antonopoulos, 2014:C3). The protocol delivers a practical solution to a more than 30- year old problem within the field of computer science, known as the Byzantine Generals Problem (Olesen, 2014). Shortly elaborated, the problem considers how to create consensus or agreement within a network of equal actors also known as a decentralized network in order to cope with the problem of double spending. Describing cryptocurrencies only as a currency can be compared to saying that the Internet is all about emails (Antonopoulos, 2014). The protocol has created a whole new 9

financial platform based on an open source license that is fostering innovation without permission for anyone who is interested. This creates great opportunities for all types of businesses, big or small, it doesn t matter. What matters is the ability to see a potential in a new innovation that could prove to be one of this decade s greatest innovations. Cryptocurrencies is definitely contributing with something new to the domain of virtual currencies with its innovative technical features and design. Bitcoin, the first cryptocurrency introduced, seems to have attracted great interests over a longer time period and reached interest of the public in several countries. The decentralised design and the total issue of 21 million Bitcoins makes up with some of classical economic theory with issuing of money. Being able to transfer funds from a to b across borders within minutes instead of days almost free of charge or with very low fees involved, is something revolutionizing by itself that could be useful for many people and businesses across the globe (A2). Cryptocurrencies could, in the long run, provide a financial platform of banking for the third world and developing countries giving the poor the possibility to open a wallet, which is more or less equal to a bank account (A3). The protocol allows micropayments to be done digitally due to its low fees allocated with transferring funds between accounts/addresses. Furthermore, a digital wallet opens up for great opportunities for trade both domestic and international, along with being able to deposit funds and create savings. This could potentially open up for new business models (A2). Despite the promising potential, it might still take cryptocurrencies years from now to become mainstream and redeem actual potential. From a technological point of view, cryptocurrencies are still in their developing and emerging phase meaning that the possibilities for success or failure may be close to even. No matter what the outcome, cryptocurencies are an interesting innovation due to the above mentioned characteristics. 10

1.1 Problem statement The discussion above naturally leads to the question of: What are cryptocurrencies, and what are the drivers impacting its diffusion and adoption? This question will direct this thesis onward by assessing relevant theory, empirics and literature. 1.2 Delimitation Cryptocurrencies in general consist of two elements: a currency and a payment protocol (Andolfatto, 2014). From an innovations point of view, the payment protocol seems to bring the most innovativeness (Antonopoulos, 2013). The focus of this thesis is therefore predominantly on the payment protocol. Despite this, a separation of the currency and the payment protocol does not make sense. Hence, the currency aspect is such a vital part of the innovation and vice versa. The overall focus of this thesis is from the innovations point of view where both merchants and consumers have been included for an overall understanding in order to comply with the problem statement. Cryptocurrencies is the superior definition of virtual currencies using cryptography. The area consists of numerous different proposals for virtual currencies. Despite this, Bitcoin seems to be the most interesting phenomena since cryptocurrencies was introduced. Most other cryptocurrencies are based on the open source Bitcoin protocol with modification. In writing, Bitcoin is also the biggest cryptocurrency in terms of network size and usage. Bitcoin will therefore act as a main reference when the aspect of cryptocurrencies is addressed. Development within the field of cryptocurrencies has proven to be quite rapid. The research conducted in this thesis was executed from January 2014 until the end of May 2014. Evolvement in the cryptocurrency community and in the ecosystem of Bitcoin after this time period is therefore not considered nor included. 11

1.3 Disposition Chapter 1 Setting the Stage Introduction/ Problem statement / Delimitation The research area and problem statement is presented. Chapter 2 Research Methodology Research Approach /Literature / Empirics The Research Methodology used to guide this study is presented. This includes literature review, qualitative and quantitative methods and handling of empirical data along with reflections upon these areas. Interview persons and the survey is introduced. Chapter 3 Theory The theoretical foundation to this thesis i made through a literature review of existing diffusion and adoption theory of innovations. Chapter 4 Introduction of Cryptocurrencies and Bitcoin This chapter explores the phenomena of Cryptocurrencies with Bitcoin as a case in order to answer the What is cryptocurrencies of the problem statement. The exploration creates a deeper understanding of the area research and identifies advantages and disadvantages of the innovation. Chapter 5 The cryptocurrency ecosystem This chapter describes the ecosystem of cryptocurrencies in order to create a holistic view and explain the challenges that businesses in the ecosystem are facing. The businesses facilitate services based on cryptocurrencies, hence they play an important role in the diffusion and adoption. Chapter 6 Drivers impacting diffusion and adoption Cryptocurrencies is analysed based on diffusion and adoption theory, using empirical data and secondary data, as well as our exploration of Bitcoin. The analysis leads to findings on what are the drivers impacting the diffusion and adoption of cryptocurrencies. Chapter 7 Conclusion and discussion The findings from the research are discussed and the problem statement is answered. Theoretical and practical implication are presented along with contributions. Moreover, limitations of this thesis are identified and discussed, and further research is suggested. 12

Chapter 2 - Research Methodology This study is intended as an exploratory field study and reflections on the desired contribution of this thesis will assist in directing the research towards its objective - of making a delimited contribution to the knowledge about Cryptocurrencies by answering the research question. This chapter aims to present the research approach of the study along with the use of relevant academic literature and to introduce the empirical and analytical approach that ultimately will lead to the findings and thereby the contribution of this thesis. 2. 1 Research Approach Research is a process of steps used to collect and analyze information to increase our understanding of a topic or issue (Creswell 2003). In relation to this research, this requires a paradigm that is suitable for exploring complex social phenomena that requires working with people and real life experiences where the researcher seeks to understand the research problem by reflecting, probing, understanding and revising meanings, structures and issues (Hirschman 1986; Orlikowski & Baroudi 1991). The aim of this research is to add to the body of knowledge of Cryptocurrencies that is more or less consistent with a positivistic epistemology, where the objective is finding truth (Miles and Huberman 1994; Yin 1994). The ontological assumption stated with this thesis is coherent and supported by the beliefs found in the philosophy of critical realism or postpositivism (Denzin & Lincoln 1994; Guba & Lincoln 1994) or neo- postpositivism (Huberman & Miles 1985). The ontological view is presented by Guba & Lincoln (1994) as reality is real but only imperfectly and probabilistically apprehensive, and so triangulation from many sources is required to know it. This view supports the qualitative method applied for gathering extensive knowledge about the subject studied in this research. This thesis is considered to be a study of information systems in the context of Cryptocurrencies. Information systems are considered to be the study of complementary 13

networks of hardware and software that people and organizations use to collect, filter, process, create and distribute data (Jessup & Valacich, 2008). It can therefore be perceived as IS research, spanning over the domains of Cryptocurrencies, its complex ecosystem along with its drivers impacting its adoption. Gregor (2006) made a distinction among five theory types in IS research, namely theory types for (1) analysis; (2) explanation; (3) prediction; (4) explanation and prediction; and (5) design and action (Gregor, 2006). Analytic studies analyze and describe the state of a phenomenon, rather than making predictions or generalizations; explanatory studies are concerned with how and why a phenomenon occurs, focusing on understanding of concepts rather than testing the predictions; predictive studies are focused on what will occur in the future, thus being less concerned with the cause; explanation and prediction (EP) provides understanding of the causes as well as prediction of a phenomenon; and design and action focuses on how to do something from a practical perspective. This field is especially related to the IS development process. The characterization of this research in relation to Gregor s types of IS research defines a study that is based on an analytical approach with some degree of explanation in order to comprehend the phenomenon studied. The outcome of this thesis will add to knowledge of Cryptocurrencies along with an understanding of which drivers are impacting its adoption. Furthermore, the findings will contribute to a better understanding of potential challenges for a broad and successful adoption of Cryptocurrencies. Thus, the focus of the thesis is not to predict the future development of Cryptocurrencies, but rather a deeper understanding of the phenomenon and which factors influence its adoption. 14

2.2 Literature The literature review of this thesis is based on knowledge gathered within various fields of literature. This includes sources that are not strictly theoretical or academic for getting a solid foundation in researching the phenomenon of Cryptocurrencies that has only received little academic attention so far. The main motive with the literature selection has therefore been conducted with the outcome in mind (Carlsson et al., 2010), which is to explore Cryptocurrencies and the drivers impacting its adoption. The informational search has lead to literature with different perspectives on Cryptocurrencies. Within this literature, few were concerned with general drivers impacting the adoption of Cryptocurrencies. Often, the search resulted in literature about a specific cryptocurrency, such as Bitcoin, Litecoin or Dogecoin as little has been written about the overall areas of cryptocurrencies. In general, literature has been approached with a certain caution and scepticism, especially with the mass media, such as news sites or portals. The main reason for this approach is in relation to the complexity of cryptocurrencies, which can be hard to grasp at once. In some cases, the so called expert pronouncement has proven not to be evident. The search for academic literature was done on a series of academic databases, such as Google Scholar, Euromonitor, EBSCOHost, ACM Digital Library, Business Source Complete. Most of these databases were accessed through the website of library of the IT- University. 15

2.3 Empirics and analysis Method Individuals Amount of individuals assessed (1) Expert Interviews (Qualitative) Individuals with different expertise and knowledge within the area of cryptocurrencies. (A) Lasse Birk Olesen founder Bitcoin Nordic and co- founder buybitcoin.ph (B) Pelle Braendgaard co- founder Kipochi (C) Hans Henrik H. Heming Interim CEO at Bips.me 3 (2) Survey (Quantitative) A multiple choice questionnaire with 10-12 questions about behavior and habits with areas connected to the study. (3) Meetup / Participant observation Table 2.1 Source own production - Empirics Bitcoin meetup on the 5th of April in the IT- Park of Cebu City. Individuals with different incentives. Some with experience within the field of cryptocurrencies while others just been introduced. 132 25-30 2.3.1 Expert interview Expert interviews are used in empirical social research in order to gain knowledge within the expert field of research. Focus should rather be on the capacities as expert rather than the person (Flick 2004). This approach was mainly chosen due to two conditions. First, the area of cryptocurrencies is a rather complex one to comprehend as it covers many different aspects, such as economical, technical, legislative. Second, the high complexity and rapid evolvement makes academic literature difficult to find. Doing expert interviews with leading individuals within the scene of cryptocurrencies seemed to provide satisfying knowledge and thus coping with the mentioned 2 conditions. A common problem with expert interviews is the question of what makes an expert. Meuser and Nagel (2004) define an expert as someone who (1) in some kind of way carries responsibility for the draft, implementation or control of a problem s solution or (2) who has privileged access to information about relevant populations, social situations and decision processes. The definition by Meuser and Nagel was taken into consideration when 16

selecting and contacting persons for the expert interviews. All of the three persons participating in the open- ended interviews comply with Meuser and Nagel s definition. All of the three interviews were conducted as open- ended interviews (Andersen, 2008) with 11 questions as a guide (Appendix 3). The interview guide was based around the research questions of the thesis, and notes were taken during the interview and later transcribed (Appendix 4-6). 2.3.2 Survey Bickmann & Rog (2009) state that the main motive for doing a survey is usually to collect quantitative or numerical information about the studied population. Surveys mostly focus on fractions of the population where information is collected to understand consumers preferences and interests (Bickmann & Rog, 2009). The desired outcome for doing a survey for this thesis, was to understand the habits of the average Filipino, along with studying their behavior when it comes to areas connected to the subject of the thesis, in relation to the study. The survey was also intended as complementary to the secondary data that in some cases were lacking relevant information to study. The data were collected between the 27 march and 7 april 2014 in the region of Central Visayas in the city of Tagbilaran and Cebu City. Respondents were asked to participate in a small survey with 10-12 questions (Appendix 1) about their preferences and behaviour. The survey was conducted on an ipad with multiple choice questions. 2.3.3 Participant observation This method is by Jorgensen defined as a field strategy that simultaneously combines document analysis, interviewing of respondents and informants, direct participation and observation, and introspection (Jorgensen, 1989). The information gathered from the participant observation of the Bitcoin meetup is purely based on communication where openness is essential (Flickr, 2009). None of the conversations from the meetup was logged in any form. The meetup was very informal as people were firstly introduced, then joined into smaller groups for discussing subjects and experiences related to 17

cryptocurrencies. The main outcome of the meetup was valuable information for the practitioners of cryptocurrency based on the observations of the conversations and a better understanding of practical implications of using cryptocurrencies. 2.4 Reliability and validity The transcription was done with the same procedure for all of the interviews. All of the questions have been given a letter and numbered sequentially to create a useful overview as references when interviews were quoted in the thesis. This study aims to examine the phenomena of Cryptocurrencies along with its drivers impacting its adoption. The focus applied is a holistic perspective where the goal is to examine how things are correlated and identify causal relationships whereby certain variables may influence other variables. In order to comply with this approach, the experts were interviewed following the same interview guide and thus asked the same questions. By cross checking the answers, a certain degree of consistency in the statements was provided. Thus these few questions revealed a different view upon the subject discussed. This is certainly caused by different beliefs and experiences from the experts as some of the topics discussed have a certain degree of subjectivity. In some cases, secondary data was afterward addressed to assess statements of the respondents in order to comply with reliability to secure a high internal validity. The survey conducted is not statistically significant for the Philippines as it was only conducted in the region of Central Visayas. Participants were randomly chosen on the populated streets in front of malls and public transportation, such as ferry terminals and bus stations. This was done in order to ensure a representative sample of the population in the Central Visayas. The survey was conducted in English as most people in the Philippines are able to communicate in English. When introducing the questionnaire to a respondent, a short introduction was given with the purpose. This introduction included a short presentation of the researchers along with a disclosure stating that it s non- profit and the answers is anonymous. After fulfillment of the questionnaire, more information about the 18

research was given along with a short introduction of cryptocurrencies. The questionnaire was tested on five test personas reflecting the population, then feedback was given. This was done to ensure the understanding of the question and limit potential language and cultural barriers. The participants observation at the meetup in Cebu city consisted of observing conversations without interruption. None of the observations from the meetup have been used in this thesis but only served as a background knowledge. The overall structured and well documented approach followed by this thesis should ensure that the study is replicable and can be interpreted to have a high reliability. 19

Chapter 3 - Theory Cryptocurrency is a technological innovation that is in its very early stage of adoption, and most consumers are therefore not aware of its existence. It is hypothesised that many of the factors affecting the successful adoption of new technologies are generic in nature. With regards to cryptocurrencies specifically, this research will assist in identifying a set of enablers and barriers of adoption. By explicitly acknowledging the context and prior history of research in the area of diffusion and adoption of innovation, we are able to identify areas of future theoretical and empirical research in the area of Cryptocurrencies. 3.1 Diffusion of innovations The term diffusion is derived from the Latin word diffusio, meaning: to spread out (Oxford, 2014). Diffusion of innovations means how innovations are spread out. The diffusion of innovations can be seen as a process where innovation- awareness and adoption is spread among individuals or firms. Unlike the invention of a new technology, which often appears to occur as a single event, the diffusion of that technology usually appears as a continuous and rather slow process (Hall & Khan, 2003). One of the most cited research in diffusion theory as of now, is the one of Stanford University professor and researcher Everett M. Rogers (Oxford, 2014). The Diffusion of Innovation has extensively been conceptualized through his work, and it has provided a core view of Diffusion of Innovation, which has proven to be stable and at the same time responsive to changes through a newer edition of his main contribution in the form of his book Diffusion of Innovation. As Rogers is one the most cited authors in diffusion research, we will give an outline of the main traits of his diffusion model here. Rogers (2003) Defines the diffusion process like this: diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system (Rogers, 2003) 20

Rogers suggested four important elements of diffusion: the innovation, communication channels, time and the social system. An innovation is an idea, practice or project that is perceived as new by an individual or other unit of adoption, and a communication channel is the means to how the messages of the innovation are diffused. These channels are an essential part of the diffusion and act as ways to communicate messages about the innovation from one individual to another. Communication is a process in which participants create and share information with one another in order to reach a mutual understanding (Rogers, 2003). Channels are the means by which a message gets from the source to the receiver, which can either be mass media or interpersonal channels. (Rogers, 2003), and time is a dimension that is involved in the adoption/rejection decision process and how early or late an individual adopts in comparison to the others in a social system. It's also concerned with how many adopt an innovation in a given time period. Finally, the social system is a set of interrelated units engaged in joint problem solving to accomplish a common goal. This means that the theory can be generalized to individuals, companies, industries and societies (Rogers, 2003). Many observers in the past have pointed to the fact that when the number of users of a new product or invention is plotted versus time, the resulting curve is typically an S- shaped distribution. The diffusion is proceeding slowly at first, accelerating as it spreads throughout the potential adopters, and then slowing down as the relevant population becomes saturated (Hall & Khan, 2003). Rogers built upon the concept when he developed his adopter curve. Rogers classified different categories of adopters for when they adopted in comparison to the other in a social system. 21

This model is illustrated as a bell curve. Figure 3.1. - Source: Rogers, 2003 - Diffusion of innovation The adopters of each category have certain characteristics. The first group of adopters to use an innovation is called Innovators - the more venturesome, more educated, those with extended information networks, then comes Early adopters - the social leaders, who are influential and respectable, Early Majority - the followers, Late majority - the skeptical and finally laggards - the traditional, unwilling followers. The adopter categorization is based on the time from the introduction of the innovation to the individuals adoption. Rogers even assigned specific percentage to the adopter categories, meaning that Innovators affiliate about 2.5% of the population, Early Adopters 13.5%, Early Majority 34%, Late Majority 34% and Laggards 16% (Rogers, 2003). 3.1.1 Rate of adoption The individuals decision to adopt is made through a cost- benefit analysis where the benefits of adopting the innovation are weighed against the cost of change, where cost of change is often characterized as uncertainty (Hall & Khan, 2003; Tolba & Mourad, 2011). The most important thing to observe with this kind of decision is that, at any point in time the choice being made is not a choice between adopting and not adopting but a choice between adopting now or deferring the decision until later (Hall & Khan, 2003). As 22

individuals tend to oppose the risks of adoption, the uncertainty will often result in a postponement of the decision. This is not true for the Innovators who are willing to experience new ideas. They are prepared to cope with high uncertainty and high risk of innovation failure. The Early adopters are more likely to hold leadership within social systems so other members will come to them for advice or information about the innovation. Early adopters attitude towards the innovation is therefore very influential on the adoption or rejection of the innovation. Early Majority is deliberate in adopting the innovation, and their inter- personal networks are important for the diffusion. Late Majority is skeptical and traditional and tend to have lower socio- economic status. Laggards are either very traditional or isolated in the social system. They are conservative and suspicious of innovations and often interact with others who share their ideas (Rogers, 2003). An innovation that has diffused to the point where Early adopters have decided to adopt, and where the diffusion is about to reach Early Majority is what many researchers claim to be the key in the diffusion process. From this point on, a domino effect is triggered into the Early majority segment. The domino effect has been coined by several researchers, Gladwell (2000) defined it as the tipping point where the rate of adoption rapidly increases as the critical mass has been reached. Markus (1990) expressed it as being how difficult it is to attract and maintain membership in networks where the value of being in the network generally increases with the number of members. According to Rogers, it s the point where enough individuals have adopted so further rate of adoption becomes self- sustaining (Rogers 2003). Some researchers have even put an exact percentage on when the critical mass is reached. Valente (1995) argued that it s reached when 10 to 20 percent of the population has adopted the innovation. Rogers believe the critical mass is reached after Early adopters have adopted, making it at 16% market penetration. The diffusion process of an innovation follows a specific pattern where the Innovators are the first to try and adopt the innovation and later spread knowledge of the innovation to the other adopter segments. This interpersonal interaction is a fundamental part of the 23

diffusion of innovations. According to Moore (2002), there is a gap between the Early Adopters and Early Majority for innovations that are discontinuous or disruptive in nature. This gap is defined as the chasm, and it explains why some innovations crash and burn although initial being popular. According to Moore (2002), it s important for businesses to target a niche market and use that as an entrance into other niche markets or bigger markets. Moore (2002) also stated that it s better to focus on whole product solutions as Early Majority might not be as willing to adopt different pieces in order to achieve the benefits. According to Wejnert (2002), it s important to recognise that innovations are influenced by their environmental context and that a successful diffusion is dependent on how suitable it is to its environment. The environmental variables include at least political, economical, cultural and ease of access (Wejnert, 2002; Hall & Kahn, 2003; Hornik, 2010). James (1993) refers to these factors as externalities and states that they affect both practicality and benefits of adoption, and also an adopter s willingness and ability to adopt an innovation. Rogers also states that communication channels affect the adoption, and the mass- media channels are more effective in creating awareness of the innovation, which is important in the early stages of the decision to adopt where interpersonal channels, like word- of- mouth are more important in the later stages (Rogers 2003). 3.1.2 Innovation characteristics Another important aspect that helps understanding the rate of adoption is the characteristics of the innovation itself. These are generally defined as characteristics that can be applied to a given context of an innovation. Rogers defined five characteristics: (1) Relative advantage, (2) Compatibility, (3) Complexity, (4) Trialability and (5) Observability. The individuals perception of these characteristics for a given innovation will influence the rate of adoption by lowering the individuals uncertainty of the innovation. The perceived 24

attributes of an innovation are the most powerful indicators of adoption rate, explaining between 49 per cent and 87 per cent of the variance in adoption rate (Rogers, 2003). Relative advantage is the degree to which an innovation is perceived as being better than the idea it supersedes. For instance; cost, social status, convenience and satisfaction are elements of relative advantage. Compatibility is the degree to which an innovation is perceived as being consistent with the existing values, past experiences and needs of potential adopters. A high compatibility will decrease the uncertainty of the innovation. Hence, the rate of adoption will increase as compatibility makes for less change in behavior for the users. An innovation can be compatible in three ways: sociocultural values and beliefs, previously introduced ideas/innovations and needs. Complexity is the degree to which an innovation is perceived as being hard to understand and use. It can be hard to adopt an innovation that requires new knowledge and skills. Excessive complexity is an obstacle and is negatively correlated to the adoption. Trialability is the degree to which an innovation can be experimented with on a limited basis. The better ability to try out the innovation, the faster the adoption will be. Trialability, therefore, is positively correlated with the rate of adoption. Trialability also has an impact on the innovation- decision process as reinvention might occur during the trial of the innovation. Reinvention implies that the success of an innovation depends on how well it evolves to meet the needs of more and more demanding risk- averse adopter groups. No process or product can rest on its laurels. Instead, continuous improvement is the key to spread an innovation - in other words - reinvention can create faster adoption. Observability is the last characteristic of innovations, which is defined as the degree to which the results of an innovation are visible to others. A high visibility of innovation fuels 25

peer discussion, which lowers uncertainty and increases adoption rate. Innovations that are perceived by individuals as having greater relative advantage, compatibility, trialability, observability and less complexity will be adopted more rapidly than other innovations (Rogers, 2003) 3.2 Hofstede's cultural dimensions theory Hofstede (1980) defines national culture as the collective programming of the mind, which distinguishes the inhabitants of one country from those of other countries. Basic values and beliefs are acquired early in life through socialization and education (Hofstede, 1999). This defines inhabitants of a nation that make them share certain basic beliefs, assumptions and tendencies along with certain preferences over others (Tilburg, 1996). Hofstede's cultural dimensions theory can be interpreted as a classical organisational theory. This is due to the basis of the data interpreted in order to calculate the national cultural dimensions. The data was collected between 1967 and 1973 by analysing a large database of employee value scores within IBM. The framework has since evolved and 2 dimensions have been added since its origin to its present with 6 dimensions. In 2010, Hofstede released new scores for 76 countries partly based on replications and extensions of the IBM study on different international populations and by different scholars (Hofstede, 2010). The theory consists of 6 dimensions: Power Distance, Individualism, Masculinity, Uncertainty Avoidance, Pragmatism and Indulgence (Hofstede, 2010) Researchers state that two of these dimensions have a correlation with innovation acceptance and diffusion (Triandis 1995: Hofstede 1999). The first and most critical dimension impacting an innovation s adoption is individualism/collectivism (Triandis 1995; Steenkamp, Hofstede & Wedel 1999; Chandrasekaran & Tellis 2008; Flight et al. 2011, Dwyer, Mesak & Hsu, 2005). Acceptance at the early stage of the innovation is fostered in collectivist societies where in- groups are influential (Dwyer et al., 2005). The second is Uncertainty Avoidance, which deals with the fact that the future can never be known. Where a high Uncertainty Avoidance leads to a slow acceptance and diffusion of 26

innovations (Kalliny & Hausman 2007; Perez- Alvarez, 2009). Based on this these two dimensions will be accessed. 27

Chapter 4 - Introduction of cryptocurrencies The following chapter serves to define cryptocurrencies in order to obtain a deeper understanding of the phenomena. This is done by a technical evaluation of some of the most interesting facets of the payment protocol, stating how transactions work and how it is compared to traditional electronic payment systems. Aspects such as security, international payments, capital controls, volatility and black market activities along with regulation of technology are evaluated. These are all areas that have been identified to be of importance for the innovations based on the interviews and secondary data addressed in this thesis. The outcome of this chapter is a table where advantages and disadvantages are illustrated for the innovation of cryptocurrencies based on Bitcoin. This table serves as a foundation for the later analysis as theorist like (Dirksen, Ament, and Go 1996; Marshall 1990; Meyer, Johnson, and Ethington 1997; and Rogers 1995) states that Innovations can have a clear, unambiguous advantage in either effectiveness or cost- effectiveness. Naturally, this table contributes to identify drivers impacting its adoption and answers the first part of the problem question, what is cryptocurrencies. Virtual currencies are not a new phenomenon. The inception of the concept is usually located in some distribution lists in the mid nineties (Barok, 2011:B2). Nowadays, there are a lot of virtual currencies available on the Internet, such as Pecunix, e- gold, Linden dollars and Facebook Credits. Despite the increased availability in virtual currencies, none of these have ever succeeded in becoming mainstream and widely adopted (Ernstberger, 2009). Throughout history, several virtual currencies have fallen under design faults resulting from a lack of trust (Dawson, 2013). In 2008, the pseudonym of Satoshi Nakamoto introduced a whitepaper describing the first cryptocurrency, and a year later, Nakamoto released the first cryptocurrency software to the public with his software client based on an open source licence (En.bitcoin.it, 2014). 28

The cryptocurrency was introduced as Bitcoin and was based on the technique of cryptography. Ever since the launch of the Bitcoin, several other cryptocurrencies have been introduced. All of these are based on the Bitcoin protocol since it is open source and freely available for everybody to study. This means that everybody with the right knowledge can create their own cryptocurrency based on the open source Bitcoin protocol with their modifications. The creation of these cryptocurrencies are also referred to as alternative- coins or altcoins (TheBitcoinNews, 2014). Mapofcoins.com suggests that there are more than 350 in circulation as of March 2014 (Mapofcoins.com, 2014). The development is quite rapid as new altcoins are introduced and others are abandoned just as quickly. Some are purely created with the intention of a quick economic profit in mind. These are characterized as pump and dump schemes where individuals are encouraged to invest in the alt- coin and after a while, the creators abandon the project with the invested money (En.bitcoin.it, 2014). Other cryptocurrencies have shown to be more serious as they have been around for a longer period of time and thus have gained more momentum. Examples of these are Dogdecoins, Litecoin, Namecoin, Peercoin and Mastercoin. The table below illustrates the main differences between Litecoin, Dogecoin and Bitcoin. A block indicates the average time it takes for a transaction to be fully verified by the network and thus spendable. Bitcoin (BTC) Litecoin (LTC) Dogecoin (Doge) blocks every 10 min coin supply* 21 million coins will be available hashing algorithm SHA256d Market Cap: $144,000,000 (Jan 5th, 2013) Launch Date: January 3rd, 2009 blocks every 2.5 min coin supply* 84 million coins will be available hashing algorithm scrypt Market Cap: 150,000 BTC Launch Date: October 2011 blocks every 1 min coin supply* 99 Billion coins will be available and 5 Billion added every year. hashing algorithm scrypt Market Cap: $56,000,000 Launch Date: December 2013 Table 4.1 Source En.bitcoin.it, 2014 - Altcoins 29

4.1 Definition of cryptocurrencies Since the introduction of cryptocurrencies, several definitions have been introduced depending on the context evaluated in. This research explores the phenomena in an innovation context and thus a more holistic view with a technical perspective in mind. Recently the Fed Vice President of St. Louis, David Andolfatto, defined cryptocurrency as a set of rules written down as a computer program designed to (Andolfatto, 2014): A) Create and manage a supply of digital currency units B) Process payments between users by debiting/crediting digital accounts This definition seems to cover the basics of cryptocurrencies and implies that it generally consists of two parameters: a currency and a payment protocol (C2:B2). The definition is coherent with the focus of this research as it also includes the technical perspective. It can be argued that the innovation of cryptocurrencies, including Bitcoin, is at the center of a three- way intersection, interfering with domains like technology, policy and finance (Coindesk, 2014). Figure 4.1 - Source: Coindesk, 2014 - Cryptocurrencies domains 30

This makes it a rather complex innovation spanning across the domains of policy and finance, which in general is believed to be more strictly regulated and less open towards innovations than the area of technology. 4.1.1 Extracting the currency aspect of cryptocurrencies Addressing cryptocurrency in the currency s aspect in today s financial system reveals that it is not a traditional currency as it does not comply very well with traditional currency standards. In its simplest form, a traditional currency serves three purposes (BBVA, 2013): Medium of exchange: As a means to bypass the problem of coincidence of wants, which exists in a barter economy. For a currency to be effective as a medium of exchange, it needs to be liquid and widely accepted Store of value: As a risk- less medium to store wealth, the value of a currency needs to be predictable Unit of account: As a benchmark to measure the value of all other goods and services transacted in As a medium of exchange, most cryptocurrencies satisfy the coincidence of wants but lack the liquid aspects as the widespread adoption of most cryptocurrencies is still limited. As a store of value, most cryptocurrencies like Bitcoin have shown to be highly volatile. This implies a risky store of value. When it comes to unit of account, cryptocurrencies role as a unit of account is still confined to a small group of businesses and individuals (BBVA, 2013). Cryptocurrencies, such as Bitcoin, only exist on the Internet and are decentralised and use peer- to- peer technology, which means that they are not supported by any central bank, state or tangible materials like gold or other precious stones (B2). They use the technique behind cryptography to control and transfer the money. Most cryptocurrencies, like Bitcoin, are transferred directly from one person to another via the Internet without going 31

through a bank, clearinghouse or third party. This makes it possible to transfer funds instantly and with minimal or no fees (A2). Most cryptocurrencies are irreversible once committed to a permanent and fully publicised in an online accessible public ledger. In the case of Bitcoin, the public ledger is called the Blockchain (C3). Brezo and Pablo state in their research papers about Issues and Risks Associated with cryptocurrencies that the appearance of a currency (Bitcoin) with such special characteristics leads to a new scenario which possibilities have never been explored before. (Brezo & G Bringas, 2012) It can be argued that cryptocurrencies do not currently comply with the traditional currency standards known. Thus, this innovation of cryptocurrencies may still hold promise as it can be characterized as an emerging technology that has to mature. Some suggest that revolutionary part of the innovation is found within the payment protocol (Antonopoulos, 2013). The focus of this thesis therefore strives towards the payment protocol rather than the currency, since the payment protocol seems to be the most innovative aspect of the cryptocurrency (Antonopoulos, 2013). Thus, the currency aspect is still a main part of the innovation of cryptocurrency and cannot be left out of this research. Since all cryptocurrencies are based on the Bitcoin Protocol with some modifications as previously discussed, the thesis will strictly focus on Bitcoin as the main driver for this research. This should be seen in relation to Bitcoin as the first and most popular cryptocurrency and the biggest in terms of usage and network. 4.2 The Bitcoin Protocol - How a transaction works In order to grasp the technical complexity behind Bitcoin and its ecosystem, a detailed explanation of the major ideas behind the Public Bitcoin Protocol will be explained in an easy and comprehensive way in this chapter. This is done in order to create a basic understanding of the principles behind the technology of the protocol to evaluate its potential. 32

Bitcoin is mathematically designed to ensure that the money supply increases at a fixed rate and slows over time and then stops altogether when it reaches about 21 million. Bitcoin is divisible with its smallest unit being 0.00000001 of a Bitcoin (Blockchain.info, 2014). The value is purely determined by demand as supply is gradually fixed. On the 22nd of November 2013, a transaction amounted to 194.9 Bitcoin, which equals more than 147 million US dollars, was transferred. The transaction was done without any transaction fees. (Blockchain.info, 2013; Southurst, 2013) In order to transfer and receive Bitcoins, both users must have a wallet. Wallets are files that provide access to multiple Bitcoin addresses. An address is a string of letters and numbers, such as: 1IOLMwZEPkjEPeCh43BeKLUybLCWrfDpN. Each Bitcoin address can have its own balance of Bitcoins. Some might consider an address to be equal to a bank account, but it is slightly different; Bitcoin users can create as many addresses as they wish within their wallet (En.bitcoin.it, 2014). In practise, most wallets generate a QR code that can be scanned instead of typing in all the digits in the address. Figure 4.2 - Source En.bitcoin.it, 2014 - Transaction signatures 33

4.2.1 Creating a new address When a user wants to receive Bitcoins, a new address can be created for the payee to send payment to. What really happens is that a cryptographic key pair is generated. The cryptographic key consists of a private key and a public key. When a message is signed with a private key, which only the user knows, it can be verified by using the matching public key, which is known to everyone. The new Bitcoin address represents a unique public key where the private key is stored in the user s wallet. The public key allows anyone to verify that a message signed with a private key is valid (En.bitcoin.it, 2014). 4.2.2 Submitting a payment The payee uses a client to transfer the amount of Bitcoins to the user s account. The user s wallet holds the private key for all his addresses. The Bitcoin Client signs his transaction request with the private key of the address he is transferring Bitcoins from. Anyone on the network can now use the public key to verify that the transaction request is coming from the legitimate account owner. 4.2.3 Verifying the transaction (mining) In order to verify the transaction in the decentralized network, miners are used. Everybody can become a miner with the right software and computer power. The incentive for miners to join the network is that, upon verifying transactions, they will be paid a small reward in the form of Bitcoin. We will explain this in the following section. The Bitcoin miners bundle or wrap up the transactions from the last 10 minutes into a new transaction block (En.bitcoin.it, 2014). The miners use computer power to calculate cryptographic hash functions (Nakamoto, 2008). 34

Cryptographic hash functions transform a collection of data into an alphanumeric string with a fixed length, called a hash value. Small changes in the original data drastically change the resulting hash value. It is therefore impossible to predict which data set will create a specific hash value. In order to create different hash values from the same data, Bitcoin uses nonce. A nonce adds random numbers to the data prior to hashing, resulting in a completely different hash value (Peck, 2012). In order to explain how the cryptographic hash functions with nonce, a fictitious example will be given (Peck, 2012): The root of all evil becomes 6d0a1899 086a (56 more characters). The root of all euil becomes 486c6be4 6dde (56 more characters). The root of all veil becomes b8db7ee9 8392 (56 more characters). Miners are forced to generate many hashes with different nonces until they find one that works. It can more or less be compared to look for a needle in a haystack (Peck, 2012). When a miner is lucky and wins this process, each block includes a coinbase transaction that pays out a certain amount to the winning miner. Mining can be compared to traditional gold mining. Bitcoin miners are working in a Bitcoin mine containing a total of 21 million bitcoins. Instead of digging gold, Bitcoin miners must calculate difficult mathematical problems by using their computer power. When a miner is lucky to solve the problem he is rewarded with new Bitcoins like a gold miner digging for gold. 4.2.4 Transaction verified With time passing on, old transactions get buried beneath more recent transactions. For anyone to modify or manipulate the details of previous transactions, they would have to redo the work the previous miners did. This is because any changes require a completely different winning nonce in order to redo all the work of the subsequent miners. As the Bitcoin network is gaining more and more popularity, in terms of miners and computer 35

power, this becomes nearly impossible as it would take billions of computer power to do this (Peck, 2012). 4.3 The Bitcoin Protocol and Traditional Electronic Payment Systems. In order to comprehend the potential of the Bitcoin protocol within the financial sector, a brief study of traditional centralized electronic payment systems must be done. There are over a dozen proposals for electronic payment systems on the Internet. This assessment is limited to the perspective of paying online with a credit card. It is believed that transmitting a credit card number over the Internet more or less always raises several difficulties (Tanaka, 1996). 4.3.1 Challenges for Traditional Electronic Payment Systems One of the main difficulties is security and fraud protection because the Internet is an open system. Another difficulty is that credit cards can only be used by authorized parties and disables the peer- to- peer usage. This often means that small shops, start- ups or individuals who want to receive payments, often have to be verified and pay an amount in fees for being able to receive credit cards. Furthermore, every time a payment is received, a small fee is charged. Although this fee is relatively low, it can be a significant cost when the payment itself is very small. Another concern is privacy. As credit card payments leave residual records of expenditure, those who issue the credit cards know the exact buying behaviour including where and when it has been used. This means that it is fully traceable. In general, most payment systems are more or less trying to cope with the above mentioned issues (Hance & Balz, 1999). According to the extent to which these systems cope with these problems, they can be classified into three digital cash program categories (Tanaka, 1996). 36

Credit card type Figure 4.3 - Source Tanaka, 1996. - Credit Card Type The first category is the Credit Card type (i) where the customer sends his ID or encrypted credit card number to the shop. The shop asks for payment to the credit card company, which confirms the customer by e- mail. After the confirmation has been made, payment is made. This solution is somewhat meant to be compliant with good safety, but it lacks the peer- to- peer, low fees and untraceability aspect. Similar credit- card based solutions are used by Mastercard and Visa based on encryption (Tanaka, 1996). 37

Check type Figure 4.4 - Source Tanaka, 1996. - Check Type The second category is Check type (ii) where person A issues an electronic check. He sends it to person B and informs the bank of his check. Person B asks for payment to the bank. After the confirmation, the bank transfers money from person A s account to person B s. This solution is meant to comply with security standards, peer- to- peer and low fees but is fully traceable. There have been several proposals for this type of systems of payment. One of these is Cybercash, which was acquired by VerSign and later Paypal. It is believed that Paypal and Western Union use a modification of this model (Ford, 2005). 38

Cash type Figure 4.5 - Source Tanaka, 1996. - Cash Type The third category is cash type (iii). Person A asks the bank to issue digital cash. The bank issues digital and reduced the account by that amount. He sends it to person B. Person B asks the bank for payment. After confirming that the digital cash is not double spent, the bank increases person B s account by that amount. Note that the bank does not recognise the sender of that digital cash to person B. This solution aims to be secure, peer- to- peer friendly with low- fees and is untraceable. In practise, this will require an Internet user to open an account with real money at an Internet- based bank. The customer asks the bank to issue a certain amount of digital cash for use on the Internet. The bank issues this digital cash using encryption and deducts the funds from the established account (Tanaka, 1996). In order to achieve untraceability on the Internet, encryption has to be fully employed to prevent untraceable money from being easily copied and spent twice, a phenomenon known as double- spending (Tanaka, 1996). The digital cash system is secured by two integers, which have a special mathematical relation, whereas no other person or institution, besides the bank, can imitate this relation. 39

It would therefore take an infinite amount of time to duplicate this relation in the absence of the bank s secret key. 4.3.2 Comparing Bitcoin with Traditional Payment Systems Comparing the Bitcoin protocol to the traditional payment systems evaluated in the previous section, the (iii) Cash Type has several similarities to the Bitcoin protocol. It can therefore be stated that the overall theory and principles for a payment system that is secure, peer- to- peer friendly with low- fees and untraceable are nothing new. The paper quoted about the description of the Cash Type system by Tanaka is dated back to 1996. 4.3.3 Security In general, traditional payment systems are struggling with security and fraud protection and have a strictly authorized procedure that disable the peer- to- peer usage. Bitcoin as a payment protocol is immune to these issues whereas the ecosystem can be exposed to risks (A7). Fraud with credit cards amounted to $190 billion in the US in 2010. This was stated by a report from LexisNexis (LexisNexis, Javelin Strategy & Research, 2010). One of the main issues with the traditional payment card system is that it is not suitable for online commerce (7A). When person A wants to make a payment to person B, all his credit- card information is used and handed over through a secure connection. This means that person B can abuse the payment card or anybody else that gets a hold of the information. It is worth mentioning that several providers of online payment gateways are trying to protect this information by adding an extra layer of security with, for example, double authorisation. This scenario is not possible with the Bitcoin protocol as the only information exchanges is the amount of Bitcoins being exchanged. No account information is therefore exchanged like with that of credit card payment. This is due to the fact that a new address is created for transferring Bitcoins as explained in the previous section. 40

The system of the Bitcoin protocol has been proven to be secure so far. Fraud is mainly at the expense of the companies dealing with Bitcoin due to internal security issues or local storage of the user. The security concern has been proven to be true as many services delivering Bitcoin storage have been compromised and Bitcoins have been lost (Coldewey, 2012: A4). It is important to highlight that the Bitcoin protocol does not include a method for safely storing Bitcoin. Storage is delivered by three parties in terms of wallets developed. At the moment, users can choose to trust a company for storing or by storing them on a private device. One may argue that the security and fraud aspect has been moved from the payment system towards the user. This means that Bitcoin presents some specific security challenges for the user when stored on a private device (Kaminsky, 2013). If the user is not careful, he can inadvertently delete or misplace Bitcoins, and once the digital file is lost, the money is lost, just as with paper cash (Brito & Castillo, 2013: A9). The user needs to protect his private Bitcoin address. Otherwise, it may leave him open to theft. Bitcoin wallets can be protected by encryption, but it is the user s responsibility to activate the encryption. If not, Bitcoin could be stolen through malware (Doherty, 2011). Another point worth mentioning is the fact that merchants often pay a certain amount or percentage in order to accept payments with credit cards, such as with Visa, Mastercard or Dankort (Karol, 2013). The fees are directly connected with maintaining and running the centralised payment system along with preventing fraud (A7). As the Bitcoin system is decentralized and driven and maintained by the miners, the cost is considerably lower. The design of the protocol implies that each miner contributes with a computer s processing power towards maintaining the infrastructure needed to support and authenticate the currency network (Brito & Castillo, 2013). 4.3.4 Decentralized payment protocols The idea of a public decentralized payment protocol is nothing new. Throughout the 1990s, several suggestions have been made, but none of these ever succeeded in a broader 41

context (B1). Most of them have fallen under design faults, such as the double spending problem resulting from a lack of trust or have reached limited adoption. The protocol of Bitcoin seems to have broken with this pattern and has been very thoroughly tested in its few years of existence. More people trust the algorithm and the protocol that underlie Bitcoin. This also means that Bitcoin may have the possibility to become mainstream and widely adopted as an alternative to establish payment protocols (Dawson, 2013). The main reason why the Bitcoin Protocol seems to have broken with the failure pattern of decentralized payment systems is that, with its invention, it introduces a new technique to solve a common problem. The problem covers how to reach consensus or agreement within a decentralized network. The problem is also referred to as the Byzantine fault tolerance problem and covers the double spending. The Byzantine fault tolerance problem was introduced in the 1980s (Lamport, Shostak & Pease, 1982). 4.3.5 The technical breakthrough The technical solution to Byzantine fault tolerance problem is included in the software released by Nakamoto in 2009. The solution clearly describes how consensus is created within a network of equal actors where nobody knows who to trust or not. More specifically, this covers who to trust if a person double spends, and which transaction should be regarded as the right one. A common solution to this problem is to give each actor in the network one vote, which makes it possible for malicious persons to run several instances of the software and thus gain an advantage in terms of votes and manipulate the system (Olesen, 2014). Nakamoto s solution to this implies that votes are based on computer power. This is exemplified if one actor s computer can make X calculations per second, he will get Y votes to vote which transaction should be approved. Whereas another actor can make 2*X calculations per second and therefore will be rewarded 2*Y votes (Olesen, 2014). This is also referred to as Proof of work (C3). This solution makes it difficult for a malicious 42

person to manipulate the system as it requires several resources in terms of calculation power in order to gain 51% of the network and thus be able to manipulate it. The strength of the Bitcoin network therefore is in the size of the network calculated in computer power. It can be argued that Bitcoin is a spectacular breakthrough within computer science as it consists of a practical solution to the Byzantine fault tolerance problem that has existed for more than 30 years. (Lamport, Shostak & Pease, 1982) The underlying technology and protocol of Bitcoin with its solution to the consensus problem is therefore a truly disruptive technology. It makes it possible to create decentralized databases for all sorts of imaginable subjects, for example, asset management in terms of stocks, real estate or decentralized dropbox, phonebook and others (Olesen, 2014). The main benefit for the Bitcoin protocol is that it is proven to work well in practise. This is something that has never been seen before to the extent as seen with the Bitcoin currency (Antonopoulos, 2014). The transparency of the protocol due to the open source license makes it possible for everyone with the right technical knowledge to evaluate and truly understand the design and nature of the complex system. Even though the Bitcoin protocol seems to have proven its worth since 2009, it is important to notice that it is only within the last few years that it has gained popularity, reaching out to a greater population and thus is still on its early development stage. It is therefore important to point out that it is not infallible, and the theory may not be applicable in the future (Brito & Castillo, 2013). With the increased popularity and economic value of the Bitcoin currency, incentives for hacking the protocol is only going to increase. The protocol is maintained by a small group of core developers along with several contributors 43

(Bitcoin.org, 2013). Anyone with the right skills and knowledge can become a contributor. The project is listed at the GitHub repository where instructions for contribution is also found. 4.4 A potential remedy for International transfers, remittance and the unbanked Several Bitcoin experts argue that the technical breakthrough of the Bitcoin protocol may open up for opportunities within markets as international and domestic transfers, remittance and the unbanked (A3:B3). These opportunities are evaluated and discussed below. Remittance covers the transferring of money by a foreign worker to an individual in the home country (Lagorio, 2014). The value of international remittances has increased significantly in recent years (Centre for Social and Economic Research Warsaw, 2012). It is estimated that the worldwide remittance economy approximately amounted to 514 billion USD in 2013 (Data.worldbank.org, 2014). The average remittance cost is 8.58% of the amount sent (The World Bank, 2013). 44

Bitcoin may have a potential within the market of remittance and international transfers. The table below illustrates different methods of international transfers and gives an indication of some of the potential advantages allocated with the Bitcoin protocol. International bank transfer Western Union Bitcoin Time 2-5 days 5 minutes 1,5 seconds* *average 10 min to be fully spendable and visible in the blockchain. Fee 50-200 DKK 10-15% + 90 DKK Less than 0,25 DKK Table 4.2 Source Bitcoin Faktafolder, 2014 - International bank transfers The table illustrates that Bitcoin has advantages when it comes to international transfers. It is not limited across borders and has a relative advantage in terms of speed as it only takes 1.5 seconds to receive it with none or a very low transaction fee involved. The average time for verifying a transaction so it s consumable is approximately 10 minutes. Western union may seem to be faster, but this requires a nearby branch where money can be claimed. The relative advantage that is found within international transfers makes the Bitcoin protocol a potential alternative for the existing remedies for remittance. It is important to point out that at the current state, using Bitcoin for remittance implies fees for currency exchange. It is likely that the remittance has to be cashout to a local currency as payment with Bitcoin is still restricted to a few merchants that are mostly online. The fee for currency exchange differs from country to country, and not all countries may have a currency exchange available. Bitcoin Nordic, which is a Nordic based exchange, charges around 4%, where it is slighty lower than that of the United States where it s around 1% (Olesen, 2014). At the current state, there are only a few players on the Bitcoin 45

exchange market, which implies some restrictions for the users in terms of accessibility. Potentially, when Bitcoin matures, more actors will join the ecosystem, and greater competition could be applied to the exchange market and in lowering fees. Another main point is that addressing Bitcoin as a remittance is the regulation that is not clearly regulated as a currency (Rizzo, 2014). Andrew Brown, a specialist in cross- border payments, argues that the current high fees in the traditional remittance market are not just imposed by greedy service providers, but the majority of the fees comes from the added cost of compliance and regulation, which Bitcoin has not been exposed to (Brown, 2014). 4.4.1 The unbanked & developing countries Another main aspect when discussing the possibilities of Bitcoin is within developing countries where the banking and financial infrastructure may be less developed (A3:B3). An estimate suggests that 64 percent of people living in developing countries lacks access to traditional banking services (Yunus, 2003). Bitcoin offers low- cost banking available to anyone who wants it, in terms of digital wallets and a platform for payments (Andolfatto, 2014: A3). No questions are asked about creditworthiness, minimum deposit and financial history, only an email address is needed. In most countries, banks are required to know their customers and comply with anti- money laundering regulations, which are difficult to comply with (BBVA, 2013: B2). The result of this is that some families in developing countries may have difficulties opening a bank account that could be needed for savings, receiving remittances and other banking services. Several families especially the uneducated and the poor are having a hard time complying with the banks requirements for proper identification and thus can not open a bank account (B2). They may therefore be forced into a more expensive alternative. Bitcoin might prove to be a great alternative here, depending on the regulation that is going to be enforced. 46

Bitcoin also opens up for cross border and online trade for the unbanked as it gives them a medium to pay through with the assumption that more and more merchant will start accepting Bitcoin (B3). Looking at the merchants side, Bitcoin offers an open source financial system that is well functional where innovation can grow without permission (Spaven, 2013). In practise, this means that programmers can develop alternative protocols on top of the Bitcoin protocol in the same way that the Web and email are run on top of the Internet s TCP/IP protocol (Brito & Castillo, 2013). An example of this is the web wallet Kipochi, that launched a product that allows people in Africa to send and receive Bitcoins and convert them to and from the Kenyan mobile currency, M- Pesa (Spaven, 2013). 4.4.2 A political statement Bitcoin might also provide relief to people living in countries with strict capital controls (Brito & Castillo, 2013). There is no central authority that can manipulate issuing of Bitcoin, reversing transaction or preventing exchange of Bitcoin between countries (A1). Bitcoin therefore provides an alternative to individuals who desire an alternative of their country s devalued currencies or frozen capital markets. (Brito & Castillo, 2013). An example of this is to be found in Argentina where some have adopted Bitcoin in response to the country s dual burdens of a 25 percent inflation rate and strict capital controls (Matonis, 2013). Another main perspective is that Bitcoin could prove to be a great competitor to central banks or similar instances by forcing them to run responsible policies. If not, people may find an alternative in cryptocurrencies, such as Bitcoin where currency control is almost impossible to enforce (Andolfatto, 2014). 47

4.5 Volatility The currency of Bitcoin has proven to be highly volatile, which can be seen by observing the exchange rate. Addressing Bitcoin as an innovation, the volatility implies certain implications. Having a medium of exchange with a high degree of volatility may not benefit the adoption and could prove to be a drawback when the value of the exchange doesn t show a certain form of stability and thus create uncertainty among potential adopters. In 2013, Bitcoin went up 56 times its price (Coindesk, 2014). Figure 4.6 - Source Coinbase, 2014 - Bitcoin exchange rate The volatility is, by several commentators, pointed out to be a main drawback at the current state (Brito & Castillo, 2013). Some suggest that the volatility foretell the end of Bitcoin (Farrell, 2013) while others suggest that these fluctuations are stress- testing the currency and might eventually decrease in frequency as mechanisms develop to counteract volatility (Gurri, 2013). It seems logical that one of the main reasons for volatility is that the market is easily manipulated (Krill, 2014:A8:C8). This can be seen in relation to Bitcoin that is still an emerging technology where drivers as regulatory 48

uncertainty, limited transaction and trading volume along with a limited selection of exchanges directly influence the market (Polemitis, 2013). If Bitcoin reaches a broader mass adoption and then gains more momentum in terms of funds invested into the market, it will become harder to manipulate, and fluctuations will occur more seldomly (Krill, 2014: A8). Krill suggests that this could potentially happen within five to ten years (Krill, 2014). Other things that seem to affect Bitcoin s volatility include media coverage (Hobson, 2013). Overoptimistic media coverage of Bitcoin prompts waves of novice investors to pump up Bitcoin prices until it reaches a tipping point, and the value eventually plummets (Salmon, 2013: C8). 4.6 The black market and Bitcoin Often when Bitcoin is discussed publicly by policy makers or journalists, the question is if Bitcoin facilitates money laundering or payment for illicit goods and services. According to Andolfatto, the answer to this question seems to be yes, but so does US dollars and gold (Andolfatto, 2014: A7). Bitcoin transactions travel wallet- to- wallet where identities are disguised. In this sense, Bitcoin is like cash in facilitating illegal trades. On the other hand, all transactions are publicly available in the block chain unlike cash transaction (Andolfatto, 2014). Several cases suggest that connecting a real- world identity to a pseudonymous Bitcoin address may not be difficult (Brito & Castillo, 2013). This should be seen in relation to that of a person s identity or at least identifying information, such as an IP address, which is often recorded when the person makes a Bitcoin transaction at a website or exchanges dollars for Bitcoins at a Bitcoin exchange (Brito & Castillo, 2013). 49

An example of illicit goods and services traded for Bitcoin is the online marketplace Silk Road where illegal products like identity documents and illicit drugs were traded between users. The structure of the market place was based on the anonymous network TOR and the pseudonymous nature of Bitcoin. (Brito & Castillo, 2013). A report by Carnegie Mellon CyLab suggests that the total monthly Silk Road transactions amounted to approximately $1.2 million in June 2012. In comparison, the Bitcoin market constituted of $770 million in transactions during June 2013, when Silkroad still existed (Christin, 2013). 4.7 Regulation of technology In the following, regulation of technology will be evaluated and addressed in relation to Bitcoin. An innovation that roots within the domains of policy and finance is likely to be exposed to some form of regulation (Coindesk, 2014). A strict and stiff regulation could potentially slow the adoption process and limit the diffusion. The perspective in this section is to explore where Bitcoin stands when it comes to regulation in order to evaluate if it could be a barrier to adoption. One main question to consider when regulation comes into matter is what consequences it would have for an innovation like Bitcoin. The question can be addressed with relevance as the current design of Bitcoin enforces pressure and brings disruptiveness on the established norm. This chapter is based on an assessment of some of the regulative challenges that the Internet is currently facing. This is in relation to Bitcoin as an innovation that is reliant on the internet. According to Falzone from Stanford Law, technology can benefit tremendously from government involvement. Regulation may be part of the involvement, but thinking just in terms of regulation obscures some important points. (Falzone, 2013). An example of an innovation that was supported by the government is the Internet. It began as a creature of government funded research (Internetsociety.org, 2013). Ever since its birth, it has created a great foundation of all sorts of innovations that nobody could possibly have foreseen in its early stages and what makes up a massive and dominant industry today, 50

housing giant companies, such as Google, Ebay, Paypal and others. The great wealth of this industry is primarily fostered by private investments today, but within its development days, most of the fundings were governmental as the payoff horizon was far too long and unforeseeable to raise sufficient investments from the private sector. It can therefore be argued that without the government involvement, there might have been no Internet today, at least as we know it (Falzone, 2013). Even though the Internet started with governmental support, it has developed into an open system based on several open protocols. The further development of the internet is facing several issues. One of these challenges is network neutrality (Herman, 2006). The concern is whether the government should allow the owners of the infrastructure to adopt practises that favour or disfavour certain uses of data, application, or certain users, and if so, to what extent? (Herman, 2006). The answer to this questions will determine whether the Internet will continue to be an open system where innovations can rise, grow and disrupt without permission as seen with Bitcoin (Hunter, 2003). By allowing a more strict regulation of the Internet, innovations will stifle because the open architecture lets everybody in and allows newcomers to innovate without permission (Falzone, 2013). When permission has to be granted, it will limit innovativeness (Hunter, 2003). Falzone argues that there is no good market solution to this problem and stresses that it is important with government intervention if needed. He points out that the role of the government is to protect the public good by keeping the structure open and preserving the ability of new participants to use the network in new and unforeseen ways (Falzone, 2013). Even though governmental involvement may be beneficial, in some cases it may not be favorable. Another main aspect of the Internet is the great fuss about privacy. A 51

reasonable question is whether the government should regulate the information that websites collect and how they use it. In this case, Falzone argues that there is greater potential for a market- based solution. He stresses that within this area If there is sufficient demand, firms can compete with one another to provide technology that protects privacy. Moreover, the extent to which each technology is successful at protecting privacy can be measured reasonably well. (Falzone, 2013) Even though Falzone favours a market- based solution, he still points out that it implies some form of limitation as information costs are very high for users whereas many do not fully understand implications of data collection (Zarsky, 2004). An example of regulation within the privacy areas is the cookie directive issued by the European Parliament (Ec.europa.eu, 2014). Falzone points out that this might be the worst possible solution in some respects because it permits lots of tracking even when the user opts out of tracking. He elaborates his statement with A system that ostensibly prohibits tracking but really permits tons of it may be very confusing to consumers (depending on its implementation) and prevent the market from delivering a solution. (Falzone, 2013) With Falzone s view upon government regulation, there is no single way forward. The Internet is a clear example of this with the issues it is currently facing. It is therefore important that the discussion is rather nuanced when the topic of regulation of innovations is addressed. Falzone stresses that it is important that the government facilitates openness in the long run and in some cases support to new technologies in order for them to rise and shine. Ultimately, regulation can therefore be interpreted as something neither inherently good nor inherently bad (Zarsky, 2004). In many cases, technology is open to the public, and there might be a link or synergy between innovators and the government. The government can prove to be an important facilitator when it comes to cultivating new technologies that are having a hard time being supported by their own market (Falzone, 2013). Often when technology matures, the market may or may not create its own regulation. In the cases where the market creates its own regulation, it is best for the 52

government not to interfere as innovation will foster and grow naturally (Plassaras, 2013). The government should therefore only interfere when the market regulation or important players threaten openness and thus innovation. The aim must therefore be to strive towards keeping the technology as open as possible in order to facilitate innovativeness and creation of new markets that drive technology forward (Plassaras, 2013). Bitcoin is an example of a technology that has risen from the great innovativeness of the Internet but differs as it includes the area of currency issuance. This task is mostly reserved to central banks that are closely connected to governments. This means that Bitcoin touches upon a domain that has been more or less reserved to governments. This indicates that Bitcoin is probably subjected to regulations as conventional actors like financial institutions, clearing houses and central banks are absent in the network of Bitcoin (European Central Bank - Virtual currency schemes, 2012). This also means that the regulation these actors are subject to does not necessarily cover or apply to a phenomenon of Bitcoin (Plassaras, 2013). When it comes to regulation of Bitcoin, two areas are especially interesting (Bitcoin Faktafolder, 2014): taxation and legality. 4.6.1 Taxation The taxation aspect covers in which situations Bitcoin should be regarded as a currency or a good. This question is relatively important concerning the taxation of Bitcoin and how the user could be taxed from using Bitcoins. Goods for instance are, in general, objective to a less strict regulation than currency and other financial instruments that are for example covered by Anti- money laundering regulation (Christopher, 2013). In general, if Bitcoin is regulated as a good, it will be difficult to enforce taxation on currency dividends, e.g. from speculation or normal usage for the user. The reason for this is that trading between users without going through the official exchanges and Bitcoin brokers makes taxation nearly impossible (Bitcoin Faktafolder, 2014). 53

4.6.2 Legality Legality covers the aspect of a potential ban, which seems unlikely, but may be the case in certain countries (Bitlegal, 2013). Along with the legality comes consumer regulation. Currently, there is no noticeable consumer protection allocated in using Bitcoin in any forms (C4). This means that the consumer is not supported by any regulations concerning storing, paying or handling Bitcoin properly except normal legislation, which, in most cases, do not fit the domain of cryptocurrencies. This is supported by Yves Mersch, a member of the Executive Board in the European Central Bank. On a conference in March 2014, he replied when asked about ECB stand on Bitcoin: "In Europe, virtual currencies do not pose a risk to price stability or financial stability, but do pose a risk for users (Hamilton, 2014). It is generally unlikely that any form of consumer protection will be introduced as long as a regulation about taxation and legality is not presented. However, due to the current lack of a clear regulation, countries around the world are working on different proposals on regulating Bitcoin. 54

Bitlegal.net gives an extensive overview on regulation regarding Bitcoin in the different countries. Currently, only a few countries act hostile towards Bitcoin. Most countries have not come up with suitable remedies to regulate Bitcoin yet.. Figure 4.7 - Source Bitlegal.com, 14/3 2014 - Legal status of Bitcoin Regulation seems to be a complicated matter where Bitcoin doesn't seem to fit into the existing regulatory framework and thus be classified to exist in a legal gray area due to its decentralized design (Brito & Castillo, 2013). Having a non- regulated technology within the domains of finance and policy does not seem like an optimal solution in the long run for all parts involved. Policymakers should therefore define and clarify Bitcoin s broader regulatory status and also emphasize on revisiting existing regulatory barriers so Bitcoin can continue to foster growth and innovation without permission. As a technology, Bitcoin is neither good nor bad but more neutral. It indicates great potential and can also be used to illicit transaction, just like cash. It is unlikely that cash would be banned as it is only the illicit use of cash that is prohibited. This should also be the case with Bitcoin. 55

4.7 Summary The initial part of this thesis aims towards an exploration of the nature of cryptocurrencies to gain a better understanding of this technological phenomenon while obtaining general knowledge about the potential and current limitations. With the introduction of Bitcoin, a new chapter about digital currencies has been commenced. This research suggests that predicting the future development within this field is complex with several variables in the domains of policy, finance and technology influences. Despite the uncertainty surrounding the future perspective of cryptocurrencies, such as Bitcoin, it appears to be an interesting innovation with prospective that could strive innovation of the traditional payments systems. Additionally, developing countries may find great potential in the open protocol that can provide a low cost financial platform open for everybody. The decentralised design of the protocol and the usage of public key encryption and peer- to- peer networking contribute to a practical solution to comply with the double spending problem also known as the Byzantine Generals Problem. This is not only a breakthrough within decentralised currencies but also within computer science. Combining these properties creates a payment system that lowers transaction costs within international transfers and remittance and gives possibilities to individuals in strict capital controlled markets. Having said this, the innovation of cryptocurrencies also poses risks to the user at the current state in terms of security, volatility and regulation. Furthermore, the pseudonymous nature of transactions and free movement of the currency might appeal to black markets in terms of money laundering. With regards to regulation, it is suggested that some form of regulatory framework is applied. This framework should keep the innovation of Bitcoin open for all so it can foster innovation without permission while it deals with the illicit aspect of the technology. 56

This research has initially indicated that it is evident that the innovation of cryptocurrencies, such as Bitcoin, brings some positive aspects along with negative ones. These are identified with a certain precaution as the technology is still in its emerging phase but will act as a main foundation for a cost- benefit analysis for potential adoption in the coming analysis. Hall & Khan, 2003; Tolba & Mourad, 2011 point out that individuals decision to adopt an innovation is based on a cost- benefit analysis where variables are weighted against the cost of change. By studying the phenomenon from a holistic point of view where empirical findings from expert interviews along with the assessment of secondary data were included, it has been possible to acknowledge that cryptocurrency has certain advantages and disadvantages as an innovation. These are summed up on the next page and shortly elaborated. 57

Advantages and disadvantages for Bitcoin as an innovation: Advantages - Low cost and fast payment transfers The Bitcoin protocol opens up for considerable advantages within domestic and international transfers and the remittance market. Disadvantages - Volatility The Bitcoin market is still relatively small and thus easily manipulated. If a broader adoption is reached, the market will become less vulnerable to manipulation. - Financial Platform open for all. Everybody can open an account with the usage of an email address. Makes it an interesting innovation for developing countries. - Security and secure storage Bitcoin users should take care to learn about and prepare for security concerns just as they currently do for other financial activities. - Eliminates traditional fraud with payment cards The design of the protocol eliminates traditional fraud with credit cards - Black market activities The pseudonymous nature of Bitcoin can facilitate money laundering and trade of illicit goods and services - Privacy. Bitcoin users enjoy a higher level of privacy than do users of traditional digital- transfer services, who must provide detailed personal information to the third- party financial intermediaries that facilitate the exchange. - Regulation & consumer protection Currently in a legal gray area with no clear regulation. Makes it difficult for the consumers to know their rights. - Innovation without permission Due to the open source, everybody with the right knowledge can get involved. This can create stimulus for Financial Innovation Table 4.3 Source own production - Advantages and disadvantages for Bitcoin as an innovation 58

Chapter 5 - The cryptocurrency ecosystem This chapter aims to explain and describe the ecosystem of cryptocurrencies in order to understand its challenges. The actors in the ecosystem play an important role in the diffusion and adoption, as they are pushing the innovation in various ways to the potential users. Therefore, understanding their challenges is an important part of understanding what drives the diffusion and adoption of cryptocurrencies. The future of cryptocurrencies will partly be defined by the companies that are facilitating services based on the technology, hence their interests in using the technology is an important part of the diffusion and adoption. There is a great variety in the different services,. Therefore, an understanding of them requires a certain degree of classification. Depicting the different services, it is necessary to understand and exemplify the ways that 1 cryptocurrencies can impact a social system and also to understand what challenges it s facing from a consumer adoption perspective in a given service context. Adoption is very much a chicken- and- egg question where on one side, consumers lead the the way for businesses to provide solutions to their demands, and on the other side, businesses provide services that drive consumers to adopt (Atonis, 2014) - a concept that is often referred to as consumer- pull and technology- push (Martin & Martin, 1994). Understanding the potential to be diffused and adopted therefore requires an understanding of the ecosystem surrounding cryptocurrencies. As explained earlier, it is a technical protocol at its core that's dependent on numerous systems in order to function and live up to the demands of its users. Mapping the ecosystem makes it possible to understand the complexity and the different areas that has the potential to influence the diffusion and adoption. The point of mapping the ecosystem is not to identify the actual companies as this thesis never intended to find these. The point is to understand the service types that are 1 Social system as Rogers define it. 59

available. Another reason why the companies themselves are not interesting is because they are constantly changing and will look very different a few years from now. Categorizing the actor roles and the service types creates valuable knowledge about the challenges and opportunities that cryptocurrencies are facing from an adoption perspective, knowledge that will further be used in our understanding of the diffusion and adoption. In order to understand and explain the ecosystem, we ll first analyse it from a supply chain perspective. Four steps have been identified in the supply- chain based on our exploration of Bitcoin: (1) Obtain and load a wallet, (2) Transact with the network, (3) Confirmation by the network and (4) Store remaining balances of funds, for instance Bitcoins. The following figure illustrates the supply chain: Figure 5.1 - Source own production - The four steps of Bitcoin 60

1. Obtain and load a wallet Numerous vendors offer users wallets. The wallets can be loaded through a) cash deposit, b) bank transfers or through c) ATM machines. 2. Transact with the network Various ways to make transactions on the network. These include a) payment processors, b) exchanges and c) investment 3. Confirmation by the network The peers confirm the transaction through mining 4. Store remaining balances of funds 2 a) in wallet, b) in bank account c) withdraw via ATM or exchange agent Five categories were identified within the supply- chain that facilitate the needed services the steps require. The identification and description of the five categories summarize the ecosystem, and can be seen on the next page. 2 Funds would be exchanged and stored in another currency. 61

Servic es/co mpon ents Wallets (Step 1, 4) Payment (Step 1, 2) Exchanges 2) (Step Hardware (Step 1,3,4) Investing (Step 2) Type Software wallets Cloud and Mobile Wallets Payment Service Providers Payment Networks OTC[D8] Exchanges Spot and Forward Exchanges Cryptocurrency mining hardware ATMs cryptocurrency ETFs 3 Cryptocurrency Venture Funds POS systems Risk Malicious software or loss of wallet leads to loss of funds like bitcoins. Funds are protected by a third party. Competition puts downward pressure on fees Low switching cost between different providers OTC exchanges, rely heavily on user counterparty reputation. Regulation can impact legality. Mining hardware may cost more in energy than the benefits it generates. Success of ATMs depends on acceptance and security measures. Volatility of BTC and security issues may make returns completely speculative. Lack of acceptance of BTC may not award attractive 4 exits for the VCs Comm ents Necessary part of the cryptocurrency infrastructure Essential role for the diffusion from a business perspective. The fall of prominent exchanges has led to focus on better and more secure services. Table 5.1 Source own production - Cryptocurrency ecosystem Spawned new market for Hardware and equipment, built specifically for cryptocurrency mining. ETF are yet to gain popularity due to high volatility of the currency. VC s are increasingly funding companies providing services within the ecosystem. The ecosystem, and therefore also the payment process, is largely dependent on its actors. Without miners, there will be no confirmation of transaction. Without exchanges, consumers are unable to access funds like bitcoins. Without wallets, no transferring of funds. Actors in the ecosystem are dependant on the success of each other in order to drive forward adoption. As of right now, the ecosystem is very fragile. Hacking, theft and 3 Exchange- traded fund. 4 Venture Capital. 62

loss of Bitcoins have proven this on several occasions (Steadman, 2014; Hern, 2014). Businesses should be very aware of this dependency as delays or failure of one might spell the doom of others. To ensure the successful adoption of an innovation in an unstable ecosystem, companies should try to facilitate services that carry low external risks as this will help ensure stability even on a fragile ecosystem. Companies should also assess the probability that other services will be successful and set their expectations right (Adler, 2006). The barrier of entry into the ecosystem is very low due to the open- source nature of 5 cryptocurrencies. Potentially, anyone can build a service based on its API without any kind of permission. The actors within the ecosystem are fragile, but the protocol has proven to be stable (Coldewey, 2012). The actors in the ecosystem are facing numerous challenges, but the openness and stability of the protocol help ensure a positive effect on the diffusion. Other studies have shown that the ecosystem as of now is mostly populated by companies that focus on a core competence and that few companies try to cover many features (Holdgaard, 2013). For innovators and early adopters, this is okay, but in order for the early majority to adopt, and therefore Bitcoin to become mainstream, whole product solutions need to be availabl, as this adopter segment isn t as willing to adopt different pieces in order to achieve the benefits (Moore, 2002). 5 Application programming Interface 63

Chapter 6 Drivers impacting diffusion and adoption The first part of the thesis strived towards bringing a deeper understanding of the phenomenon of cryptocurrencies with an in- depth study of Bitcoin. The extensive knowledge obtained in this part works as a knowledge bridge in order to better understand the diffusion and adoption of cryptocurrencies. It is believed that a solid knowledge foundation of the phenomenon can be beneficial in the understanding of diffusion and adoption and therefore make a more nuanced analysis with several different aspects in mind. Guided by the research question and the theory, this chapter explores and analyses the diffusion and adoption of cryptocurrencies with focus on adoption of Bitcoin. The Philippines have been explored with regards to factors related to their respective drivers for adoption where environmental context, user characteristics and innovation characteristics are emphasized (Rogers, 1995; Wejnert, 2002; Hall & Khan, 2003; Hornik, 2010). Rogers, among others, argues that it is important to assess an innovation within a given context of a social system as this influences the diffusion and adoption (Rogers, 2003). In this study, the Phillipines act as a social system in order to put matters in context for an applicable understanding. 6.1 Externalities and adoption readiness Rogers acknowledges in his adoption theory that there are externalities influencing adoption and diffusion of Innovations (Rogers, 2003). Despite this, his main focus is to explain why and how innovations spread and at what rate. In relation to Rogers theory, further studies have indicated and suggested that it is important to recognise innovations that are influenced by their environmental context, which means that they are reliant on externalities. It is suggested that these environmental variables include at least political, economical, cultural and ease of access (Wejnert, 2002; Hall & Kahn, 2003; Hornik, 2010). James (1993) refers to these factors as externalities and states that they affect both 64

practicality and benefits of adoption and also an adopter s willingness and ability to adopt an innovation. In the case with the diffusion and adoption of Bitcoin, it can be argued that externalities are the foundation of a successful adoption. It is unlikely that a diffusion of the Bitcoin will take place if certain externalities are not present or accessible. For example, Bitcoin is currently technology reliant, which means that users need to have access to the Internet via a device such, as a computer, smartphone or tablet. It will therefore be relevant to address the technological infrastructure. The following section is targeted at externalities in relation to adoption and diffusion of Bitcoin in the Philippines. The externalities are framed by the PEST framework for ensuring a satellite view of the external environment. The PEST analysis will indicate the current readiness of the Philippines along with highlighted possibilities and threats to the adoption of Bitcoin in the macro environment focusing on the scope of this research. The PEST framework implies a Political, Economic, Social and Technological analysis and has a direct relation to the externalities suggested by Wejnert (2002); Hall & Kahn (2003) and Hornik (2010). Within the Political analysis, a regulatory dimension will be included based on the discussion from Regulation of Technology. The Economic assessment will focus on the economic state of the country where aspects such as remittance, unbanking and accessibility to financial services are included. The Social dimension will include a closer study of demographic factors along with cultural factors. This is due to the scope of the research, which implies great focus on the consumer s adoption of new innovations as a means to understand the drivers of cryptocurrencies adoption. The Technology factor is framed around the technological infrastructure that is necessary for usage. 65

6.1.1 Introduction to the Philippines The Republic of Philippines is an island country located in Southeast Asia close to countries like Taiwan, China and Vietnam. The country has a population of 105 million people (Cia.gov, n.d.), making it the 13 th most populated country in the world. In addition to this, the country has approximately 12 million people living and working overseas (Philstar.com, 2012). The migrants frequently send funds back to their family in the Philippines. The country is distinguished from the rest of South East Asia by having English and local Tagalog as the official languages (Cia.gov, n.d.). In practise, this means that a big majority of the population is able to communicate and understand English. 6.1.2 Political / Regulation Regulation of cryptocurrencies, such as Bitcoin, in the Philippines is still an undefined area (A1). As of March 2014, the only authority that announced an official notice is the central bank also known as Bangko Sentral ng Pilipinas. Their announcement of the 6 th March 2014 consists of a warning advisory on virtual currencies for users. It has come to the attention of the Bangko Sentral ng Pilipinas (BSP) that virtual currencies like Bitcoin are now being exchanged in the Philippines. The public is hereby warned that such exchanges are not regulated by the BSP or by any regulatory authority in the country at this time. Thus, there are no existing regulations which would specifically protect consumers from financial losses if an organization that exchanges or holds virtual currencies fails or goes out of business. (Bsp.gov.ph, 2014) Along with this disclaimer, BSP list 5 warnings about virtual currencies. These include: Loss of money on a virtual currency exchange Digital currency being stolen/hacked Payments are direct and non- reversible Highly volatile Virtual currencies can be used for money laundering and other illicit activities 66

The press release does not indicate a stand on the two main aspects of regulations suggested in the chapter about Regulation of Technology but rather concludes that cryptocurrencies impose certain risks for users and are unregulated. This may not ease the adoption process as BSP do not mention any of the positive aspects allocated in using cryptocurrencies. In order to gain insights about the regulative landscape of the Philippines concerning cryptocurrencies, an extensive study by The World Economic (TWE) forum along with Boston Consulting Group could prove to be relevant. The research is on mobile financial service development in 20 developing countries including the Philippines where regulatory proportionality and regulation is evaluated in the context of allowing sustainable development of financial services through mobile phones (World Economic Forum, 2012). It is believed that this report can indicate how Bitcoin potentially could be regulated as Bitcoin would operate in the same field as mobile financial services. The research takes several aspects into consideration and focuses on financial regulation, given the potential risk of financial stability and consumer protection. The areas covered in the dimensions includes: financial sector regulation, telecommunications sector regulation, Mobile Financial Service (MFS) regulation and Policy and coordination along with consumer protection in terms of regulation and Enforcement and Administration (World Economic Forum, 2012). In general, these dimensions seem to be of great interest to cryptocurrencies as a direct correlation to these from the regulation perspective discussed in the chapter about Regulation of Technology can be drawn. The TWE assessment of the Philippines as shown below indicates that the regulatory landscape within the dimensions are neutral besides financial sector regulation where advantages are indicated. 67

Figure 6.1 - Source TWE, 2012 - Mobile financial service development The research does not embrace a deeper elaboration of its scores in the regulatory dimension except the explanation of how it was calculated. All the scores are comparative to the 20 countries researched mapped in the illustration below. Figure 6.2 - Source TWE, 2012 - Institutional and market environment 68

Despite the fact that the TWE research is a comparative research, several interesting aspects may be extracted from it. First of all, the Philippines have a high readiness for mobile financial services based on institutional environment covering regulation and consumer protection. This could indicate that policymakers in general are open towards new innovations within the area of mobile financial service, which cryptocurrencies are depending on. Secondly, the research indicates that the landscape within consumer protections is neutral - this means that no major obstacles are to be found within this area when it comes to mobile financial services. This may indicate positive signs for cryptocurrencies since the existing services do not seem to be limited by strict consumer regulation. Consumers in the Philippines may therefore, to some extent, be used to mobile financial services where regulation requires them to evaluate certain risks associated with using the product. Although the research by TWE gives some indications of the existing regulatory framework that stands on mobile financial services, it is still complicated to determine how regulation of cryptocurrencies will be enforced in the Philippines and how it will influence adoption. It is more or less certain that regulation will have an impact on the adoption among users. A clear defined regulatory approval of cryptocurrencies where a suitable consumer protection is enforced will ease the adoption substantially and move cryptocurrenies away from the current legal gray area. 6.1.3 Economic factors The overall economic landscape of the Philippines indicates great potential. The country will be the fastest growing economy among the Emerging Market Economies with a real GDP growth of 7.5% in 2014 closely followed by China with 7.4% (Euromonitor, 2013). The EMEs are characterized by fast growing consumer markets creating great potential for companies (Euromonitor, 2013). This could prove to be quite an interesting case for cryptocurrencies in general as increased consumption constitutes a great potential for companies within the ecosystem but also the innovation in general. Furthermore, Euromonitor has identified the Philippines to be among one of its new Asian Tigers along 69

with Indonesia, Thailand, Malaysia and Vietnam. The Asian Tigers show a distinguished characteristic by opening up for free trade agreements as well as attracting investors with their business friendly policies, young populations and competitive labour costs. (Euromonitor International, 2013). These are all characteristics that could prove to be in favor of cryptocurrencies. 6.1.3.1 The poor and unbanked Even though the future prospect looks promising, the country still faces massive poverty. According to the World Bank, the poverty headcount ratio was 26.5% in 2009. In other words, over one fourth of the population is living below the national poverty line (Data.worldbank.org, 2014). In 2009, a report by the National Statistical and Coordination Board in the Philippines revealed that 23.14 million Filipinos were living on 46.14 Pesos (PHP) equal to 1.04 US dollars (reading between the poverty lines: revisions in the official poverty thresholds, 2012). It seems obvious that these people living in poverty do not have access to financial services, such as banking. Their overall incentive may be weak for banking services, but a general way to get out of poverty is doing business. Doing business without a banking account could prove to limit trade geographically as it is difficult to receive payments. A main barrier to getting a bank account for these people is that the banking industry assigns too complex regulation as previously mentioned where it is required to identify its consumers. Some of these poor people may not have valid identification like passports or official addresses (B2). Another aspect is the large part of the Philippines population that is unbanked. A survey done by Consumer Finance Survey (CFS) in 2009 revealed that 8 out of 10 Filipino households did not have a deposit account. The quantitative research allocated with this thesis revealed that 53% of the respondents answered that they did not have a deposit account in a bank (Question 6). This indicates that there is still quite a large part of the population that is unbanked despite the growth in deposit accounts. The CFS survey further reveals possible reasons why the bank deposit penetration is so low. When asked, roughly 93% of those without a bank account cited that the main reason 70

for this was the lack of money. Others said that they do not need a bank account, cannot manage an account, minimum balance is too high or they do not like dealing with banks and financial institutions. Another main fact when it comes to banking is that a lot of Filipinos have a low degree in financial literacy (Euromonitor International, 2013). The majority are, in general, short term minded as they have low interests and lack considerable knowledge of saving and investing their money for income protection and retirement. Cash savings are mostly made for health and education. Along with these, many do not worry about the future and many spend their money as soon as they earn it (Euromonitor International, 2013). The large majority of unbanked also make payment cards relatively rare. The World Bank estimated that 7% of the population had a credit card in 2009 (Datatopics.worldbank.org, n.d.). This research indicated that 50.5% still do not have a payment card, and only 3.1% of the respondents had a credit card whereas 40.5% have an ATM card and 6.1% have a debit card (Question 7). The low adoption of payment cards implies that cash is still the king. Cash ensures consumers to stay within budget, and it is also the preferred mode of payment for most businesses (Euromonitor International, 2013). The reason for the limited adoption of payment cards may be several. Some of these include bargain shopping centres that usually give big discounts when a customer pays in cash for gadgets or goods in bulk. Although the Trade Department has made it unlawful, some establishments continue to impose additional charges on credit card payments. Some consumers who do not have sufficient knowledge on this keep on paying the surcharges or are forced to pay in cash (Euromonitor International, 2013). A study by the BSP about financial inclusion in the Philippines suggests that accessibility to banking services are limited to the more established cities. This is reflected in the 609 out 71

of 1.634 municipalities found in the Philippines that do not have a banking office. Furthermore, 23% do not have an access point in terms of an ATM. Access points, as defined by the AFI Financial Inclusion Data Working Group (FIDWG) and G- 20, are regulated units where CICO transactions can be performed (FIDWG). Figure 6.3 - Source FIDWG, Banking overview The lack of accessibility to banking in certain areas as indicated in the illustration above may have lead to a system supplemented by other innovative channels. Examples are mobile money, agents and ATMs with cash- in and cash- out capabilities (Report on the State of Financial Inclusion in the Philippines, 2012). The markets for alternative financial services have emerged, and these include pawnshops, money changers, remittance agents 72

and foreign exchange dealers. (ibid). These alternative financial services seem to have taken over where the banks didn't deliver and give services to the unbanked. It is estimated that these alternative financial services account for a considerable size of the total resources of the financial system. Thus banks are still the major players where bank branches and ATMs serve as the basic distribution channels of financial services (Report on the State of Financial Inclusion in the Philippines, 2012). There are several highlights in the economic landscape that create an interesting case for cryptocurrencies with its relative advantages in creating a financial platform open for all. The quite large amount of poor people and the unbanked along with a limited accessibility, banking services constitute a great potential. The case is not only allocated to cryptocurrencies, but in general to financial services. One service that has originated from this great potential is the introduction of mobile money. In December 2009, a research paper by CGAP, GSM Association and McKinsey examined mobile money usage in the Philippines (Pickens, 2009). Some of their key findings include some interesting points, such as: One- half of active mobile money users are unbanked, and 26% are poor, living under the Philippines poverty line Distribution is key: intensive users who do four or more transactions per month are 40% more likely to live within five minutes of an agent (partner establishments where customers can transact, eg. cash- in funds, cash- out remittance, send remittance) 1 in 10 unbanked users saves an average of US$31 (one- quarter of their family savings) in a mobile wallet (Pickens, 2009) 73

Figure 6.4 - Source Pickens, 2009 - Mobile Money The table illustrates that the low- income Filipinos primarily use mobile money to send money. Even though the research reveals that 12% of low income, unbanked users do not own a phone. This suggests mobile money can reach lower than even the current bottom of mobile ownership (Pickens, 2009). Even though the two major phone companies in the Philippines both have their own version of mobile money, the research conducted in this thesis reveals that the adoption may still be limited despite the great potential for a service like mobile money. Only 16% of the respondents answered that they have used mobile money, such as g- cash or smart- money (Question 8). The 84% who answered no were questioned if they would consider using mobile phones for transferring and storing money if it was secure (Question 8.1). Not surprisingly, only 38% answered yes. In general, this may indicate that a certain amount of Filipinos are somewhat a bit skeptic when it comes to financial services on mobile phones. This should also be seen in relation to the fact that out of the 16% of the respondents who used mobile money, 85% of these had a positive experience using mobile money, and the remaining 15% had a neutral experience (Question 8.2). 74

Combining these findings with the assessment about financial inclusion by BSP indicates that the Filipinos may be open to alternatives when it comes to financial services. The findings also suggest that most prefer traditional forms where personal contact is preferred rather than technical interaction like mobile money. This is consistent with the fact that cash is still preferred. This may prove to be a burden for cryptocurrencies at first hand since they are more or less technological like mobile money. It may therefore be suggested that physical agents are needed for a faster adoption. 6.1.3.2 Remittance A main pillar of the Philippine economy is remittance. According to a World Bank research, the Philippines is the second largest recipient for remittances in Asia (Mohapatra, Ratha & Silwal, 2010). Remittance has been steadily growing along the years and is today considered to be a vital part of the economy for better or worse. The World Bank estimates that remittance was accounting for 9.8% of the country s GDP in 2012. In comparison, Denmark s remittance of the GDP was around 0.4 in 2012 (Data.worldbank.org, 2014). The remittance is the outcome of the 12 million migrants living overseas sending money back to their families and relatives. Even though the percentage of the remittance of the GPD has been declining from 10.7% in 2010 to 9.8% in 2012, the national economy is still very dependent on investments the remittance yields as this often goes directly into various household needs, such as food, shelter and education (Ordinario, 2012). The remittance is therefore pointed out by the National Economic and Development Authority (Neda) to play an important role in the economy in promoting inclusive growth or economic growth that trickles down to the masses (Ordinario, 2012). The quantitative research conducted in this thesis also strongly indicated that remittance is quite widespread. 69% of the respondents answered that they have relatives working abroad sending funds/money back to the Philippines (Question 10). 75

The prefered method is bank or wire transfer with 43%, and 22% use Western Union, 2.2% mobile money whereas the remaining respondents answered Others or Don t Know (Question 10.1). The remittance market seems to be quite an interesting case from a cryptocurrency perspective. The attributes of fast and low cost payment can be highly attractive to the users that are used to more expensive and slower services, such as Western Union or bank transfers. Despite the relative advantages that cryptocurrencies might bring to the remittance market, it is noticeable that regulation may play an important role as discussed previously. 6.1.4 Social and Cultural The composition of the social aspect in the PEST analysis will consist of a closer look at different social aspects, such as demographic factors that are relevant for the research. Along with the demographics, a greater emphasis on the cultural dimension will be applied. The aim of the cultural aspects is to identify different patterns in the population and business environment that may have an influence on the adoption of new technologies. The cultural dimension of a country may seem straightforward to a local, but as for a foreign researcher, the cultural analysis will induce a better understanding of the society s culture and its members, thus creating a better understanding and insight. 6.1.4.1 Demographic of the Philippines The population in the Philippines can overall be interpreted as young and growing. The old- age dependency ratio (percentage of persons older than 65 per persons aged 15 64) was 6.2% in 2012 (Data.worldbank.org, 2014). This is very low compared to the neighbouring countries in East Asia and advanced economies, such as Europe where the ratio was 26.5% in 2012 (Data.worldbank.org, 2014). Based on calculations from Cia.gov, the median age is calculated to 23.3 years. 76

One may consider which implications a young population has on the adoption of a new innovation. In 2001, Marc Prensky coined the terms Digital Natives and Digital Immigrants in his research paper by the same name. Shortly elaborated, he describes how students have changed radically where today s students are no longer the people our educational system was designed to teach partly. He partly points out that it is because of their attitude and usage of technology. He therefore comes up with a new term for the new generation of students: Digital Immigrants. Arguing that they are all native speakers of the digital language of computers, videogames, and the Internet, they are more likely to adopt new innovations (Prensky, 2001). In general, the Filipinos have acknowledged the importance of education and perceive it as a way out of poverty. The school life expectancy is estimated to 11 years (Cia.gov). Further studies by BSP indicate that some households savings drop during the enrollment season when these households are forced to take out their savings to pay for school tuition fees (Euromonitor International, 2013). These indications are also concordant with the findings from the questionnaire in the survey that was conducted for this thesis. When asked about the highest level of education completed, 50.4% of the respondents answered College and 23.7% a Bachelor s degree (question 3). It may therefore be likely that Prensky's definition and findings are applicable to the Filipinos as most of them receive education. Since the introduction of the term Digital Natives, it has been used in several contexts and evolved to not just covering students but people in general. According to Techopedia.com, a Digital Native is an individual who was born after the widespread adoption of digital technology (Technopedia.com, 2014). The Techopedia differentiates its terminology from Prensky s as the term doesn't refer to a particular generation but for children who have grown up using technology whereas Prensky's definition is more coined towards a more homogenous generation of new students. 77

It can therefore be questioned whether the quite large, young and educated population really consists of digital natives as all children are not born as digital natives by nature. The factor that makes the difference is the interaction with technology at a young age (Techopedia, 2014). Despite this, it is rational to believe that a young and educated population would be quicker and better at adopting a new technology in general, compared to a population with a high old- age dependency rate. In order to determine how tech- savvy the young population of the Philippines is, statistics on the usage and interaction with technology will be addressed in the technological analysis of the PEST framework. 6.1.4.2 Cultural In order to obtain general knowledge about the cultural spectra of the Philippines elements of Hofstede, cultural theory will be accessed. By interpreting relevant aspects of the cultural dimension theory by Hofstede, it should contribute to a nuanced interpretation of the Philippines culture based on the society and the behaviour of its members. In Hofstede's cultural theory two dimensions seem to have a correlation to innovation acceptance and diffusion. These are Individualism/Collectivism and Uncertainty Avoidance (Triandis 1995: Hofstede 1999). Several researchers acknowledge that individualism is the most critical factor that affects innovation s adoption (Triandis 1995; Steenkamp, Hofstede & Wedel 1999; Chandrasekaran & Tellis 2008; Flight et al. 2011, Dwyer, Mesak & Hsu, 2005). 78

Figure 6.5 - Source Hofstede, 2010 - Cultural dimensions 6.1.4.2.1 Individualism Individualistic societies can be characterized by a certain reliance on personal beliefs in making decisions (Roth 1995; Steenkamp, Hofstede & Wedel 1999; Perez- Alvarez, 2009) whereas people in collectivistic societies tend to belong in groups where group norms are appreciated and followed by its members. It is therefore natural that group consensus is critical to decision making (Wickliffe & Pysarchik 2001). The Philippines scored 31 in individualism and thus can be described as a collectivistic society. The group culture is therefore imprinted in the society were the group takes care of each individual in exchange for loyalty. In the Philippines, this is often reflected in a strong loyalty to the family, extended family or extended relationship to someone near. Loyalty will therefore in most cases override most other social rules and regulations. The society fosters strong relationships, where everyone takes responsibility for fellow members of the group (Hofstede 1999). 79

Respondents from the survey conducted in this thesis indicates a strong group- behaviour in accordance with the findings from Hofstede. When questioned about who they consult in order to get financial guidance, 87% responded Family and Friends, 6.1% answered Bank, where 3.8% use the Internet, and 3.1% consult Other (Question 11). This clearly suggests the influence of the group- behavior where financial guidance is obtained from the group rather than banks or other information sources like the Internet. Gorodnichenko and Roland found that the individualism- collectivism cultural dimension has an important and robust causal effect on innovation and long run growth (Gorodnichenko & Roland, 2010). Acceptance at the early stage of the innovation is fostered in collectivist societies where in- groups are influential (Dwyer et al., 2005). It can therefore be stated that it is very likely that the deeply rooted collectivist culture can, and will, influence an adoption of cryptocurrencies and has to be taken into consideration. 6.1.4.2.2 Uncertainty avoidance The Uncertainty Avoidance dimension has to do with the way that a society deals with the fact that the future can never be known (Hofstede, 2001). It is another critical cultural dimension that influences innovation s adoption. A high Uncertainty Avoidance leads to a generation of rigid rules within the society and is expected to slow the acceptance and diffusion of innovations (Kalliny & Hausman 2007; Perez- Alvarez, 2009). The Philippines scored 35 on this dimension and have a relatively low preference for avoiding uncertainty. This means that they, in general, have a relaxed attitudewhere practise counts more than principles and deviance from the norm is more easily tolerated. The attitude and tolerance towards risk is relative where innovation in general is not seen as something threatening. The score of 35 generally describes a society with room for new innovations to diffuse, and the members do not necessarily feel threatened by ambiguous or unknown situations that the innovation can cause. 80

6.1.5 Technology infrastructure Since the target of the PEST analysis is directly related to the adoption of Bitcoin in the Philippines, the focus of this dimension is the current development and use of technologies in relation to the usage to cryptocurrencies. Cryptocurrencies are a technology that is reliant on certain conditions to function properly and diffuse among users. (Antonopoulos, 2014). This includes electricity and a device that is able to reach the bitcoin network, e.g. a smartphone with Internet access. It is estimated by the World Data Bank that the overall access rates to electricity is 80% (Data.worldbank.org, 2014). 6.1.5.1 Internet The percentage of the Filipino population using the Internet was 30.5% in 2012 slightly above the Asia Pacific average of 28.0% (Euromonitor International, 2013). 30.5% may not be seen as a high percentage of the Filipino population but compared to 2007 with only a 6% usage, it indicates a steady development. Question 5 of the qualitative research reveals that 11.5% of the respondents don't have access to the Internet whereas 32.8% use a net café, 28.2% have access at home, 11.5% use public wifi, and only 12.2% have access through their smartphone. These statistics clearly indicate that Internet penetration is moving forward at a quite rapid pace, but the overall accessibility is still limited as the majority of the respondents uses a net café. This may not come in handy for the general adoption of cryptocurrencies where some users may have to go to a net cafe or home in order to access the Internet. A larger adoption of Internet access through smartphones could benefit the adoption as it would become easier for users to access cryptocurrencies. It is estimated that the improved 3G and 4G coverage combined with more affordable prices on smartphones will increase data plans on smartphones (Jiwire.com, 2013). This could prove to be a positive contributor to the adoption of cryptocurrencies. 81

6.1.5.2 Mobile phones Household possession of a mobile phone has increased slightly from 64.4% in 2007 to 83.9% in 2012 (Euromonitor International, 2013). The majority of mobile phones are mobile cellular covering all non- smart phones. It is estimated by Google that smartphone penetration was 39% in 2012, increasing drastically in the coming years due to the decline in prices on smartphones. The survey from Google revealed that within the first 6 months of 2012, the perceived smartphone usage intensity increased by 33%, which meant that the smartphone users were accessing the internet more frequently in the last six months. Question 4 in the questionnaire reveals quite a large adoption of smartphones among the respondents. 74% answered Yes to having a smartphone, defining a smartphone as a phone with touchscreen. Another interesting fact is that mobile commerce is also on the rise. It is estimated by Google that smartphones shoppers are frequent buyers. 68% make mobile purchases at least once a month (Google, 2013). However, the positive development in mobile commerce barriers still exist. Google s survey reveals that 39% don t trust credit card security on mobile devices (Ibid). This aspect could be quite interesting. Cryptocurrencies, such as Bitcoin, seem to be immune to the classic security issues allocated with credit cards as stated previously. This could prove to be a great case for cryptocurrencies. 82

6.1.6 Summary It is important to recognise that innovations are influenced by their environmental context and that a successful diffusion is dependent on how suitable it is to its environment (Wejnert, 2002). In this case, the PEST clearly indicates that diffusion is impacted by externalities in the Philippines. In the following section, highlights from each of the pillars in externalities have been proposed. Political and Regulatory Landscape Vague indications of a positive or neutral regulatory framework for cryptocurrencies could eventually benefit the regulatory framework of Bitcoin A high regulatory readiness for mobile financial services with a neutral landscape within consumer protection. Consumers are in general exposed to mobile financial services where consumer protection is neutral, meaning that no extra consumer rights are added Economic Landscape Heavily reliant on remittance. This makes an interesting case for Bitcoin as an important part of the GDP consists of remittance. Users may seek a faster and more budget friendly method for remittance Large unbanked population with limited accessibility to banking services and low adoption of payment cards and technology based financial services, such as mobile money. The large unbanked population makes a great case for Bitcoin as this could potentially benefit from the innovations in terms of payments with foreign and domestic trade. Despite financial services like this, mobile money is having a slow adoption curve even with positive reviews from its users 83

Social and Cultural Landscape Large, young and English speaking population that generally indicates a certain level of Tech savvy- ness A collectivistic culture where innovation may not necessarily be seen as something threatening. The group behavior may turn out to be an obstacle for Bitcoin if the group decides to reject Bitcoin despite its advantages compared to alternatives Technological Progressed technology adoption of smartphones and Internet access but still limited accessibility to Internet through smartphones. The increasing consumption of smartphones makes a great case for Bitcoin, but the limited connectivity is definitely a barrier for usage and thus adoption. Despite the current state, this further indicates an increase in accessibility of Internet through smartphones The assessment of externalities in the Philippines has overall proved that Bitcoin seem to have a good case in terms of potential with a huge remittance market and a large unbanked population. The regulatory landscape indicates some sort of openness to similar financial services as Bitcoin. Despite this, there are several barriers that have to be taken into consideration and could potentially threaten or slow down adoption, such as limited access to the Internet and group- behaviour mentality. The average Filipino is not afraid of new innovations but is showing some hesitation to mobile financial services, such as mobile money. 84

6.2 Diffusion of Bitcoin in the Philippines According to the survey, 4% of the Filipinos have heard of Bitcoin (Question 12), hence the diffusion is in the very early stage. Spreading the knowledge of Bitcoin through mass media channels is therefore of high importance in order to create more awareness. 6 Awareness- knowledge is important as it motivates the individual to seek out the two other 7 8 types of knowledge being How- to - and Principles- knowledge (Rogers, 2003). The media tend to depict Bitcoin negatively or falsely, impacting the individuals motivation to seek further knowledge in a negative way (A7:B7). In relation to the Philippines specifically though, Lasse Birk Olesen said that media in the Philippines seem to be generally more positive (A7). The fact that the population in the Philippines is English speaking and that a vast amount of Bitcoin information online is available in English increases the likeliness of gaining awareness- knowledge as well as increasing the possibility of obtaining the necessary How- to knowledge. As of now, there is also no regulation of cryptocurrencies, meaning there is little knowledge of what the consequences, if any, are of using it. As mentioned earlier, these areas cover taxation, legality and consumer rights. Lack of this knowledge affects the motivation to seek further information negatively. 6.3 User characteristics User characteristics of the adopters are very much already incorporated in the externality section of the analysis. As mentioned earlier, Filipinos have a collectivistic nature where the decisions are made in small inter- personal networks. This is also indicated by the survey in which 87% said they seek financial guidance through family and friends (Question 11). Collectivistic societies tend to influence the innovation acceptance at the 6 Information that an innovation exists (Rogers, 2003) 7 The information necessary to use an innovation properly (Rogers, 2003) 8 Information dealing with the functioning principles underlying how an innovation works (Rogers, 2003) 85

early stage of the innovation as in- groups are more influential (Dwyer et al., 2005) One could argue that this means the diffusion of Bitcoin is largely dependant on the targeting of 9 opinion leaders in these networks, and that focusing on spreading awareness- knowledge to each individual through mass- media communication channels might not have as great an effect. Another interesting characteristic of the Filipinos is how little they tend to avoid uncertainty (Hofstede, 2010). Societies with high uncertainty avoidance tend to be abiding to strict rules within the society, which is expected to slow acceptance and diffusion of innovations (Kalliny & Hausman 2007; Perez- Alvarez, 2009). As adoption of an innovation is an uncertainty reduction process, having a general attitude where innovation is not seen as threatening will have a positive effect on the rate of adoption. According to our survey, only 16% had actually tried using mobile money (Question 8), and 62% said they would not consider using it (Question 8.1) showing that there is a tendency to avoid this innovation. Many factors can be the reason for this, but it s an interesting point, showing that even though as a culture they are open minded, an innovation with a strong case does not guarantee adoption. 6.4 Innovation characteristics The five innovation characteristics are seen as the most influential factors impacting adoption speed (Rogers, 2003). This section analyse each of the five characteristics. 6.4.1 Relative advantage The diffusion of an innovation is an uncertainty reduction process. As individuals go through the process of deciding to adopt an innovation or not, they seek information to reduce the uncertainty of the relative advantage of the innovation (Rogers, 2003). The sub- dimensions of relative advantage include: economic profitability, low initial cost, a decrease in discomfort, social prestige, a saving of time and effort and immediacy of effort (Rogers, 2003). As described earlier, the advantages of Bitcoin are low cost and fast 9 Individuals who are able to influence other individuals attitude (Rogers, 2003) 86

payment transfers, a financial platform open for all, limitation of traditional fraud with credit cards, higher level of privacy and innovation without permission due to its open- source nature. Low cost in the form of inexpensive payment transfers is saving money, thereby being an economic profitability. Fast payment transfers means saving time and effort as the user doesn t have to wait for intermediaries to clear transactions or have to go to the nearest bank in order to collect it. The open financial platform lowers the requirements of using cryptocurrencies as everybody can open an account, and the services facilitating accounts come as free software, thus creating low initial costs for the individual. Fraud limitation and higher level of privacy both result in a reduce of discomfort. The following table shows the different types of relative advantage of cryptocurrencies: Relative advantage: Low cost due to inexpensive payment transfer Advantage type: Economic profitability Open financial platform Anybody can open an account without credit worthiness Wallets are free Limits traditional fraud with payment cards High level of transparency Low initial cost A decrease in discomfort Fast payment transfers A saving of time and effort Table 6.1 Source own production - Different types of relative advantage for cryptocurrencies The Philippines is largely unbanked, and payment cards are still limited in their diffusion, therefore creating opportunities for alternative payment methods. These opportunities already manifested itself in payment methods, such as mobile payment, pawn shops and money transfer agents, indicating that there is a case for cryptocurrencies. Low initial costs and saving time and effort are strong advantages in this case. Remittance constitutes an important part of the GDP in the Philippines, creating a huge market for foreign exchange 87

agents, such as Western Union. Our survey also indicated this as 69% of the respondents said they have relatives working abroad sending funds back home (Question 10). This also makes a strong case for the adoption of cryptocurrencies as the economic profitability means saving money for the individual Filipino. As noted earlier, future regulations might lower the profit gained by making it costly to abide rules and regulations of money transfer. A focus on other advantages, such as the decrease in discomfort or saving time and effort could be a way to ensure a market gain even if the economic profitability isn t the main driver. The relative advantage of limiting fraud also makes cryptocurrencies a preventive innovation. A preventive innovation is a new idea that an individual adopts now in order to lower the probability of some unwanted future events. Preventive innovations have a slower rate of adoption due to delayed reward or no reward at all (Rogers, 2003). This is clear for the relative advantage of limiting fraud as potential adopters might find already adopted payment systems safe enough, hence focusing on spreading knowledge of cryptocurrencies through its ability to limit fraud will result in slower adoption. 6.4.2 Compatibility From a cultural perspective, an innovation s incompatibility with a said culture can block its adoption (Rogers, 2003). For the Philippines, digital payment and money transfer is a huge market, but the diffusion and adoption of mobile financial services is still limited. It is deeply rooted in the culture that money is a physical thing, and the most common way of paying and storing money is in physical form. Money transfer is also a physical act where you deliver the money to the money transfer agent and collect the money from another agent. Hence, the procedure is physical money in and physical money out. This cultural tendency is negatively related to the compatibility of cryptocurrencies as they are a digital form of payment and money transfer solution. In order to assess new ideas and give them meaning, individuals use old ideas as comparison. The reason to this is because individuals can only understand an innovation 88

by basing it on something familiar (Roger, 2003). By comparing the innovation with previous practice, it s possible to interpret and understand the innovation, thus decrease its uncertainty. As cryptocurrencies can be implemented in numerous ways, it is possible to make it highly compatible. Mobile payment has already been introduced to the Philippines and as our study shows, it is slowly gaining ground. Using cryptocurrencies as the underlying payment structure for mobile payment applications will help decrease uncertainty due to it s compatibility. The company 37coins is an excellent example of this. By integrating SMS- gateways with the Bitcoin protocol, they are opening up for payment to anyone with a phone, using SMS (Cawrey, 2014). Placing ATMs that accept for instance Bitcoins is another way to decrease uncertainty, enabling the possibility to send in Bitcoins and withdraw in Pesos (Wagner, 2013). These are just two examples of ways to lower uncertainty by making cryptocurrencies more compatible. The more compatible an innovation is, the less change in behaviour it represents. A highly compatibility does raise the question of how useful the service then really is. As the differences between the different innovations are lowered due to high compatibility, the relative advantage of the service over other innovations might decrease or dissapear. Another interesting aspect of highly compatible innovations is that they can be seen as the first step in a cluster of innovations (Rogers, 2003). The introduction of cryptocurrencies in a way that is highly compatible can reduce uncertainty, thus, pave the way for less compatible innovations with greater relative advantages. An aspect to take into consideration with regards to compatibility is innovation negativism, which is the degree to which an innovation's failure affects potential adoption of future innovations (Rogers, 2003). As mentioned earlier, there has historically been much fraud 89

and high transaction costs in connection with electronic payment like credit/debit cards. It could be argued that this has created a general innovation negativism towards digital payment, making potential adopters precautious of using these kinds of innovations. Again, the study shows that even though mobile payment could provide a great alternative payment method, it still hasn t reached mainstream adoption (Question 8). 6.4.3 Complexity The more complex an innovation is, the lower its rate of adoption will be. As this research shows, cryptocurrencies prove to be very complex to understand. From a consumer perspective, understanding cryptocurrencies isn't really necessary in order to use it. Explaining the engine of a car for instance is highly complex, but you don t need to understand the complexity in order to drive it. The same can be said about cryptocurrencies; understanding the concept of digital money and the decentralised system of it should not be necessary in order to use it. One strategy to lower complexity is therefore for companies to disguise the fact that for instance Bitcoin is the protocol being used, and instead, focus on the relative advantage of their innovation. An example could be mobile payment using the Bitcoin protocol but not focusing on Bitcoins being the currency used, hence leaving the Bitcoin aspect out of it. Another example of this strategy being implemented is the start- up Buttercoin, who plan to target the remittance market by working with local licensed money transmitters. Here, users won t necessarily know they are using Bitcoin or even have heard of it (Brustein, 2014). As of the current state of cryptocurrencies, securing the currency is also an aspect that is very complex, which requires the individual to have a high degree of tech understanding. Some businesses, such as Xapo (Rizzo, 2014) are lowering complexity by guaranteeing safe storage backed by a 3rd party insurance company, making the need to understand storage obsolete. 90

As of now, only few exchanges exist in the Philippines (A1), indicating that the complexity of obtaining Bitcoins is high. Businesses facilitating sales of Bitcoins in the Philippines are currently cooperating with other vendors in order to lower the difficulty of buying and selling. One of these exchanges, Coins.ph (2014), is currently allowing its customers to get cash for their bitcoins at over 3000+ remittance outlets as well as in GCash and in Major Banks, making bitcoins more accessible, lowering the complexity. 6.4.4 Trialability Trying out an innovation can dispel uncertainty of it. This is more important to the relative early adopters of an innovation as they have no precedent available to follow (Rogers, 2003). For later adopters, this isn't as important due to the fact that they are surrounded by peers who already adopted the innovation, making their experience with the innovation act as a trial. This makes it less crucial for later adopters to have a personal trial with the innovation (Ibid). Our study shows that the largest cryptocurrency, being Bitcoin, is still in the very early stage of diffusion. Trialability is therefore an important factor in increasing the rate of adoption. From an economic perspective, the barrier of entry is low as most software required is free and the minimum amount of Bitcoins you can buy is very low. This means that it doesn t take much investment to be able to trial cryptocurrencies. 6.4.5 Observability Cryptocurrencies are software, meaning it s less observable and therefore has a slower rate of adoption. It could be argued that the observability of cryptocurrencies has increased as merchants and e- merchants start accepting for instance Bitcoins as a payment method. In relation to e- merchants, the consumer will be aware of Bitcoin when they choose their desired payment method. This though, is not an observation of consumer adoption of Bitcoin and therefore not a visible result for other potential adopters. It does create awareness- knowledge of the innovation though. For physical merchants, the acceptance of Bitcoin will result in potential adopters seeing payment being conducted. An 91

example of this is a café where a person is using a smartphone to pay. Other buyers will see the payment being conducted in real time, creating direct observation of adoption. The following table shows a summary of the characteristics of cryptocurrencies and their effects on the rate of adoption, based on the findings in this section: Cryptocurrency characteristic High relative advantage in the form of: Economic profitability Low initial cost Saving of time and effort Decrease in discomfort Incompatibility with values and beliefs Highly comparable with existing innovations Complex to understand and complex process to use Easy to try without much commitment Effect on rate of adoption Positive Negative Positive Negative Positive Physical difficulty to observe Negative Table 7.1 Source own production - Effects on the rate of adoption The analysis shows that cryptocurrencies are affected by both positive and negative drivers. Assessing how much the individual characteristics influence the adoption is beyond this thesis, but earlier research shows that relative advantage, compatibility and complexity have the highest influence (Rogers, 2003) 92

Chapter 7 - Conclusion and Discussion 7.1 Findings and contribution Little academic research can be found within the area of cryptocurrencies so far. This thesis contributes towards the IS literature on cryptocurrencies by taking the first step in exploring what drivers are affecting the diffusion and adoption of it from an innovation perspective. This study finds that the characteristics of the innovation, the domains the innovation touches upon, externalities and user characteristics all influence the diffusion and adoption, which is in accordance with previous findings (Rogers, 2003; Wejnert, 2002; Hall & Khan, 2003; Tolba & Mourad, 2011). Cryptocurrencies are innovations within the domain of information systems that touches upon policy, finance and technology where it has the possibility to challenge existing systems with its innovative, open and decentralized design. By studying the innovation, this research has been able to identify the drivers that are affecting its diffusion and adoption. From a technological perspective, the open- source nature of Bitcoin makes it widely available, allowing anyone to get involved. This helps it bring increasing usage and prominence as companies can easily implement services based on it. The diffusion of Bitcoin is dependent on both user and business adoption. The openness of the Bitcoin protocol creates lower barrier of entry for businesses, hence positively affecting the adoption from a business perspective. Economic profitability, low initial costs and saving time and effort have been identified as the consumer- drivers to increase the rate of adoption. These are based on an exploration of Bitcoin proving that its advantages are faster and cheaper transactions and openness by allowing anyone to use it. Opening up the financial system through an open- source platform with no regulation creates opportunities to integrate various existing innovations 93

with Bitcoin, allowing financial services that are based on the Bitcoin protocol to be highly compatible with existing services, hence increasing the rate of adoption. Cryptocurrencies have proven to be of a very high complexity. This is due to the nature expanding across finance, policy and technology, combined with the fact that they are a relatively new innovation. Storing and transferring of personal funds are a very delicate area. So far, hackers have proven on several occasion that it's an area where the individual has to be much aware of how to properly store his or her funds in order to keep them safe. Understanding how to store your funds has historically been outsourced to the banks, but with Bitcoin, that role is given to the individual - everybody is their own bank. This increases the complexity of Bitcoin as a certain degree of tech savvy- ness is required in order to safely store your Bitcoins. Regulation is of now a very grey area, creating a high uncertainty of what the repercussions are of using Bitcoin (C4). The complexity of the technology itself cannot be lowered, but the complexity of areas, such as storage and regulation can with time. As the ecosystem evolves, better, standardized and more secure solutions should be available, and as Bitcoin gain more ground through adoption, governments will be forced to take a stand on it. The usage of Bitcoins in black market sales, as well as the falls of several Bitcoin exchanges, resulted in a general negative media depiction of the innovation. Awareness of Bitcoin through mass- media channels is essential for the diffusion, but the negative media depiction is impacting the individual's willingness to understand and try out the innovation, hence lowering the rate of adoption. It is evident that for cryptocurrencies to be diffused, certain criterion must be satisfied. The foundation for this innovation is the presence of electricity, Internet and cell or smartphones. In undeveloped countries, it is not a certainty that these preconditions are satisfied, which is interesting as these countries are the ones having the largest benefit of the services that come with it. 94

The case of Bitcoin challenging the existing remittance market by lowering fees is one of the most used when it comes to showing the advantages of Bitcoin. Our study shows that a country like the Philippines could benefit greatly from this too, but that the economic profitability doesn't necessarily mean that it's going to be adopted. Many factors affect the adoption, and even if the culture in general is open towards innovation, financial innovations still seem to be adopted with caution. This cautiousness is most likely rooted in the fact that cash is still the most widely used payment method, and digital transferring and storing of funds in general still haven't been widely adopted. The case study explained the political, economical, social and technological state of the Philippines in relation to the diffusion of Bitcoin. It was found that politically the Philippines is generally not heavily regulated and for Bitcoin explicitly, there are indicators showing that they are open towards it. Economically, it seems that the Philippines could benefit greatly from a financial service like Bitcoin due to their large unbanked population and their huge remittance market. Socially, the population seems to be very open towards innovations, having a curiosity that supersedes the uncertainty and complexity that innovations carry with them. Some indications show that for financial innovations specifically, there is certain hesitation though. Technologically, the Philippines is experiencing a growth in availability of Internet, and many Filipinos are adopting smartphones. The infrastructure might not be completely ready for a mainstream adoption of Bitcoin, but the stage is set for its entrance. This research provides a thorough explanation of how cryptocurrencies function and their implications for the financial area of information systems. The explanation contributes to the understanding of cryptocurrencies by piecing together the different areas involved, thus bringing a holistic view of the innovation. Besides explaining how cryptocurrencies function, a mapping of the ecosystem and the factors driving consumer adoption has been explored. The ecosystem brings knowledge to cryptocurrencies by highlighting the overall 95

areas that businesses can participate in and how these areas interact with each other, as well as explaining what critical factors businesses entering the ecosystem should be aware of. From a consumer perspective, this research indicates what influences the individual s reason to adopt as well as what factors of cryptocurrencies influence the adoption- decision and in what way. 7.2 Limitations This study has shown that the diffusion of cryptocurrencies is dependent on factors concerning the individual user, the businesses facilitating Bitcoin services, externalities impacting the innovation and characteristics of the innovation. These findings are based on a very broad research- aspect, in order to generate a holistic view. The reason for this is to identify which drivers are affecting the diffusion of cryptocurrencies, thereby creating a basis for further research on their influence on the diffusion. It is important to recognize that as Bitcoin is an emergent technology, many factors can influence its development, hence an uncertainty of its future state is evident. The future state of Bitcoin can result in new drivers or factors that influence the diffusion, thus creating a need for more research. Rogers provide extensive research on the diffusion and adoption of innovations, detailing highly theoretical concepts of the factors that influence diffusion and adoption. These abstract concepts provide general explanations to the tendencies in the area of diffusion of innovations. His research is largely of non- business fields of study, leaving the leap from theory to practical application up to the individual. He provides no clearly defined process for applying the framework, hence no steps for generalizing this non- business research. He also dosn t provide insight on how to measure the individual drivers impact on the innovation, only detailing what characteristics they have. Even though Hofstede's cultural dimensions theory is based on a factor analysis, several researches have expressed concern with the framework as it may not hold true in 96

different cultures. Some studies have explored cultural differences in Information Technology by comparing data across cultures and borders. (Straub et al., 1997). The issue concerns measuring the relevance of culture on the macro- level as it is often without precision in predicting behaviour of individuals. Some individuals may not hold the same values as the national culture they are a part of. (Karahanna and Srite, 2006). 7.3 Conclusion This study has been framed and guided by the problem question: What are cryptocurrencies, and what are the drivers impacting its adoption? This question has been examined through the literature and empirically studies conducted with this thesis and can be answered as follows. What are cryptocurrencies? The phenomenon cryptocurrencies arose with the introduction of Bitcoin back in 2009. It consists of a currency and payment protocol based on open source and the principles of cryptography (Andolfatto, 2014). The currency aspect seems to have its restrictions compared to currencies as we know them today (BBVA, 2013) whereas the payment protocol seems to bring innovation with the fields of payment systems. The decentralized nature of Bitcoin where third parties, like clearing houses and centrals banks, are left out and replaced by a public ledger seems to constitute innovativeness to the traditional payment system. The innovativeness opens up for great possibilities where it practically creates a low- cost payment platform open for everybody. Despite this, it is still an emerging technology with certain limitations that has to be overcome in order to become mainstream. This study uses Bitcoin as the main driver for understanding and define the phenomena of cryptocurrencies. Bitcoin could potentially fail due to unanticipated complications that could undermine the further development. This does not exactly mean that the phenomenon cryptocurrencies is likely to follow. Other Altcoins could potentially take the complications into account. 97

What are the drivers impacting cryptocurrencies diffusion and adoption? The drivers impacting the diffusion and adoption of cryptocurrencies are both external and internal. Externalities are outside forces affecting or influencing cryptocurrencies where internalities are the characteristics of the innovation and the individual s perception of the innovation. It was found that regulation can have a large impact on cryptocurrencies where openness towards the innovation leads to a higher rate of adoption. Remittance and large unbanked populations are identified as strong cases positively impacting the rate of adoption. Limited access to the Internet will severely limit the diffusion and adoption of cryptocurrencies due to their digital nature. Cultural tendencies can have an influence on the rate of adoption; a population like the one in the Philippines tends to be open for innovations, but financial innovations might have a slower rate of adoption due to its span across the areas of policy and finance. Businesses facilitate services based on cryptocurrencies, which brings increasing usage for the individual user. The nature of the ecosystem involving cryptocurrencies therefore also impacts the adoption. Its fragility is negatively related to the adoption where its openness for new players is positively related. Economic profitability, low initial costs, decrease in discomfort and saving of time and effort and decrease in discomfort were identified as being the relative advantages of cryptocurrencies, having a positive effect on the rate of adoption. A high compatibility with existing innovations due to its open- source nature was also found to have a positive effect. Incompatibility with culture and habits related to financial innovations, high technological complexity and a low observability due to its software nature were found to have a negative effect on the rate of adoption. 98

7.5 Suggestions for further research This study opens up for further exploration of drivers impacting the diffusion and adoption of cryptocurrencies. The primary concern of this study has been to explore cryptocurrencies and identify the drivers impacting its diffusion and adoption where further research might be concerned with how influential the individual drivers are. Suggestions for further research include: Further testing of the individual drivers impact on the diffusion and adoption Exploration of the drivers impacting cryptocurrencies within other social systems than the Philippines Examination of the drivers affecting merchant adoption of cryptocurrencies to further understand its diffusion Design science research on building more accessible applications based on cryptocurrencies. As the diffusion and adoption is essential for cryptocurrencies to function and live up to its promise, the area in general calls for more academic attention. The holistic view of cryptocurrencies and the drivers impacting it provides a delimited contribution, but the field of cryptocurrencies is still relatively undiscovered with a lot of areas for researchers and companies to explore. 99

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Appendix Appendix 1 - Questionnaire overview Appendix 2 - Data from questionnaire Appendix 3 - Open- ended Interview questions. Appendix 4 - Interview Lasse Birk Olesen - Founder Bitcoin Nordic and Co- founder Buybicoin.ph Appendix 5 - Interview Pelle Braendegaard - Co- founder at Kipochi and Co- Founder/CEO at Agree2 Appendix 6 - Interview Hans Henrik - Interim CEO at BIPS 109

Appendix 1 - Questionnaire overview 1) Please choose your gender 2) How old are you? 3) Highest level of education completed? 4) Do you have a smartphone? (mobile phone with touchscreen) 5) How do you access the Internet? (You're welcome to select several options) 6) Do you have a deposit account in a bank. 7) Do you have a payment card? 8) Have you ever used mobile money or cash such as g- cash or smart- cash? 8.1) Would you consider using your mobile phone for transferring and storing money if it was secure? 8.2) How was your experience using mobile money? 9) Have you ever used Western Union? 10) Do you have any relatives working abroad sending funds/money back to the Philippines 10.1) What is the preferred method for sending funds/money to you? 11) Who do you consult when you want financial guidance? 12) Have you heard of Bitcoin? 12.1) Which of the following statements do you relate to Bitcoin? (You're welcome to select several options) 110

Appendix 2 - Data from questionnaire Total Responses 132. Abandoned Responses 0.8%. Responses that skipped 0%. Average Duration 1:54.1 1) Please choose your gender Male: 38,6% - Female: 61,4% 2) How old are you? Average age: 25 Years - median age 22 Years 3) Highest level of education completed Secondary: 24,4%, College: 50,4%, Bachelor: 23,7%, Masters 0,8%, Other 0,8% 4) Do you have a smartphone? (mobile phone with touchscreen) Yes 74% - No 26% 5) How do you access the Internet? (You're welcome to select several options) I don't have access to the Internet 11,5% I use a net café 32,8% I have access at home 28,2% I have access through my smartphone 12,2% Public Wifi 11,5% Friends/family 3,8% 6) Do you have a deposit account in a bank. Yes 47% - NO 53% 7) Do you have a payment card? No 50,5%, ATM card 40,5% Debit card 6,1% Credit card 3,1% Dont know 0,8% 111

8) Have you ever used mobile money or cash such as g- cash or smart- cash? No 84% Yes 16% 8.1) Would you consider using your mobile phone for transferring and storing money if it was secure? Yes 38% No 62% 8.2) How was your experience using mobile money? Very good 19% Good 66% Neutral 15% 9) Have you ever used Western Union? No 61,1% Yes for international and domestic money transfer 16,8% Yes only for domestic money transfer 14,5% Yes only for international money transfer 7,6% 10) Do you have any relatives working abroad sending funds/money back to the Philippines Yes 69% No 31% 10.1) What is the preferred method for sending funds/money to you? Bank or wire transfer 43,3% Western Union 22,2% Mobile money 2,2% Paypal 0,1% Other 17,8% Don't know 14,4% 11) Who do you consult when you want financial guidance? Family friends 87% 112

Bank 6,1% Internet 3,8% Other 3,1% 12) Have you heard of Bitcoin? No 96% Yes 4% 12.1) Which of the following statements do you relate to Bitcoin? (You're welcome to select several options) It's a digital currency 80% Its unsecure 0% Fast payment transfers across borders 0% Highly volatile 0% Its difficult to use 0% Its difficult to buy 20% 113

Appendix 3 - Open- ended Interview questions. 1. Giv en kort introduktion af dig selv og hvordan du arbejder med innovationen Bitcoin. 2. Hvordan vil du definere bitcoin? 3. Nævne en række fordele som bitcoin som innovation kan bringe med sig? 4. Hvad ser du som de generelle udfordringer forbundet med adoptionen af Bitcoin for forbrugere. 5. Hvilken rolle ser du at regulering af bitcoin har og hvilken rolle ser du forbrugerbeskyttelse i forhold til adoptionen af Bitcoins? 6. Hvor ser du Bitcoin om 5 år? 7. Hvordan ser du de generelle medieres udlægning af Bitcoin? Hvilken retning mener du de påvirker forbrugerne? 8. Hvorfor er Bitcoin så volatil? Mener du det har betydning for forbrugernes villighed til at bruge Bitcoin? 9. Hvordan opfatter du problemet med sikker opbevaring af Bitcoin? 10. Hvilken rolle ser du en teknologi som Bitcoin kan få i udviklingslande hvorfor kan den være fordelagtigt i udviklingslande? 11. Hvilke pre- conditons ser du opfyldt hvis et udviklings land skal adoptere Bitcoin? 114

Appendix 4 - Interview Lasse Birk Olesen - Founder Bitcoin Nordic and Co- founder Buybicoin.ph A1) Giv en kort introduktion af dig selv og hvordan du arbejder med innovationen Bitcoin. Jeg hørte om Bitcoin i 2011. Meget spændende at lave en valuta uafhængig af stater og centralbanker. Prøvede herefter at købe mine egne Bitcoin og fandt ud af det var besværligt med at sende penge til en japansk virksomhed med bankoverførsel, der tog flere dage. Herefter skulle man til at finde ud af hvordan deres børs virkede. Jeg kom på den ide, at det skulle gøres nemmere for danskere og europæere at få fat i Bitcoins. Jeg ville gøre det nemmere for europæere at købe bitcoins gennem Bitcoin Nordic. Visionen og ambitionen for Bitcoin Nordic er en komplet pakkeløsning for brugere og forbrugere, så de har alt hvad de skal bruge hvad angår Bitcoin i deres dagligdag. I januar startede vi Buybitcoin.ph., som er lidt det samme koncept. Nemt at købe/sælge i Filippinerne. Inden vi startede var der ingen filippinske bitcoin børser, så det var noget med udenlandske overførsler. Nu har vi gjort det nemmere, så man kan sælge og købe sine bitcoin samme dag. Det er ligesom den infrastruktur, der skal være på plads for at Bitcoin kan fungere. Når vi så har fået det her på plads, så er planen, at vi fokuserer her mere på pengeoverførsel. Specielt de filippinere der arbejder i udlandet og gerne vil sende penge hjem. Det er et meget stort marked med 25 milliarder dollars om året. Her betaler de typisk mellem 9-10% til sådan nogle som Westeren Union, f.ek.s ved at sende penge fra USA til Filippinerne. Derfor mener vi, ved at bruge bitcoin, at det kan gøres bedre og billigere. A2) Hvordan vil du definere Bitcoin? Bitcoin som en teknologi er en decentraliseret database, som kan bruges til flere forskellige ting. Det det primært bliver brugt til nu er som en valuta. Bitcoin som valuta er en digital valuta, som kan sendes fra det ene sted i verden til et andet sted i verden på få sekunder og praktisk talt uden gebyrer, og alle kan oprette en bankkonto eller digital wallet. Det er derfor meget tilgængeligt for alle som har en computer eller mobiltelefon. Jeg tror Bitcoin lige nu er på et stadie som internettet var i midten af 90erne. Lige nu er der en snæver brugerbase, der bruger bitcoin, men teknologien har potentiale til at udvikle sig rigtig meget. Så jeg tror over de næste 10-20 vil man se en udvikling som internettet har været igennem. A3) Nævn en række fordele som Bitcoin som innovation kan bringe med sig Den kan give folk adgang til finansielle services, som de ikke har det i forvejen. Der er en rigtig stor gruppe af Filippinere der ikke har en bankkonto og slet ikke har noget kreditkort. Jeg ved ikke hvor mange der er men det er jo 10-50 millioner, der ikke har de her ting. Det tilbyder Bitcon, at blot man har adgang til en computer eller mobiltelefon, så kan man få noget til at fungere på samme måde som en bankkonto, som man pludselig kan sende penge med til hele verden. Filippinere vil derfor kunne blive kunder hos europæiske eller amerikanske virksomheder fra den ene dag til den anden, og det har de ikke kunne før. 115

Herudover kan andre innovationer drage nytte af den decentraliserede databasestruktur. F.eks. kommunikation så i stedet for man bruger e- mails, som ligger på servere rundt omkring, så kan man lave et decentraliseret kommunikationssystem. Det er der allerede nogle der har gjort med Bitmessage. Det kan også bruges til ejerskabscertifikater til alt muligt. Eksempelvis dollars så man kan sende dollars rundt på bitcoin netværket eller ejerskab til guld eller aktier, så man eksempelvis kan lave en decentraliseret aktiebørs. Man kan også bruge det til at lave en decentraliseret Dropbox, så folk kan opbevare deres data i Bitcoin Blockchain, som man ikke behøver at stole på, at Dropbox opbevarer ens data sikkert og Dropbox ikke går ned i morgen og være sikker på at NSA ikke lytter med hvad man opbevarer i Dropbox det kan man potentielt gøre gratis og sikkert i Bitcoins Blockchain. Det er nogle af de ting Bitcoin kan bruges til udover som valuta. A4) Hvad ser du som de generelle udfordringer forbundet med adoptionen af Bitcoin for forbrugere? Jeg tror, der er mindst 2 ting. Først og fremmest skal det være nemmere at købe og sælge Bitcoin. Vi har gjort en stor del med Bitcoin Nordic og BuyBitcoin.ph, men det skal også gøres endnu nemmere, og det arbejder vi så på. Det andet punkt er, at det skal være nemmere at opbevare sine Bitcoins, der er desværre folk som får stjålet deres bitcoins, så der skal udvikles services som gør det nemmere at opbevare sine bitcoins sikkert. Man ser allerede nu, at der er eksempler på innovative løsninger. A4.1) Hvad er dit syn på forbrugerbeskyttelse? Det tror jeg også er et område, der vil udvikle sig. I Bitcoin ligger der en mulighed for at man kan indbygge escrow funktioner, så hvis man laver en stor handel på nettet på ex. 10.000 dollars, så kan man vælge at have en tredjepart ind over som i tilfælde af en uenighed mellem køber og sælger kan gå ind og træffe en afgørelse om hvem der har ret. Det er noget, der måske vil blive udviklet. Markedet vil afgøre, om det er noget der vil blive efterspurgt, fordi man aldrig kan gøre disse ting gratis. Ulempen ved at indføre sådanne ting er, at der er introduceret ekstra omkostninger for transaktionen, fordi den her escrow skal have et gebyr for denne service. Spørgsmålet er om forbrugeren vil foretrække at bruge denne beskyttelse, eller om de vil foretrække ikke at have denne beskyttelse og derved spare et par procent. Jeg gætter på de fleste vil foretrække at få det lidt billigere, når de handler for små/mellemstore beløb, men når de laver store indkøb på nettet, vil de nok benytte sig af en escrow service. A5) Hvilken rolle ser du, at regulering af Bitcoin har? Jeg tror, at det vi vil se er at reguleringen vil komme til at berøre dem der går ind og veksler ind og ud fra kroner, euro eller dollars. Så det er virksomheder som mine, som vil blive berørt. De lande som er begyndt at indføre sådanne regler er USA og Singapore, som kræver at Bitcoin vekslere identificerer deres kunder, og hvis de ser noget mistænkeligt skal de lave en rapport og indsende til myndighederne, og det er så for at tage hensyn til hvidvaskning og terrorfinansiering. Jeg tror ikke, man vil gå ind og regulere forbrugere af Bitcoin eller 116

virksomheder som sælger ting for Bitcoin eller Miners, men derimod det kun handler om den der veksler mellem fiat valuta og Bitcoin. A6) Hvor ser du Bitcoin om 5 år? Om 5 år tror jeg Bitcoin er en del mere udbredt end det er nu og om end ikke alle har prøvet at bruge det, så tror jeg alle kender en som bruger det. Men jeg tror der vil gå mere end 5 år, før det er helt mainstream. Men det er meget svært at spå om. A6.1 Hvor ser du dine virksomheder om 5 år og hvor vil dine fokusområder være? Jeg tror stadig, vi vil have den her veksel service, hvor vi veksler mellem fiat valuta og Bitcoin og den anden vej. Men jeg tror vi vil have flere services. Jeg kunne forestille mig, at vi også tilbød folk, at vi opbevarede deres bitcoins, og at vi måske begynder at tilbyde flere finansielle services, som man i dag får i banken. Måske kan vi begynde at lave udlån i Bitcoin og give folk der har Bitcoin hos os renter. Services som banker normalt udbyder. Virksomheder som min skal gå i denne retning. A7) Hvordan ser du de generelle mediers udlægning af Bitcoin? Hvilken retning mener du de påvirker forbrugerne? I Danmark og vesten har det ikke været særlige spændende. Det har handlet om kursudsving, hacking børs konkurser og de illegale ting, som Bitcoin kan bruges til. Det der har manglet meget er proportionerne omkring de her ting. F.eks. hver gang de taler om der kan købes stoffer med Bitcoin taler de aldrig i hvor stort omfang det sker. Der er ingen undersøgelser, der viser, at Bitcoin bliver brugt til det i højere grad end kroner eller euro. Tværtimod de tal jeg har set, så ud af det samlede antal bitcoin transaktioner er der færre procent af dem der bliver brugt til stofhandel end hvis man kigger på hvor stor en andel af verdens BNP der generelt bliver brugt på illegal stofhandel. De tal tyder faktisk på at Bitcoin bliver brugt i mindre grad. Så der har manglet nogle proportioner, og jeg synes medierne har manglet at snakke om de meget store potentielle fordele der er med Bitcoin, f.eks. effektivisere betalinger, udenlandske overførsler, undgå svindel, give adgang til det et globalt finansielt system til folk i udviklingslande som ikke har adgang i dag. Jeg synes, det man har set her i Filippinerne er generelt en meget mere positiv tilgang har man talt meget om remittance aspektet. Hvordan Bitcoin kan gøre det billigere og mere effektivt end Westeren Union f.eks. Her har man ikke i samme grad fokuseret på de irriterende historier med børs konkurser og stofhandel. Men jeg tror også i vesten, at vi vil se, at efterhånden som Bitcoin bliver mere udbredt vil der komme mere fokus på de positive aspekter i vesten. A8) Hvorfor er Bitcoin så volatil? Mener du det har betydning for forbrugernes villighed til at bruge Bitcoin? 117

Jeg tror, det er sådan en børnesygdom som Bitcoin har lige nu. Bitcoins totale markedsværdi er ca. 7 milliarder dollars. Hvis man sammenligner det markedsværdien af alle dollars eller euro der findes derude, så er det stadig meget meget småt. Så er det mindre end en afrundingsfejl. Så det betyder at noget som stadig er så relativt småt, og hvis der kommer nogle investorer der en eller anden dag vil købe nogle Bitcoin, kan de presse prisen op, eller hvis der er en der vælger at sælge alle sine Bitcoin kan det være med til at presse kursen. Men efterhånden som Bitcoin vokser her de kommende år, så tror jeg den her volatilitet vil blive mindre blot via markedsværdien. Det synes jeg allerede man har set, for da jeg hørte om Bitcoin i 2011, oplevede jeg hvordan den steg fra 30 dollarcent til 32 dollars, og så faldt den ned til 2 dollars. Det er nogle meget mere voldsomme udsving end dem vi har set de seneste år. Volatiliteten er en børnesygdom, som Bitcoin vil gå igennem. Man ser også nye og små aktier, som kommer på børsen er mere volatile end store og gamle aktier, der har været på børsen i 20 år. Så det må man også forvente med Bitcoin. A9) Hvordan opfatter du problemet med sikker opbevaring af Bitcoin? Det vi har nu, der har man grundstene eller byggeklodserne som gør, at det er muligt at bruge bitcoins til noget. Men det vi vil se, det er, at folk vil bruge de har byggeklodser til at udvikle systemer som er ovenpå disse byggeklodser som er meget mere brugervenlige end systemet i dag. Og der ser man allerede tiltag. Der er en virksomhed, der allerede tilbyder, at man kan opbevare Bitcoin hos dem og de Bitcoin bliver forsikret hos Lloyds of London, så hvis de bliver mistet, så dækker Lloyds hvad det er værd. Man ser også, at der er virksomheder som Bitgold.com, som har fundet en ny innovativ måde at opbevare Bitcoin på, der ikke er blot et sted, men de skal angribe op til 3 forskellige steder for at de kan stjæle bitcoins. Så min forventning er også, at det er et område vi forventer udvikler sig. Man så også dette med nethandel. I de tidlige dage på nettet havde man ikke krypterede forbindelser, så hvis man handlede på nettet, så kunne enhver på linjen faktisk opsnappe hvad man havde med at gøre. Så udviklede man SSL protokollen, som gør sikker nethandel muligt, og i dag har langt de fleste ingen kvaler ved at handle på nettet. Det er en udvikling, vi også kommer til at se med Bitcoin. A10) Hvilken rolle ser du en teknologi som Bitcoin kan få i udviklingslande hvorfor kan den være fordelagtigt i udviklingslande? Der er internationale pengeoverførsler, adgang til finansielle services og ecommerce - en stærk konkurrent til Western Union elller Money Gram, og hvis man kan spare et par procent på gebyret her, så er det noget der kan hjælpe filippinske familier meget. Så er det med adgang til finansielle services, som er noget helt unikt, som jeg ikke har et andet system, der kan tilbyde, så enhver med telefon eller computer kan få adgang til en konto som gør at man kan modtage og sende penge til hele verden praktisk talt gratis. Det er noget helt nyt, som man aldrig har set før. E- commerce er meget småt, delvist fordi kun få har kreditkort, så i dag når man betaler på nettet, er der mange webshops, der er integrerede med Dragonpay, som har kontakt til alle banker. Så kan man gå ned i en bank med kontanter på disken og så informere Dragonpay webshoppen om, at der er blevet betalt. Så det er meget lavpraktisk. Her kan Bitcoin gøre e- handel nemmere og mere attraktivt 118

A11) Hvilke preconditions ser du opfyldt hvis et udviklingsland skal adoptere Bitcoin? I udviklingslande er internetadgang typisk ikke særlig udbredt. Det vigtigste er at mange har en mobiltelefon, det ville foretrække at det var en smartphone, men det er nok ikke realistisk, men der er faktisk udviklet services som kan bruge Bitcoin med en alm telefon, hvor man kan sende sms er fra. Så jeg vil sige det er udbredelsen af mobiltelefoner der er vigtig. Så tror jeg også det er en villighed til at prøve noget nyt som kan være ret vigtigt. 119

Appendix 5 - Interview Pelle Braendegaard - Co- founder at Kipochi and Co- Founder/CEO at Agree2 B1) Giv en kort introduktion af dig selv og hvordan du arbejder med innovationen Bitcoin Jeg er datalog og har arbejdet med cryptocurrency feltet siden 90'erne, et godt stykke tid før Bitcoin. Mange af os var interesserede i dette felt på det tidspunkt af samme årsag, som vi er interesserede i Bitcoin nu, og det er at vi ser store muligheder for at hjælpe folk i udviklingslande. Jeg har før i tiden arbejdet i Caribien og Latinamerika, og nu er der fokus på Afrika og samtidig også Latinamerika. Bitcoin har jeg arbejdet med de sidste to - tre år. Det sidste år har jeg arbejdet mest i Afrika i forbindelse med Kipochi, som er den wallet jeg har været med til at lave. Vi har stor success med at gøre Bitcoin tilgængeligt i Afrika specielt. Stadigvæk mange ting der mangler for at det rigtig kan tage over, men der er en del forskellige folk, der arbejder sammen for at prøve på at få det her igang. B2) Hvordan vil du definere Bitcoin? Virtuel currency som det mest generelle, som enten er baseret enten på sig selv, som Bitcoin er, eller som er baseret på dollar, guld eller noget andet. Virtuel currency er noget som er fundable, dvs. en unit kan udveksles til en anden unit. De kan så generelt bruges til forskellige ting. Indtil videre har der været mange virtuel currencies i spil og den slags, men de har ikke været cryptocurrencies, fordi at cryptodelen ikke har været en decideret del af det. Det som vi arbejder på nu i 90'erne og i begyndelsen af 2000'erne var centrale cryptocurrencies. Dvs. der var en central server, som holdt styr på transaktionerne, men alle transaktionerne kunne verificeres individuelt. På samme måde som man kan gøre med bitcoin i dag. Dengang var de fleste cryptocurrencies baseret på et eller andet som guld eller dollar, så for at kunne gøre dette var der meget arbejde på at få skabt forskellige governance models, så man var sikker på, at et gram elektronisk guld var et gram guld værd, eller der var dollars på en bankkonto. Man kunne let gå ind og lave en kontrakt og sige det var noget værd, men hvis du ikke har nogen måde at bevise det på, så var det svært at få opstartet. Meget af det fokus vi havde i den første generation var på, at transaktioner kan verificeres. Efterfølgende i 5-6 år var det på, at det skulle verificeres at en virtuel currency rent faktisk var det værd, som man nu sagde. Bitcoin er et betalingsnetværk først og fremmest, det er en fejl at folk fokuserer på valuta delen af Bitcoin. Bitcoin er også en valuta, men først og fremmest er det et betalingssystem. Bitcoin er decentraliseret, det er verificeret af sig selv, og det er åbent. Hvorimod med den første version af en cryptocurrency med central server gør at man skal have den til at stå et sted. Dvs. man skulle følge lokale bankregler, osv. Dette gør at man kommer tilbage til de samme problemer, som man gør i bankverdenen. Det største problem ved bank og betalingssystemer i ulande er "know your customer", som OECD har presset ned over dem. Dette er grunden til, at man skal vise id ved oprettelse af bankkonto. Dette er nemt nok i Danmark, men svært i ulande, f.eks. folkeadresse findes ikke så mange steder i verden. 120

I de fleste af ulandene har man ikke en postadresse. Ved at have disse krav til oprettelse af bankkonto eliminerer man muligheden for dette for en stor del af verdenen. Problemet er sådan set ikke, at de ikke har adgang til en bankkonto, men at de services som en bankkonto giver adgang til ikke er tilgængelige uden. Her kommer Bitcoin ind, da du reelt set bare åbner en konto, det er ikke noget du skal spørge om. Jeg mener, det er det absolut vigtigste ved Bitcoin, fordi der ikke er denne her centrale enhed, der kan gå ind og regulere bitcoin. B3) Nævn en række fordele som Bitcoin som innovation kan bringe med sig For virksomheder gør Bitcoin det nemmere at acceptere elektronisk betaling, hvilket i forvejen er svært i nogle lande. B4) Hvad ser du som de generelle udfordringer forbundet med adoptionen af Bitcoin for forbrugere? Det er svært at købe og sælge Bitcoin i de fleste ulande. Vi arbejder med banker og mobiloperatører. Det tager tid at få dem overbevist, selvom banker har været rimelig åbne i Afrika. Det tager stadig noget tid at komme ind i deres systemer og den slags. Det er et stort problem, at familier i Nairobi ikke har en måde at veksle Bitcoin om til Schelling. Det skal løses bottomup og topdown. Bottomup, det er at små butikker i nabolaget kan købe og sælge Bitcoin. For at gøre det på stort plan ville det være betydeligt nemmere, hvis mobilselskaberne eller bankerne hjalp til også. B5) Hvilken rolle ser du at regulering af bitcoin har? Lige nu er det et stort problem, at centralbankerne ikke forstår Bitcoin så meget som de burde. Centralbank i Kenya f.eks. er åben til Bitcoin - de har bare mange andre prioriteter lige nu. For at bankerne kan arbejde med Bitcoin vil det være nemmere, hvis der er en officiel udtalelse, hvilket centralbanken i Kenya ikke er kommet med endnu. Centralbankerne kan ikke regulere det, men de kan lave regler for køb og salg, og jeg tror, at vi vil se disse regler inden for det næste års tid. Banker kan hjælpe, og flere og flere wallets kan gå ind og hjælpe til. Stadigvæk er der noget forbrugeransvar. Det er noget industrien går og arbejder på at løse. Paranoide brugere vil sikkert gå ind og bruge en Windows bitcoin Client, en native Client. Det er meget et spørgsmål om brugeruddannelse. B6) Hvor ser du Bitcoin om 5 år? Jeg ser den som en fundamental protokol på nettet, og om 5 år vil de fleste salgstransaktioner på en eller anden måde gå over Bitcoin. Jeg tror, Bitcoin kommer til at erstatte swift netværket. 121

B7 Hvordan ser du de generelle mediers udlægning af Bitcoin? Hvilken retning mener du de påvirker forbrugerne? Det har nogle gange været svært at læse Bitcoin artikler uden at have en styg grimasse i ansigtet. Der er mange af dem, der ikke har forstået det i lang tid. Det er ved at gå over nu, men i lang tid kunne man ikke nævne Bitcoin uden at nævne Silkroad. Medier kan godt lide at skræmme med det sensationelle, men selvom om dette har forbrugeren stadig vist stigende interesse. Måske dette har noget at gøre med at brugeren er mere kritiske over for medierne, end de var for 5 år siden. For nylig har medierne gjort et langt bedre job. B8) Hvorfor er Bitcoin så volatil? Mener du det har betydning for forbrugernes villighed til at bruge Bitcoin? Bitcoin er så volatilt, fordi det er nyt stadig. Markedet prøver stadig at finde ud af, hvad prisen bør være. Det har betydning til at begynde med om folk vil holde bitcoin i længere tid. B10) Hvilken rolle ser du en teknologi som Bitcoin kan få i udviklingslande hvorfor kan den være fordelagtigt i udviklingslande? Folk skal være åbne for ny teknologi, hvilket generelt ikke er et problem for ulande, da de er meget nysgerrige. Jo bedre et lands finansielle system virker, jo mindre er der grund til at bruge Bitcoin. Der kan være meget stor grund til en person i Somalia, der ikke har en bankkonto, vil bruge bitcoin. 122

Appendix 6 - Interview Hans Henrik - Interim CEO at BIPS C1) Giv en kort introduktion af dig selv og hvordan du arbejder med innovationen Bitcoin Kort om mig, jeg har en økonomisk baggrund og har læst på Århus Universitet og har været iværksætter siden start halvfemserne. Jeg lavede et webbureau i midt halvfemserne, hvor vi voksede fra 0-60 mand på få år og fik det fusioneret ind i en svensk større konstruktion og så braste boblen. Det var rigtig rigtig sjovt dengang. Så har jeg efterfølgende taget en master i forandringsledelse, hvor jeg skrev om sociale teknologier tilbage i 2004, og det brugte jeg som katapult for at starte en ny virksomhed, som hedder Wemind, som er et social consultancy firm kan man kalde det, og det eksisterer stadig i dag. Jeg har ikke noget med dem at gøre mere. Efterfølgende har jeg startet andre små virksomheder op, men på den anden side af bordet hvor jeg ikke har været rådgiver, men teknisk hvor vi udvikler apps. Første gang jeg møder Bitcoin er i 2012 ved en præsentation, som Lasse Birk Olesen holder på Tedx i København. Tedx har jeg fået til Danmark i sin tid, da jeg sad i Wemind. Det fangede mig godt nok ikke rigtig der med Bitcoin, men det gjorde det så sidste år, hvor jeg i forbindelse med noget andet research stødte på Bitcoin igen. Da jeg først begyndte at grave ned i det, så fandt jeg den samme energi, som jeg fandt omkring internettet i start- midt halvfemserne og tænkte, det felt skal jeg bare ind i. Og det er jeg så nu i form af mit job hos Bips. Bips har en hovedforretning, som er paymentprocessor, hvilket gør, at Bitcoin kan tage imod Bitcoin som betaling. Det svarer til, at du kan gå ned i en butik og bruge dit dankort, så er det den software der gør, at du kan betale med dit dankort. Det er det vi har gjort bare med Bitcoin. Vi er en globalt fokuseret virksomhed, selvom vi bor i København og har måske et mere europæisk fokus end f.eks. Bitpay eller Coinbase, som har base i USA. Men vi har kunder i hele verden lige fra Sydafrika, Rusland, Chile, Letland, Tyskland, Danmark - alle steder faktisk. C2) Hvordan vil du definere Bitcoin? Bitcoin som begreb skal man forstå at dele op for det er ikke en og samme ting over det hele. Bitcoin et dels et betalings netværk, det er en platform og det er en valuta. Det som tingene sovses ind i er at folk ikke kan forstå det med platform og netværk, det kigger alene som et betalingsmiddel og forstår ikke kursen går op og ned det. Vi vil se en mængde af andre typer applikationer ovenpå den her platform. C3) Nævn en række fordele som Bitcoin som innovation kan bringe med sig? Bitcoins hovedingrediens er den tekniske innovation. Du har den her blockchain eller publicledger, hvor alle transaktioner der sker med Bitcoin gemmes. Det er nok den her distribuerede open soruce public ledger, det synes jeg er innovaitonen. Så har du det element, som handler om Prof of Work, som er de der arbejder eller administrerer netværket og får lidt for deres arbejde. 123

C4) Hvad ser du som de generelle udfordringer forbundet med adoptionen af Bitcoin for forbrugere? Usability - det er rigtig svært at forstå for menigmand, at man skal scanne en QR kode. QR koder har langt de fleste hørt om og set hvordan de ser ud, men kun de færreste brugt, og det er endnu færre der ved hvor scannere er på deres smartphone, hvis de har sådan en. Ud fra en usecase er Bitcoin miserabel. Det er nummer 1. Nummer 2 ting, det handler om området - om hvordan er det vi kigger på Bitcoin, skal vi se det som sådan et store of wealth, er det en vare, er det en valuta eller hvad er det? Det at man ikke klart har defineret fra statens side af, hvad det er, og de ikke har foretaget sig omkring regulering af Bitcoin. Det gør, at når folk får stjålet deres bitcoins, så har de ikke nogen at gå til. Det bliver nemlig ikke set som et aktiv på den måde som hvis det havde været kroner eller guldbarrer. Det er de to ting, som jeg umiddelbart lige ser. Jeg havde en tredje lige før, men den har jeg glemt. C5) Hvilken rolle ser du, at regulering af bitcoin har? Man kan vælge at have to standpunkter. Det ene standpunkt handler om, at forbrugerne skal beskyttes i forhold til, når de handler med Bitcoin som på lige fod når de handler med alt muligt andet som hvis de handler fysisk nede i butikken eller online via en webshop. Den forbrugerbeskyttelse er meget høj, og i Danmark er den særdeles høj. Vi er bedre beskyttet online, end når vi handler offline. Jeg har siddet som formand for E- Handelsfonden i knap 12 år, så det ved jeg alt om. Altså, det er det ene punkt at vi har en lige så god forbrugerbeskyttelse som den verde,n vi kommer fra. Det andet standpunkt, det handler om vi er blevet alt for meget beskyttet, så det der med vi faktisk selv tager stilling til, at når vi nu gør noget kan det faktisk have en konsekvens, det er der nogle, der mener vi skal have mere af. Det nytter ikke noget, at vi luller hinanden ind i vat og tror, at hvis noget går galt, så er der nogen, der kommer og klarer det for os. Jeg er måske mere til det første, hvis vi skal have en mass adoption af Bitcoin, så nytter det ikke noget, at vi gør det mere besværligt for folk. C6) Hvor ser du Bitcoin om 5 år? Så er vi tilbage til hvilken del af Bitcoin, for jeg kan ikke forudse, hvad der kommer til at ske med Bitcoin som penge. Jeg tror på, vi vil se et marked og nogle nye typer af forretningsmodeller, som baserer sig på Bitcoin, som er de penge vi taler om her, netop fordi transaktionsomkostninger er meget små i forhold til nogle af de løsninger, vi har i dag. Det kunne f.ek.s være man så, at en meget trængt nyheds branche som onlineaviser som endnu ikke har fundet ud af at tjene penge måske kunne implementere ovenpå at vi betaler et meget lille beløb for det vi læser, men vi betaler trods alt noget for det vi læser. Det er den ene del. Den anden del handler om, hvad den her public ledger kan bruges til. Den kan bruges til rigtig mange andre ting. Det er derfor folk er begyndt at kalde det Bitcoin 2.0 applikationer, altså hvor vi i dag har en grøn legoplade, hvor vi kun har en gul klods som omhandler penge. Andre klodser vi kan placere oven på den her platform, som er særligt kendetegnet af den her public ledger, som jeg var inde på tidligere. Jeg tror, vi vil se et skift i brancher og industrier, som i dag handler med en truste me model, hvor vi har udliciteret tillid til en tredjepart. Det kan 124

eksempelvis være en bank, hvor du og jeg skal udveksle penge og bruger derfor en bank, som ham vi kan stole på. Fremadrettet har vi ikke behov for den her tredjepart. Så vi går fra en trust me og går over til trust- no- one, så transaktioner laves mellem hinanden uden en tredjepart, og den del af Bitcoin har at byde på har en stor og gylden fremtid. C7 Hvordan ser du de generelle mediers udlægning af Bitcoin? Hvilken retning mener du de påvirker forbrugerne? Det der sker i det er, at Bitcoin som sådan stadig er lidt for kompleks. Man mangler stadig nogle tydelige billeder på, hvad er det her for noget. Nogle tydelige og fælles indikationer på hvad det er, og indtil vi har det, vil uoplyste journalister og andre have frit slag i at kunne formulere deres budskab, som de synes og hvordan de gerne vil vinkle den, og det gør, at den retorik der er omkring Bitcoin pt. er fortrinsvis negativ. Og det gør, at hastigheden af den her teknologis adoption bliver sænket. Det er lidt at sammenligne med andre teknologi innovationer som eksempelvis internettet, som som sådan heller ikke lige var det foretrukne valg for alle tilbage i start halvfemserne. Det var noget med, der var nogle usergroups, som havde nogle beskidte billeder, og nu røg virksomhedens sikkerhed på internettet, for nu var der en computer på internettet. Mange af de historier vi så for 20-25 år siden, ser vi nu med Bitcoin. Jeg vil tro over tid, at antallet af positive omtaler vil overgå dårlige. C8) Hvorfor er Bitcoin så volatil? Mener du det har betydning for forbrugernes villighed til at bruge Bitcoin? Jeg tror, at grunden til at Bitcoin er så volatil, er at de der har købt ind i Bitcoin so far, og særligt indenfor de seneste 6 måneder, har været unge mennesker og andre, der har syntes her kan vi tjene en hurtig skilling og set det som et investeringsobjekt. Nu kan man så se, at tingene ikke rykker så hurtigt som for 3-4 måneder siden. En anden ting er så fordi det er ret nyt, og vidensniveauet ikke er ret høj, så giver små negative historier har indvirkning på kursen. En anden ting er, at alle de der har Bitcoin ikke er så mange. Vi taler ganske få, altså ikke mange millioner, men måske 10.000, der har over 100 Bitcoin, og så er der nogle ganske få, der har rigtig mange Bitcoin. Desuden er der nogle, der har rigtig mange Bitcoin, og hvis de går ud og siger, nu sælger jeg 10.000 Bitcoins, så kan de nemt påvirke markedet og kursen meget drastisk. Men med tiden vil man se, at Bitcoin kommer ud i mange flere hænder, og det gør, at der skal meget mere til, at kursen bliver påvirket altså der skal simpelthen en større spredning af Bitcoin ejere til. C9) Hvordan opfatter du problemet med sikker opbevaring af Bitcoin? Her kan man jo se det igen i forhold til forbrugerbeskyttelsen, at dem der vil ind i det her felt har et ansvar om selv at sikre sig, hvordan man opbevarer Bitcoin sikkert. En anden ting er, og det er noget af det, man har hørt med MtGox og nogle af de andre børser, at man skal se dem for, hvad de er og ikke hvad man synes de skal være. 125

MtGox har været en børs, hvor man kan købe og sælge Bitcoin, men det er ikke en bank, hvor man kan opbevare sine bitcoins. Folk skal altså tænke sig om, man skal ikke bare trust me, når man ikke ved, hvem der er i den anden ende, men man skal snarere gå over i trust no- one mindset og tænk,e hvordan kan jeg beskytte mig selv, og hvordan kan jeg minimere den tillid, jeg skal vise andre institutioner, som jeg ikke kender noget til. C10) Hvilken rolle ser du en teknologi som Bitcoin kan få i udviklingslande hvorfor kan den være fordelagtigt i udviklingslande? Her tænker du på penge eller platformen? Platformen. Her kan den bruges til at sende penge frem og tilbage uden høje gebyrer som Western Union, som andre tager, og det vil gøre, at der kommer mere velfærd ned til de her lande. Det er godt for afsender og modtager ikke at skulle betale de her gebyrer. Det er den ene ting. En anden ting er, at jeg tror, det er muligt for dem der i dag ikke har en bankkonto, at de nu kan få handlet på nettet. Det er en god ting. I forhold til teknologien og udviklingen - om det kan skabe nogle typer institutioner, der kan gøre noget ved udviklingslande - har jeg svært ved at svare på. 126