An object, a claim and information
Cash is physical: a banknote is a liability of the central bank and legal tender in its currency area. A current-account balance, however, is the customer's claim on a commercial bank. A card payment usually moves no specific banknote; records change across bank accounts and payment systems.
Money cannot therefore be defined by its material alone. It may take the form of metal, paper or a digital record. What matters includes the rules for issuing it, its transferability, acceptance by others and confidence that the balance will remain usable later.
Not all money is the same liability
Central-bank notes and coins, commercial-bank reserves and household deposits sit on different layers. Households generally have no direct central-bank account; they use cash and commercial-bank deposits. Banks settle net obligations among themselves using reserves and other assets.
A deposit is an asset for the customer but a liability on the bank's balance sheet. The bank promises to make payments and, under the account terms, redeem or transfer the deposit. Regulation, capital, liquidity, supervision and deposit protection reduce risk, but do not make every bank liability risk-free in every circumstance.
- banknotes: a central-bank liability; coins are issued under public monetary rules
- bank deposit: a commercial bank's liability to its customer
- reserves: central-bank money mainly used among eligible institutions
How bank deposits are created
When a bank makes a new loan, it normally credits the borrower with a new deposit. This simultaneously creates a bank asset—the loan receivable—and a bank liability—the customer's deposit. Banks are therefore not merely passive intermediaries lending the exact notes somebody else deposited earlier.
That does not mean a bank can create money without limit. It is constrained by creditworthy demand, capital and liquidity rules, funding costs, interest rates and risk management. Repayment of principal reduces the corresponding deposit and loan claim; interest is bank income, not automatically new principal.
Is Bitcoin money?
Bitcoin can be used for payment, and some people hold it as a reserve asset. In most economies, however, wages, taxes and everyday prices are still accounted for in state currency. Bitcoin therefore performs individual monetary functions to different degrees depending on the country, user and situation.
Bitcoin is not a liability of a central or commercial bank. Units and transfers are recorded by a distributed network under protocol rules. That difference is fundamental, but by itself says nothing about Bitcoin's future price or suitability for a particular person.