Bitcoin Central, a Bitcoin exchange based in France, has announced that they are the “first exchange licensed to operate as a bank.”

This is certainly exciting news for Bitcoin’s acceptance and ease of use, but one line in this announcement struck me. They clarified that they are not exactly a bank, but a payment services provider “which is basically the same as a bank, just without the debt-money issuing part.” That’s right; they can’t be a bank because they don’t create money out of thin air. After all they’re working with Bitcoins, it’s just not possible.

Most of us are taught that a bank is an institution that accepts deposits from the public and then lends that money out to businesses, homeowners, etc. in exchange for interest payments, some of which gets passed on to the depositors. At moments in history this was true, it’s called loan banking. However, todays banks (or more specifically, commercial banks) are fundamentally different.

They are not custodians of your money, but debtors who owe you money when you come asking for it. And, more importantly, they have the state sanctioned power to issue new money with the press of a button. The modern banking system cannot function without the ability to create money.

Of course you could have a Bitcoin ‘bank’ that issued vouchers or receipts in excess of their Bitcoin deposits or reserves. After all, gold storage facilities did exactly that hundreds of years ago which is what lead to modern fractional reserve banking.

But you will never see a commercial Bitcoin bank; money that cannot be pulled out of thin air is incompatible with the modern banking system.  If you replaced the Dollar, the Pound or the Euro with Bitcoin, modern commercial banking would cease to exist.