Suppose I have a hundred bucks in cash. The verification of this fact is that I have a set of physical banknotes with a specific printing pattern, watermarking, IR paint all on a specific piece of paper bearing a unique serial number. I can't use more money than I have - I would have to circumvent physical security and print more banknotes, which is infeasible, but possible.

Suppose I have a hundred bitcoins. The proof I own them is that I have the cryptographic keys for signing them - which can be confirmed by looking up my wallet in the distributed mesh. I can't just say I have more bitcoins than I do - I would have to circumvent the cryptographic security and seed the distributed mesh with false data, which is infeasible, but possible.

Suppose my bank has a hundred bucks in their electronic account. What method is used to verify that the bank indeed does have those hundred bucks in their possession?

Is there a central authentication authority that keeps a tally of how much electronic money individual banks have?

Is it a cryptographically signed P2P model where banks exchange proof-of-work keys?

As a thought experiment let's assume I take over the IT infrastructure of a bank and arrange a transfer, to another bank, for more money than the sum of all of it's accounts and reserves.


For the moment let's assume there's no human intervention and the transfer doesn't get flagged as suspicious - we just let the system run it's course automatically.

Such a transfer would amount to digital counterfeiting, creating money out of thin air. What mechanism or mechanisms, apart from human intervention in case of suspicious activity, are in place to ensure that money isn't just created out of thin air?