Here are the important properties of the pieces of green paper we
carry in our wallets that I can think of offhand. Additions are
welcome; I hope to learn something here.
1. Supply is limited. Only the government can counterf..., er, print
more of them in significant quantities in practice, and there are
political repurcussions that keep them from doing that too freely.
2. They are good for paying taxes and many existing debts and contracts, such
as mortgages, cable bills, phone bills, etc.
3. They are more-or-less freely exchangeable.
4. They are durable enough that they probably won't become unusable
while they're in my pocket.
Does money have to have any other properties? Whether it's green
paper or bits seems unimportant. Checking account balances have most
of the above properties, except the bank gets to do controlled amounts
of counterfeiting too (the sum of the account balances generally
far exceeds the money the bank has on hand).
The vast majority of money is bits already. Most people don't have
most of their wealth as green paper; it's in account balances and
equity of various kinds.
Tim Freeman