Some financial services companies have tried this in the last few years, and it's worked out badly for them. The problem boils down to withdrawals - the "bank"

Some financial services companies have tried this in the last few years, and it's worked out badly for them. The problem boils down to withdrawals - the "bank" can manipulate it's own internal accounts numbers all it wants, but it can't actually give out more bitcoin than it owns. Here are three failure modes: 1. People deposit bitcoin (10 million) and dollars into the "bank". Inside the bank, they trade the dollars for made up bitcoin. Now the bank books show 30 million bitcoin on people's accounts. People begin withdrawing the bitcoin. Because the bank controls 10 million of actual bitcoin, only the first 10 million can be withdrawn, everyone else is not going to be able to withdraw their bitcoin. This creates a run on the bank effect. 2. The bank has (10 million) bitcoin, and it wants to lend out lots of made up bitcoin. The first 10 million that it loans out can be sent using the bitcoin that it has. After that it has no more actual bitcoin. It can't send any more bitcoin out, so it can't lend out any more than that. You would be pretty mad if you had a loan that you were paying interest on that was stuck in your bank and you couldn't spend. 3. Fine, the bank says. We'll have bitcoin that you can only spend inside our bank, can only trade to and from dollars inside our bank. Then we can do whatever we want! So the bank lets people buy bitcoin on their accounts inside their system for dollars. The bank doesn't even inflate the bitcoin holdings. Then the price of bitcoin goes from $20,000 to $60,000, and people start selling it back to the bank for dollars. Now the bank is loosing $40,000 for every bitcoin that it virtually held for users. Doing the virtual bitcoin thing usually results in collapse of company doing it.