User that wants to buy BTC via an exchange: * User deposits USD/EUR/etc into an exchange (such as MtGox) * User places a "bid" to buy BTC at a certain price (

User that wants to buy BTC via an exchange: * User deposits USD/EUR/etc into an exchange (such as MtGox) * User places a "bid" to buy BTC at a certain price (USD/EUR/etc per BTC) * User waits for their "bid" to be matched by the exchange to another user who has placed an "ask" to sell their BTC for USD/EUR/etc So, the USD/EUR/etc being exchanged between users in an exchange is put there first by the users. The exchange itself does not front USD/EUR/etc; or at least it shouldn't.