The BoE bank notes are promissory notes but the promise they carry is just a ridiculous joke. We find inscribed on them "I promise to pay the bearer on demand the sum of ..." but if you took a tenner to the BoE and gave it to them and demanded the sum of £10, they would just give you a different tenner or two fivers, which of course aren't backed by anything either. It's swapping one 'promise' with another ad infinitum, with no settlement at the end.
This is the problem with fiat currencies, they have no real backing. Governments like it because they can keep printing more and more money so they can spend more without increasing taxes (although they often do both). Central banks like the BoE love it because they receive interest-bearing government bonds in exchange for all the money they are creating out of thin air. Commercial banks love it too because they too can create 10 times the amount of money they have on deposit out of thin air (this also being backed with nothing) and loan it out at interest.
This is why we have inflation because the central banks and commercial banks can just create more and more money without having any limits imposed as there is no requirement to back any of it with anything. They just keep inflating the money supply until the currency becomes worth a fraction of a percent of its original value. In extreme cases hyperinflation ensues and billions of units of the currency are needed just to buy a loaf of bread.
So neither bitcoins nor fiat currencies are backed by anything. At least the expansion of bitcoins is limited by computational power. Bitcoin's problem is that there is not enough accountability in the exchanges and people have little recourse if they get scammed.
In my view the ideal alternative currency would be a super-secure (to the standard of a major bank's internet banking) digital gold currency with accounts insured against fraud/ theft and regular independent auditing of the gold that backs the currency up.
