Ben Laurie is a respected cryptographer (he maintains OpenSSL and is in charge of security research for Google) and he's skeptical of BitCoin, a virtual, cryptography-based currency that has attracted a lot of attention. Ben has written three posts describing his objection to "proof-of-work" as a basis for a virtual currency, and they're great reading, as are the followups from his readers. I don't have the crypto chops to have a strong opinion one way or another on this, and in situations like that, watching people a lot smarter than me arguing is my best strategy for getting smarter myself:

Also, for what its worth, if you are going to deploy electronic coins, why on earth make them expensive to create? That's just burning money – the idea is to make something unforgeable as cheaply as possible. This is why all modern currencies are fiat currencies instead of being made out of gold.

Bitcoins are designed to be expensive to make: they rely on proof-of-work. It is far more sensible to use signatures over random numbers as a basis, as asymmetric encryption gives us the required unforgeability without any need to involve work. This is how Chaum's original system worked. And the only real improvement since then has been Brands' selective disclosure work.

If you want to limit supply, there are cheaper ways to do that, too. And proof-of-work doesn't, anyway (it just gives the lion's share to the guy with the cheapest/biggest hardware).