Physical wallets can exist and some independent parties already are working on them. In my mind, using the physicality issue as your only argument is to ignore the larger concept of BitCoin.
I think it's clear Ron Paul hasn't looked too heavily into the issue. Mises did a report on it recently and they were less harsh on BitCoin than many of the folks around here. I think the debate is still open, and I hope Ron Paul learns more about it because to be honest I don't think he'd thought it through much if at all before being asked there.
Is it "Money"? Depends what definition you use, everyone seems to have their own. The simplest definition of money would definitely allow BitCoins if people did indeed use them:
money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market. -Rothbard
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