Time to rethink Central Bank Money (Part 2)

Part 1 of this blog post noted that, under the Accounting View of Money (AVM), the central bank’s balance sheet should show money issuance—whether reserves, banknotes, or digital currency—as equity. This form of equity differs from the corporate meaning of shareholder ownership. Rather, it reflects the state’s sovereign power to create monetary value and consists of the revenue income (accumulated and undistributed) generated by the injection of this purchasing power into the economy.

On the reserve-holders side—commercial banks and other authorized financial intermediaries—these balances are custodial assets that are kept in custody with, and administered by, the central bank.

This change aligns accounting with the real nature of money (chart 1). It requires no alteration to the mechanics of monetary policy—interest on reserves, open-market operations, and settlements continue unchanged—but it alters how money is understood and reported.

Chart 1. Accounting View of Money: Reserves as Equity

Why this change matters

The current classification of sovereign money as a liability is not merely a technical quirk; it shapes how institutions, markets, and legislators think about money. The problem is conceptual: the liability framing embeds assumptions about redemption, funding, and solvency that do not apply to sovereign monetary instruments but nonetheless influence policy debates, stress-testing practices, and legal drafting.

The liability convention also shapes how central bank independence and policy authority are perceived. When sovereign money is portrayed as a debt obligation, central banks appear financially constrained, as if their ability to act depended on protecting a fragile capital position. This reinforces a view—common in political debates—that monetary authorities must “preserve their balance sheet,” limiting room for unconventional measures or for sustaining large liquidity injections during stress. Such concerns do not arise from economics but from accounting language.

Under the AVM, money creation strengthens—not weakens—the issuer’s financial position, provided it is conducted within a sound and sustainable policy framework. This reframes central bank independence in a way that aligns with institutional reality: what protects the central bank is not accumulated accounting capital, but the credibility of its mandate, the clarity of its statutory powers, and the transparency of its operations.

Recognizing sovereign money as equity dispels the idea that balance-sheet losses impair the central bank’s capacity to fulfill its functions. It restores focus on the true sources of policy space—legal authority, institutional design, and the trust of the public—rather than on artefacts inherited from a bygone monetary era.
 

The reform blueprint

Reclassifying money from liability to equity involves three concrete policy actions:

1. Statutory recognition of the power to issue irredeemable monetary assets.
2. Reclassification of reserves and central bank digital currencies (CBDCs): for the issuer, as equity, and for holders, as custodial assets recorded off the issuer’s balance sheet.
3. Transparent reporting of seigniorage as equity originated by the revenue income generated by money creation.
4. The reclassification would not alter monetary policy operations but would ensure that accounting accurately reflects sovereign money’s real nature.

Why emerging markets stand to gain

For emerging and developing economies, this conceptual shift would bring multiple advantages. It would enhance monetary and fiscal credibility, since money creation, constrained by inflation risk and market confidence, visibly adds to central bank equity. It would strengthen trust in domestic digital currencies, built on clear ownership and custody principles. And it would simplify cross-border frameworks, as harmonized definitions of money ease regional settlement systems.

By recognizing money as sovereign equity, emerging economies can simplify monetary governance and deepen institutional credibility in a rapidly evolving financial landscape. When money creation is transparently recorded as an act of public value creation—rather than as debt—governments, central banks, and financial institutions can coordinate within a clearer framework of accountability. This fosters greater policy coherence between fiscal and monetary authorities, strengthens the legal and institutional foundations of digital finance, and clarifies the ownership and custodial status of new monetary instruments such as CBDCs and tokenized deposits.
 

Restoring conceptual integrity

Money is not the government’s debt; it is the government’s equity in circulation—a reflection of the state’s power to define value and ensure exchange.

Central banks are not debtors but custodians of sovereign value, reinforcing the trust upon which modern money ultimately rests. Acknowledging this fact restores coherence between accounting and economics and aligns monetary institutions with the realities of the digital era.

In doing so, countries can build a trust-based financial environment, one where citizens, markets, and international partners all share a common understanding of what sovereign money represents: a durable equity of the state that underpins transactions, confidence, and cross-border integration. 

^{1 Under the AVM, deposits with commercial banks are shown to feature a dual nature (as liabilities and equity). Here, we abstract from this issue and use the current accounting convention, treating these deposits as liabilities.}