Central bank money is still accounted for as debt, a legacy of an earlier monetary order. Treating sovereign money as equity would clarify central bank balance sheets, strengthen institutional transparency, and better prepare monetary systems for future digital-era design choices.
Modern monetary systems rest on a conceptual inconsistency that has gone largely unchallenged for too long. In most jurisdictions today, two legacy conventions still shape how central bank money is understood and reported. First, central bank money is commonly treated as a liability on the central bank’s balance sheet. Second, central bank laws typically authorize note issuance, lending, and open market operations, and yet they rarely state explicitly that the central bank has the sovereign power to create reserve money ex nihilo (Bateman and Allen, 2022).
These conventions are so familiar that they appear natural. In fact, both are historically contingent residues of an earlier monetary order. And both obscure the true nature of sovereign money in a fiat system. They cloud balance-sheet transparency, perpetuate legal and accounting confusion, and risk distorting public and policy understandings of what central banks actually do—especially now, as monetary systems enter the digital era.
Under the Accounting View of Money (AVM), the conventional treatment is conceptually wrong. Central bank money—whether in the form of banknotes, reserves, or central bank digital currency (CBDC)—is not debt. It is better understood, for the issuer, as a form of sovereign equity (Bossone and Costa (2021),[1] and for holders as a custodial asset safeguarded and administered by the central bank (Bossone and Costa, 2025). These are not semantic refinements but radical shifts that clarify the legal nature of money, strengthen institutional transparency, and offer a sounder basis for the design of digital monetary instruments.
The Liability Illusion
The starting point is straightforward. A financial liability is a contractual obligation of one entity to transfer an economic resource to another (IASB, 2018). But central bank reserves do not satisfy this definition.
Reserves are created when the central bank credits the account of a commercial bank, whether against securities, through lending, or as part of some other monetary operation. They are not resources that commercial banks place with the central bank in the ordinary sense of lending funds to it. They are monetary assets brought into existence by sovereign monetary authority.
The same is true when reserves move through the payment system. If one commercial bank transfers reserves to another, the central bank does not hand over an economic resource that it had previously borrowed from one institution and now passes to another. It simply debits one account and credits another. The receiving bank’s reserve balance is not a repaid debt or a transferred store of value in the contractual sense. It is a monetary record maintained and administered by the central bank within the architecture of the payment system.
This matters because the standard liability treatment implies a relationship that does not actually exist. It implies that reserve holders have lent funds to the central bank and that the central bank therefore owes those funds back. But that is not how reserves work. Commercial banks do not fund the central bank through reserve holdings. Nor does the central bank incur an obligation to redeem reserves into some higher-order asset.
That last point is decisive. Unlike conventional debt, reserves are irredeemable. They cannot be converted into gold, foreign exchange, or any superior monetary instrument. At most, they can be exchanged for banknotes, which are themselves central bank money and share the same sovereign origin. In a fiat system, there is no redemption chain above central bank money. There is only conversion among its forms.
So why do reserves still appear as liabilities on central bank balance sheets? The answer is not analytical necessity but historical inertia. Under metallic and convertible monetary systems, central bank money was indeed redeemable into specie or foreign assets. In that context, the liability classification made sense. But once convertibility disappeared and sovereign fiat systems became the norm, the old form survived even though its conceptual foundation had vanished.
Accounting language, in other words, outlived the monetary regime that had once justified it.
Money Creation as Equity Creation
Once the liability illusion is set aside, the accounting logic changes fundamentally. When a central bank issues reserves against securities or loans, it creates purchasing power. The assets it acquires—government securities, bank loans, or other eligible claims—generate income for the central bank. That income, and the value created through sovereign issuance, are better understood as strengthening the issuer’s financial position, not weakening it (Archer and Moser-Boehm, 2013) .
Yet current accounting convention portrays the opposite. It records reserves as amounts owed by the central bank to the commercial banking system, while commercial banks record those same reserves as claims on the central bank (Chart 1).
Chart 1. Current Accounting: Reserves as Liabilities
Central Bank Balance Sheet
Consolidated Commercial Banking Sector Balance Sheet
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This representation embeds several misconceptions. First, it suggests that commercial banks are financing the central bank. They are not. Reserve balances are not loans extended by banks to the monetary authority; they are monetary assets created by the authority and held by banks within the reserve system.
Second, it suggests that the central bank “owes” reserves back to the banking system in the same way that an ordinary debtor owes repayment to a creditor. It does not. Its operational responsibility is to maintain transferability, settlement integrity, and convertibility among forms of sovereign money—not to repay a borrowed resource.
Third, it gives the misleading impression that large-scale money creation mechanically weakens the central bank’s balance sheet by swelling its liabilities. That can make the central bank appear financially fragile, especially during crisis interventions or asset purchase programs, precisely when public understanding of its capacity matters most.
This is not an abstract issue. In emerging and developing economies, where institutional credibility is often more exposed to political contestation and market sensitivity, presenting reserve issuance as debt can unintentionally feed narratives of monetary overreach, balance-sheet deterioration, or even quasi-insolvency. The problem is not economics. It is representation.
The Custodial Nature of Reserves
A more accurate interpretation begins from a different premise: reserve holders retain ownership of their reserve balances, while the central bank safeguards and administers those balances within the sovereign monetary system.
In that sense, reserves are custodial assets from the standpoint of the holder. The central bank is keeping them in custody and operating the infrastructure through which they are mobilized, transferred, and settled.
This custodial interpretation is conceptually important in all monetary systems, but it becomes indispensable in digital ones. The issue is especially stark in debates over central bank digital currencies (CBDCs). If retail CBDC is treated as a liability of the central bank in the same way as conventional debt, then citizens are implicitly cast as creditors who have “lent” the state its own money. That is a legal fiction. The better view is that holders own sovereign digital money and that the central bank safeguards and administers it within a public monetary architecture.
This distinction is not trivial. It affects how ownership is defined, how insolvency and bankruptcy remoteness are understood, how access rights are framed, and how digital payment systems are legally structured. In a world of tokenized claims, programmable payments, and ledger-based settlement, ambiguity over the legal nature of money is not a harmless theoretical defect. It can produce operational confusion, supervisory complexity, and avoidable legal risk.
History Shows That Monetary Transitions Require Reclassification
Monetary history is full of moments when legal and accounting categories had to be revised because the nature of money itself had changed. The move from metal to certificates, from redeemable notes to fiat currency, and from paper instruments to dematerialized records all required legal adaptation. Each transition forced institutions to confront a basic question: what, exactly, is the nature of the monetary claim being held?
The shift from gold-based money to fiat money was one such moment. Once redemption into specie disappeared, central bank money ceased to be a claim to an underlying commodity and became instead an expression of sovereign monetary authority. But accounting practice did not fully follow. Liability classifications remained in place even after the legal and economic logic underpinning them had evaporated (Costa, 2009).
Today’s digital transition presents a similar moment of institutional lag. As monetary value becomes increasingly ledger-based, tokenized, and programmable, the old liability language becomes even less adequate. When value exists only as authoritative digital record, the question of whether that record is borrowed, owned, or held in custody becomes foundational.
A legal and accounting framework that continues to describe sovereign money as debt risks importing obsolete concepts into the design of tomorrow’s monetary system.
What the Accounting View of Money Changes
Under the AVM, the central bank’s balance sheet would record money issuance—whether reserves, banknotes, or CBDC—not as a liability but as equity. This does not mean equity in the corporate sense of shareholder ownership. Rather, it refers to sovereign monetary value created by the state and reflected in the income and net worth generated by issuance.
On the holders’ side, reserve balances would be recognized as custodial assets held with, and administered by, the central bank. They would no longer be mischaracterized as loans to the central bank (Chart 2).
Chart 2. Accounting View of Money: Reserves as Equity
Central Bank Balance Sheet
Consolidated Commercial Banking Sector Balance Sheet
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This reclassification would not alter the mechanics of monetary policy. Interest can still be paid on reserves. Open market operations still work. Settlement procedures remain unchanged. Central banks would continue to manage liquidity, implement monetary policy, and operate payment systems exactly as before.
But the conceptual gain would be substantial. The central bank’s balance sheet would finally describe what sovereign money actually is.
Why the Change Matters
The existing liability convention is often dismissed as harmless bookkeeping. It is not. Accounting categories shape institutional understanding. They influence legislation, policy debate, and public interpretation.
When sovereign money is classified as debt, central banks appear financially constrained in ways that are alien to their actual role. Their ability to act can seem dependent on preserving capital in the same sense as private firms. This can reinforce the mistaken belief that asset purchases, emergency liquidity support, or large-scale reserve creation endanger the central bank’s viability because they expand its “debt.”
That perspective distorts the meaning of central bank independence. What protects a central bank is not the appearance of a pristine corporate-style balance sheet. It is the credibility of its mandate, the legal clarity of its powers, and the institutional trust that supports its actions.
The AVM restores attention to those real foundations. It makes clear that money creation, when conducted within a sound policy framework, is an exercise of sovereign authority that generates public monetary value. It follows that accounting losses or capital fluctuations do not bear the same significance for a central bank as they do for a private intermediary. To treat them as equivalent is to import the wrong ontology into the heart of monetary governance.
This matters especially in periods of stress. In crisis conditions, the last thing a monetary system needs is an accounting framework that accidentally suggests that the issuer of sovereign money is weakening itself by using its own powers.
A Reform Blueprint
If the conventional view is wrong, what would reform require? Three steps follow. First, central bank statutes should explicitly recognize the power to issue irredeemable sovereign monetary assets. The reserve-creation function should no longer remain implicit in legal drafting.
Second, reserves and CBDCs should be reclassified. For the issuer, they should appear as sovereign equity rather than debt. For the holders, they should be recognized as custodial assets safeguarded by the central bank, with the relevant custody arrangements transparently recorded.
Third, seigniorage should be reported more clearly as equity originating in the revenue income generated by sovereign money creation. This would make visible what is currently obscured by inherited liability conventions.
None of this would weaken prudence, transparency, or discipline. On the contrary, it would strengthen all three by aligning legal and accounting language with monetary reality.
Why Emerging Economies May Gain the Most
The benefits of this shift may be greatest in emerging and developing economies. These economies often face tighter credibility constraints, greater exposure to sudden shifts in confidence, and stronger pressure to modernize payment and monetary infrastructures quickly. For them, conceptual clarity is not a luxury. It is part of institutional resilience.
A framework that treats sovereign money as equity can improve transparency around money creation and seigniorage, support trust in domestic digital currency, and simplify the legal architecture of new monetary instruments. It can also help regional and cross-border initiatives by clarifying ownership and custody in systems where multiple jurisdictions must coordinate around settlement and digital claims.
More broadly, it can improve coherence between fiscal authority, central banking, and financial supervision. When money creation is transparently recognized as public value creation rather than disguised as debt issuance, the institutional conversation becomes clearer. The relationship between monetary authority, public balance sheets, and digital financial innovation can then be understood on a more accurate basis.
Restoring Conceptual Integrity
At bottom, the issue is simple. Money is not the government’s debt to society. It is a sovereign monetary instrument that derives its status from law, institutional credibility, and the state’s authority to define the unit of account and sustain final settlement.
In that sense, sovereign money is better understood as the state’s equity in circulation than as its debt. And central banks are better understood not as debtors to the holders of money, but as issuers and custodians of sovereign monetary value.
The digital age makes this clarification increasingly urgent. As monetary systems become more technologically sophisticated, the legal and accounting concepts used to describe them must become more, not less, precise. If old categories survive after their analytical usefulness has disappeared, they will not merely confuse theory. They will interfere with institutional design.
Reclassifying sovereign money from liability to equity would not change how central banks operate. It would change how accurately we understand them. And that is precisely why the reform matters.
References
Archer, D., and P. Moser-Boehm (2013). Central Bank Finances. BIS Papers No. 71, Bank for International Settlements.
Bateman, W., and J.G. Allen (2022). “The Law of Central Bank Reserve Creation.” Modern Law Review, 85(2), 401–434.
Bholat, D. (2024). “How to Modernise Central Bank Balance Sheets: No Notes.” Financial Times, 29 November.
Bholat, D., A. Beja, and R. Darbyshire (2025). “Accounting for Banknotes.” Central Banking, 6 January.
BIS (2022). Project Dunbar: International Settlements Using Multi-CBDCs. BIS Innovation Hub. Bossone, B., & Costa, M. (2025). “When Money is Equity for Its Issuer: Message to Central Banks.” SSRN Working Paper, 9 November.
Bossone, B., and M. Costa (2021). “Money for the Issuer: Liability or Equity?” Economics, 15, 43–59. Bossone, B., and M. Costa (2025). “When Money is Equity for Its Issuer: Message to Central Banks.” SSRN Working Paper, 9 November.
Costa, M. (2009). Sulla natura contabile delle “passività monetarie” nei bilanci bancari. Quaderni Monografici Rirea, No. 85.
Dyson, B., and G. Hodgson (2016). Accounting for Sovereign Money: Why State-Issued Money is Not “Debt.” Positive Money.
IASB (2018). Conceptual Framework for Financial Reporting: IFRS Conceptual Framework. IFRS Foundation, London.
- 1. [1] Covick and Davis (1990) were the first to contend against categorizing banknotes as state liabilities and proposed that they should be regarded as a source of revenue—i.e., seigniorage (and hence, equity). The equity nature of central bank reserves has more recently been argued by Dyson and Hodgson (2016) and it is at the core of the AVM. Other authors who recognize it include Kumhof et al (2020), Bholat (2024), and Bholat et al (2025).
- 2. [2] Under the AVM, deposits with commercial banks are shown to feature a dual nature (as liabilities and equity)—see our works cited earlier. Here, we abstract from this issue and keep with the current accounting convention, treating them as liabilities.
