Sovereign Money Is Not Debt: Why Central Bank Accounting Must Change

Key Takeaways

• Central bank reserves currently recorded as liabilities on balance sheets
• Bossone and Costa propose treating money as sovereign equity
• Accounting shift would improve legal clarity for CBDC issuance
• Redefining money could enhance central bank transparency and policy credibility
• Legacy conventions stem from historic orders, not modern monetary reality

Pulse Analysis

The prevailing accounting treatment of central‑bank money—classifying reserves and currency as liabilities—originated in a pre‑digital era when banks issued notes backed by gold or government debt. This convention persists across jurisdictions, embedding the notion that the central bank ‘owes’ the monetary base to commercial banks and the public. While historically convenient, the liability label masks the fact that fiat money is created ex nihilo by sovereign authority, not borrowed from external sources. As economies digitize, the mismatch between legal form and economic substance becomes increasingly visible.

Biagio Bossone and Massimo Costa advance the Accounting View of Money (AVM), arguing that central‑bank money should be recorded as sovereign equity rather than debt. Under AVM, banknotes, reserves, and future central‑bank digital currencies (CBDCs) are custodial assets for holders and equity stakes for issuers, reflecting the state’s power to create money without corresponding obligations. Reclassifying these items would sharpen balance‑sheet transparency, reduce legal ambiguity, and provide a clearer framework for designing digital monetary instruments that do not carry implicit debt connotations.

If policymakers adopt the AVM, the ripple effects could reshape monetary governance. Transparent equity reporting may bolster confidence in central‑bank independence, influencing investor expectations and sovereign credit ratings. Moreover, a clear equity basis for CBDCs could simplify regulatory oversight, facilitate cross‑border digital payments, and mitigate the risk of misinterpreting digital tokens as debt securities. The proposal also invites academic debate on the nature of money, prompting revisions to accounting standards and potentially guiding future reforms in central‑bank statutes worldwide.