VoxEU Column Financial Markets Monetary Policy

Monies (old and new) through the lenses of modern accounting

A correct application of the general principles of accounting raises fundamental doubts about the current conceptions of money. This column argues that such an application allows the inconsistency whereby cryptocurrencies are not a debt liability if they are issued by private-sector entities, but become so if they are issued by central banks, to be resolved. In both cases, cryptocurrencies actually represent equity capital of the issuing entities, a conclusion that should greatly assist national monetary and financial authorities in shaping regulations.  

Coins circulating as legal tender in national jurisdictions are treated as debt liabilities of the issuing states and are reported as a component of public debt under national accounting statistics (ESA 2010). Similarly, banknotes issued by central banks and central bank reserves are accounted for as central bank debt to their holders. And commercial bank money (demand deposits) are accounted as debt in the financial statements of the issuing banks, while cryptocurrencies are not liabilities of any individuals or institutions if they are created by private entities, but are debt liabilities if they are issued by central banks (CPMI, 2015). 

In fact, a correct application of the general principles of accounting raises fundamental doubts about the above conceptions of money. Debt involves an obligation between lender and borrower as contracting parties, but then:

  • Which obligation derives for the state from the rights entertained by the holders of coins? 
  • Which obligation derives for a central bank from the rights entertained by the holders of banknotes or by the banks holding reserves?
  • Which obligations derive for commercial banks on the large share of demand deposits that are never converted into cash or central bank reserves (not even during times of severe financial crisis)?
  • And why is it that the same instrument is a debt liability when it is issued by the state, and it is not when it is issued by the private sector?

A correct accounting view of money allows us to address these issues in turn.

State money is not debt

Convertibility into ‘higher’ forms of value (e.g. precious metals or liabilities issued by hegemon countries) has all but disappeared ever since state monies have become so by fiat – convertibility of coins and banknotes into silver or gold, and then into dollars, was suspended long ago, and central banks reserves are unredeemable.1 Therefore, while these monies are still allocated as debt in public finance statistics and central bank financial statements, they are not debt in the sense of carrying obligations that imply creditor rights. 

State money issuances involve transactions whereby money is sold in exchange for other assets (including when they are exchanged against credit claims under lending contracts).The proceeds from money sales represent a form of ‘revenue income’. Under current accounting practices, this income is (incorrectly) unreported in the income statement of the issuing institution and is instead (incorrectly) set aside under debt liabilities.

A correct application of the general accounting principles should instead recognise that state monies may not be considered as debt. The income associated with their issuance, and undistributed, should go into retained earnings and be treated as equity. The assimilation of money to equity requires moving beyond the distinction between equity liabilities and debt liabilities as applied for investigating the nature of financial instruments (Schmidt 2013, PAAinE 2008, PwC 2017).2     

Money accounted as issuer’s equity implies ownership rights. These rights do not give money holders possession over the entity issuing the money (as shares giving investors ownership of a company or residual claims on the company’s net assets). Rather, they consist of claims on shares of national wealth, which money holders may exercise at any time. Those who receive money acquire purchasing power on national wealth, and those issuing money get in exchange a form of gross income that is equal to its nominal value. The income calculated as a difference between the gross revenue from money issuance and the cost of producing money, known as ‘seigniorage’, is appropriated by those who hold (or are granted) the power to issue money.

Two notations are in order, in this regard. First, rents from seigniorage are systematically concealed and seigniorage is not allocated to the income statement (where it naturally belongs), while it is recorded on the liabilities side of the balance sheet, thus originating outright false accounting. Second, ‘primary’ seigniorage should be distinguished from secondary seigniorage, the former consisting of the income generated by the change in the stock of money issued, and the latter consisting of the interest income received on the money that was issued. The state does not receive any secondary seigniorage from coins (they are not lent), while central banks receive both primary and secondary seigniorage from banknotes and reserves but typically account only for secondary seigniorage on banknotes. 

Bank deposits are ‘hybrid’ liabilities 

Commercial banks create their own money by issuing liabilities in the form of demand deposits (McLeay et al. 2014). To do so, they do not need to raise deposits from their clients (Werner 2014). Still, they must avail themselves of the cash and reserves necessary to guarantee cash withdrawals from clients and to settle obligations to other banks emanating from client instructions to mobilise deposits to make payments and transfers. 

Thus, commercial bank money constitutes a debt liability for deposit-issuing banks, since these are under obligations to convert deposits into cash on demand from their clients and to settle payments in central bank reserves at the time required by payment system settlement rules.However, in a fractional reserve regime banks hold only a fraction of reserves against their total deposit liabilities. Also, the amounts of reserves they actually use for settling interbank obligations are only a fraction of the total transactions settled.The fractional reserve regime and the economies of scale allowed by the payment system and depositor behavior reduce the reserves needed by the banks to back their debts.

More generally, absent adverse economic or market contingencies inducing depositors to convert deposits into cash, the liabilities represented by deposits only partly constitute debt liabilities of the issuing bank, which as such require reserve coverage. The remaining part of the liabilities is a source of income for the issuing bank – income that derives from the bank’s power to create money. In accounting terms, to the extent that this income is undistributed, it is equivalent to equity. 

This double nature of demand deposits is stochastic in as much as, at issuance, every deposit unit can be either debt (if, with a certain probability, the issuing bank receives requests for cash conversion or interbank settlement) or equity (with complementary probability).3

The stochastic double nature of bank money is consistent with the principles of general accounting as defined in the Conceptual Framework of Financial Reporting, which sets out the concepts underpinning the International Financial Reporting Standards (IFRS).4 In light of these standards, demand deposits are a hybridinstrument – partly debt and partly revenue. The debt part relates to the share of deposits that will (likely) be converted into cash or reserves, while the revenue part relates to the share of deposits that will (likely) never be converted into cash or reserves. This share of deposits is a source of revenue. Once accumulated and undistributed, it becomes equity. 

In force of IAS 8, IAS 32 applies for the accounting of this hybrid liability instrument and provides that the debt component must be separated from the equity one.5 From such separation derives that, once the debt component is identified, the residual left is the equity component.6

Cryptocurrencies are always equity of the issuers 

The correct application of the general accounting principles allows us also to resolve the inconsistency recalled at the outset, whereby cryptocurrencies are not a debt liability if they are issued by private-sector entities, while they become so if they are issued by central banks. 

The accounting arguments developed above unambiguously clarify that in both cases cryptocurrencies represent equity capital of the issuing entities. 

Such conclusion should greatly assist national monetary and financial authorities in shaping transparent and consistent regulations in the area of cryptocurrencies.  

Important implications

In concluding, a number of critical implications follow from a correct accounting view of money:

  • Under current accounting practices, seigniorage is largely underappreciated, it is systematically concealed, and is not allocated to the income statement (where it naturally belongs), while it is recorded on the balance sheet under debt liabilities, thus originating outright false accounting. 
  • The application of correct accounting practices should lead to ‘cleaning up’ fiscal budgets and central bank balance sheets from the false practice of considering state monies as ‘debt’.
  • If money is accounted as debt, instead of correctly being considered as equity of the issuing entities and wealth for the society using it, it inevitably introduces a deflationary bias in the economy, which deserves analysis.
  • Central banks with the power to issue the national currency may ‘create’ their own capital, and they can do so at any time they need to. In other words, to the extent that a central bank retains the power to issue money, it can never find itself in a position of having to request for recapitalisation by the government.  It follows that central bank independence may never be threatened by problems of undercapitalisation (the central bank can always assign itself a quota of nominal national wealth. 
  • Owing to double nature of commercial bank money, a relevant share of the deposits that banks report in the balance sheet as ‘debt toward clients’ generates revenues that are very much similar to the seigniorage rent extracted by the state through the issuance of state money (coins, banknotes, and central bank reserves). 
  • Much as demand deposits are hybrid instruments, commercial banks are hybrid institutions, too: as issuers of debt-deposits, when they lend money they act as pure intermediaries; as issuer of equity-deposits, they are money creators. Importantly, while the income earned on debt-deposits is from intermediation, income on equity-deposits is seigniorage. 
  • Commercial bank seigniorage represents a structural element of subtraction of net real resources from the economy, with potentially deflationary effects on profits and/or wages, distributional consequences, and frictions between capital and labor – all effects that should be studied carefully. 
  • It is necessary to identify and estimate the various forms of state and commercial bank seigniorage, the share of seigniorage that is returned to its legitimate “owners” (the citizens), and its effects on economic activity as well as on the economy’s incentive structure and the distribution of national wealth across society.
  • Finally, similar considerations hold for cryptocurrencies. They should be treated consistently and be recorded as equity of their issuers, irrespective of the private or public nature of issuers.   


Committee on Payments and Market Infrastructures (CPMI) (2015), Digital currencies, Bank for International Settlements, November.

ESA (2010), European System of Accounts, Eurostat, European Commission.    

McLeay, M, A Radia and R. Thomas (2014a), “Money Creation in the Modern Economy”, Bank of England Quarterly Bulletin 54(1): 14-27.

PricewaterhouseCoopers (PwC) (2017), Distinguishing liabilities from equity

Pro-Active Accounting in Europe (PAAinE) (2008), “Distinguishing between Liabilities and Equity”, Discussion Paper.

Schmidt, M (2013), “Equity and Liabilities – A Discussion of IAS 32 and a Critique of the Classification”, Accounting in Europe 10(2): 201-222.

Werner, R A (2014),“How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking”, International Review of Financial Analysis 36: 71–77.


[1] Except where the central bank adheres to fixed exchange rate arrangements, the economy is dollarised, or the country is under a currency board regime.

[2] International Accounting Standard (IAS) 32 defines a ‘financial instrument’ as “a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”, and an ‘equity instrument’ as “any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities” (par. 11). Under these definitions, legal tender money is neither ‘credit’ for its holders nor ‘debt’ for its issuers. It is instead net wealth of the holder and net worth (equity) of the issuers.

[3] The share of debt-deposits (or equity-deposits as its complement) is a stochastic variable that is influenced by behavioral and institutional factors (for example, cash usage habits or payment system rules) as well as contingent events. For example, in times of market stress, the share of debt-deposits tends to increase, while it tends to be lower when there is strong trust in the economy and the banking system in particular. Policy and structural factors that strengthen such trust (for example, the elasticity with which the central bank provides liquidity to the system when needed or a deposit insurance mechanism) increase the share of equity-deposits. All else being equal, the stochastic share of debt-deposits for a small bank is greater than for a larger bank; vice versa, the larger is the bank, the greater is the share of equity contained in its deposit liabilities.

[4] According to the Framework, “A liability is a present obligation of the entity to transfer an economic resource as a result of past events.” (Section 4.26) and, “Financial reports represent economic phenomena in words and number. To be useful, financial information must not only represent relevant phenomena, but it must also represent the substance of the phenomena that it purports to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the same. If they are not the same, providing information only about the legal form would not faithfully represent the economic phenomenon.” (3 Section 2.12 of the Conceptual Framework)

[5] Specifically, IAS 8 (Sections 10-11) requires that, “In the absence of an IFRS that specifically applies to a transaction, other event or condition, … management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements in IFRSs dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.”

[6] See IAS 32, Sections 28 It is noteworthy that, in the case ruled by the quoted standard, the hybrid instrument has the double nature of “liabilities-capital” and not “liabilities-revenue”; however, capital and retained earnings belong to equity. Briefly, equity can be shared into at least two major components: capital and other ownership's contributions, on the one hand, and retained earnings on the other. IAS 32 provides regulation for splitting hybrid instruments between a part attributable to liabilities and a part attributable to equity. Based on the definitions of the Framework, once the component recognizable as debt liability is identified, the residual component is attributed to equity.

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