Sovereign Money
as Equity

Abstract

In June 2026, economists Biagio Bossone and Massimo Costa published “Sovereign Money is not Debt: Why Central Bank Accounting Must Change,” arguing that central bank reserves, banknotes, and central bank digital currency (CBDC) are misclassified as liabilities under current accounting convention. Their Accounting View of Money (AVM) holds that because fiat reserves are irredeemable — convertible only into other forms of the same sovereign money, never into a higher-order asset — they fail the IASB's own definition of a financial liability and should instead be recorded as sovereign equity for the issuer and custodial assets for the holder.

This white paper assesses five core questions in turn: whether the underlying accounting argument is technically sound; what implementing the reform would actually require in practice; whether it is workable in the current geopolitical environment — one shaped by contested dollar dominance, sanctions-driven payment fragmentation, and active central bank digital currency competition (CIPS, mBridge, SPFS, the digital euro, and the BRICS Cross-Border Payments Initiative); what the reform implies for central bank independence; and where, concretely, its real-world adoption is most likely to be tested first. A fourth case study, Brazil, is added in this revision to ground the workability assessment in a jurisdiction where the reform's central questions are already arising in practice, independent of any formal AVM proposal.

We conclude that the technical case is largely sound and represents a genuine, defensible correction to an accounting convention inherited from the convertible-currency era. We further conclude that the reform is operationally low-risk — it changes no mechanism of monetary policy — but that its real-world adoption incentives are inverted from where the authors suggest: the institutions with the strongest motive to adopt it (credibility-constrained emerging market central banks) face the highest political risk in doing so, while the institutions facing the lowest political risk (the Federal Reserve, ECB, Bank of England) have the weakest motive, since markets already do not treat their reserve liabilities as functionally fragile regardless of accounting label.

Switzerland's two-tier monetary architecture, examined in Section 4.4, provides the clearest existing evidence that strong institutional credibility can substitute, in practice, for much of the benefit the AVM promises — the Swiss National Bank has operated through periods of negative recorded equity without institutional crisis, though we qualify this finding against the larger-scale Bank of England Asset Purchase Facility losses, which suggest the substitution effect holds but warrants separate verification at greater scale. The Bank of Japan's digital yen pilot, examined in Section 4.5, is identified as the single most concrete, technically mature, and trackable live case for monitoring whether the reform's most plausible adoption pathway — CBDC-specific legal architecture rather than full statutory reform — moves from theoretical possibility to institutional practice, though the same institutional gradualism that recommends the BoJ as a test case implies a multi-year observation horizon. A new Section 5 examines the reform's implications for central bank independence across four distinct risks — fiscal dominance optics (the most consequential), political weaponisation, coordination and sequencing risk, and a previously unexamined accountability gap arising from the greater valuation discretion inherent in equity accounting relative to liability accounting — finding a conditionally positive overall assessment that nonetheless surfaces genuine risks the original paper does not address.

This revision adds three further dimensions absent from earlier drafts. Section 2.4 delineates the AVM precisely from Modern Monetary Theory, establishing that the reform is a static accounting clarification orthogonal to fiscal policy stance, not a fiscal policy framework in its own right. Section 4.6 identifies a previously unexamined practical bottleneck: external auditors may decline to certify an AVM reclassification absent specific IASB-level guidance, a constraint distinct from every political or institutional obstacle examined elsewhere in this paper, and one this revision further develops by examining jurisdictional variation across audit regimes. Section 6.2 cautiously identifies one narrow, plausible application of the AVM's custodial logic to BRICS sanctions-resistance objectives, explicitly distinguished from any claim that the reform itself advances de-dollarisation.

This revision additionally adds a new Section 7.1 setting out an honest sequencing logic for implementation — engaging audit standard-setters before statutory drafting, and pre-negotiating legal interoperability before cross-border arrangements are finalised — alongside an explicit timeline expectation grounded in the historical pace of IASB standard-setting: major projects of comparable scope have taken five to ten years from initial proposal to finalised standard, suggesting the research agenda this paper sets out should be read as a multi-decade monitoring exercise rather than a near-term one, though we also acknowledge a narrower, faster unilateral adoption pathway that the IASB-centric timeline does not fully capture.

A new Section 4.8 broadens the evidentiary base: the Central Bank of Chile (continuously in negative equity since 1997), the Czech National Bank, and the Bank of Israel join Switzerland as documented cases of central banks operating with negative recorded equity without monetary policy impairment — part of a pattern of ten emerging-market and small open economies carrying negative equity between 2002 and 2021, per BIS Bulletin No. 68. A new Section 7.3 adds explicit testable predictions, including that CBDC legislation will increasingly adopt custodial-asset framing, that the IASB will eventually engage with the classification question, and that wholesale CBDC frameworks will precede any general reserve-accounting reform. A new paragraph in Section 3.1 addresses the quantifiable benefits of adoption directly.

A new Section 4.7 introduces Brazil as a fourth case study, distinct in kind from Switzerland and Japan: rather than illustrating institutional credibility or a mature CBDC pilot, Brazil demonstrates the AVM's central legal and political questions arising organically, in a jurisdiction with no engagement with the AVM literature whatsoever. The Banco Central do Brasil's Drex initiative has shifted, under its own internal redesign, from a conventional liability-based CBDC toward a tokenisation infrastructure layer whose legal characterisation remains unsettled — a live instance of the classification difficulty examined in Section 6.1. Separately, the Banco Master fraud crisis and the subsequent multi-branch judicial and legislative challenge to the BCB's regulatory authority provide the clearest real-world illustration available of the fiscal dominance and political weaponisation risks examined in Section 5.3, unfolding independently of any AVM-related proposal.

Most critically, we find the reform is fully orthogonal to the external determinants of reserve-currency dominance — liquidity depth, network effects, and crisis-liquidity capability — examined in our companion analysis of dollar dominance (NGE Investment Letter 109, June 2026). Relabeling a currency's domestic accounting treatment does not alter its international convertibility, capital account openness, or bond market depth. We close with a revised, falsifiable research agenda anchored on the Bank of Japan pilot and the legal interoperability question (Section 6.1) as the two highest-priority indicators to monitor.

Contents

1. Introduction: An Accounting Convention Inherited From a Different Monetary Era

Every central bank balance sheet published today still presents reserves, banknotes in circulation, and — where issued — central bank digital currency as liabilities. This convention is so deeply embedded in monetary economics, financial journalism, and policy discourse that it rarely invites scrutiny. Bossone and Costa's intervention is to ask a simple question with surprisingly large consequences: liabilities to whom, and redeemable into what?

Under the gold standard and subsequent convertible-currency regimes, the answer was clear. A banknote was a claim on a quantity of gold, or later, under Bretton Woods, dollars convertible into gold at a fixed rate. The liability classification was not a convention — it was a literal description of a contractual redemption obligation. When that convertibility was severed (definitively, for the dollar, in August 1971), the contractual obligation disappeared. The accounting label did not.

A precision note on scope, worth stating explicitly at the outset: this paper's title, following the original Bossone–Costa paper's own framing, refers to “sovereign money” broadly, but the reform examined throughout addresses specifically central bank money — reserves, banknotes, and CBDC. It does not address government debt, treasury securities, or other instruments sometimes loosely grouped under the broader “sovereign money” label. This distinction matters precisely because this paper goes to some lengths (Section 2.4) to delineate the AVM from MMT and other broader fiscal policy frameworks; a more narrowly precise title would be “Central Bank Money as Equity,” and readers should understand the analysis throughout in those terms, notwithstanding the title's use of the original paper's broader, established terminology.

2. Assessing the Technical Argument

2.1 The Liability Test, Applied Correctly

The authors' core technical move is narrow and, on its own terms, difficult to dispute. The IASB's Conceptual Framework (2018) defines a financial liability as a present obligation of an entity to transfer an economic resource as a result of past events. Central bank reserves do not meet this test once convertibility into an external asset has been abolished. When a commercial bank holds reserves at the central bank, it is not owed gold, foreign exchange, or any instrument other than further units of central bank money — itself subject to the identical question. There is, in the authors' formulation, “no redemption chain above central bank money.”

This is a genuinely useful clarification, not merely a rhetorical reframing. It exposes a real category error: the implicit suggestion, embedded in standard balance-sheet presentation, that commercial banks are extending credit to the central bank — funding it — through their reserve holdings. They are not. Reserves are created by the central bank, not lent to it.

2.1.1 A Deeper Gap: Does the IASB Framework Even Apply to Central Banks?

There is a further point worth making explicit, one that strengthens rather than weakens the authors' case. The IASB's Conceptual Framework was developed primarily with business entities in mind — entities operating for profit, with conventional shareholders, and liabilities dischargeable through bankruptcy. Central banks satisfy none of these conditions. Paragraph 2.15 of the Framework acknowledges that “some entities, such as government departments or agencies, may not have profit as their primary objective,” but provides no specific guidance for how such entities should classify instruments that do not fit the standard liability or equity categories designed for ordinary corporations.

This is a genuine interpretive gap in the accounting standard itself, not merely a question of how to apply an otherwise-settled standard to central bank reserves. It means the AVM is not simply correcting a misapplication of existing rules — it is proposing a new classification standard for a category of entity that the IASB's own framework does not adequately address. This strengthens the authors' underlying case (the existing convention was never well-suited to central banks in the first place) while also suggesting that any genuine resolution may ultimately require IASB-level standard-setting attention, not merely individual central banks adopting divergent national presentations of the same underlying instruments.

This gap is not merely inferred; it has been substantially confirmed by the IASB's own consultative process. During the IASB's 2013–15 review of the Conceptual Framework, public sector accounting bodies submitted formal feedback flagging exactly this deficiency, and documentation from that review process records that the revised Conceptual Framework, as developed through the Exposure Draft stage, “continues not to assist in resolving public sector specific issues of importance.” The IASB's own review materials acknowledge the gap rather than resolve it. Separately, and more tellingly still, the existence of the International Public Sector Accounting Standards Board (IPSASB) as a distinct standard-setting body — maintaining its own Conceptual Framework for public sector entities since 2014, with substantive updates as recently as 2023 — is itself structural confirmation that the IASB's business-entity-oriented framework was never considered adequate for public sector financial reporting generally, central banks included. No IASB agenda item has specifically and definitively resolved central bank reserve classification; the gap this paper identifies is real, documented in the IASB's own review history, and remains open.

2.2 What Changes, and What Does Not

Critically, and the authors are explicit on this point, the AVM reform changes no operational mechanism of monetary policy. Interest on reserves continues to function identically. Open market operations, repo facilities, and quantitative easing programmes operate exactly as before. Settlement finality through the payment system is unaffected. The reform is confined to the accounting and legal description of what already happens — not a change to what happens.

This is the paper's strongest defensive claim and, in our assessment, a fair one. The AVM is not modern monetary theory (MMT) in disguise. It does not argue government spending is unconstrained, nor does it dispute that inflation results from the interaction of money quantity, velocity, and real economic capacity — a point the authors do not directly address but which is not contradicted by their argument. The reform is closer to a long-overdue tidying of inherited terminology than a substantive change in monetary capacity.

2.3 Where We Would Push Back

Three qualifications deserve more weight than the original paper gives them.

• Accounting labels are not narrative-neutral, even when they change nothing operationally. The authors acknowledge this as the reform's chief benefit (improved public and market understanding) but underweight it as a risk. A central bank balance sheet that no longer shows “liabilities” ballooning during a large asset-purchase programme removes a visible, if conceptually flawed, signal that market participants and legislators have used for decades as an intuitive (if imperfect) check on the scale of intervention. Removing a flawed gauge is not costless even when the gauge was misleading — it removes a coordination point for public debate, and what replaces it (seigniorage and equity disclosures) is less intuitively legible to a non-specialist audience, including most legislators who appropriate central bank budgets or oversee their mandates.
• The custodial-asset framing for CBDC holders, while legally cleaner, raises a separate question the paper does not resolve: custodial relationships typically carry fiduciary duties, segregation requirements, and specific insolvency-remoteness protections under most jurisdictions' financial law. Recasting CBDC holdings as custodial assets is not merely a label change for the holder — it may import an entire body of custodial law (originally designed for assets like securities held by a broker) into sovereign digital currency, with consequences for privacy design, programmability, and government claims on funds that the paper treats as a benefit without examining the corresponding legal complexity.
• The reform's stated greatest beneficiaries — emerging and developing economies seeking institutional credibility — are also the economies where unilateral departure from globally standardised central bank accounting carries the highest market-perception risk. IFRS and BIS-aligned reporting conventions, however conceptually imperfect, are part of how rating agencies, foreign reserve managers, and IMF Article IV consultations benchmark monetary institutions against one another. An emerging-market central bank that reclassifies its reserves as equity ahead of the major reserve-currency issuers is more likely to be read by markets as a deviation requiring explanation — precisely the opposite of the credibility-building effect the authors intend — than as a sign of conceptual sophistication.

The custodial-asset compliance burden referenced above is not abstract. Existing custodial law regimes in major jurisdictions already impose specific, codified obligations that would plausibly attach, by analogy or direct extension, to sovereign digital currency held in a custodial framework.

The practical consequence is that treating CBDC as a custodial asset could impose meaningful new operational and compliance costs on distributing intermediaries — commercial banks, payment providers, fintechs — potentially disadvantaging smaller participants relative to large, well-capitalised institutions already equipped to manage custodial compliance at scale. This is not an argument against the custodial framing, which remains legally cleaner on balance. It is a genuine implementation cost the original paper identifies but does not quantify, and which deserves more detailed jurisdiction-by-jurisdiction examination before any CBDC programme adopts it as a design default.

2.4 Delineating the AVM From Modern Monetary Theory

The original paper states that the AVM “is not modern monetary theory (MMT) in disguise,” a clarification we endorse but believe deserves more precise delineation than a single defensive sentence, given how readily critics conflate any argument about sovereign monetary capacity with MMT's broader policy agenda.

The AVM and MMT share certain premises: both hold that a sovereign fiat issuer is not financially constrained in the manner of a household or corporation; both treat the conventional accounting representation of central bank liabilities as conceptually problematic; both regard seigniorage as a genuine revenue source rather than a disguised form of borrowing. Where the two frameworks diverge is more consequential than where they agree. The AVM is, at its core, a static accounting clarification — it prescribes no change to fiscal policy, monetary policy, or the conduct of central bank operations. MMT is a substantive policy framework that argues for specific fiscal interventions (a federal Job Guarantee being the most cited example), a particular theory of the relationship between taxation and money creation, and an active, interventionist role for fiscal policy in macroeconomic stabilisation that goes considerably beyond accounting presentation.

This distinction matters practically: the AVM could be adopted by a central bank operating under the strictest conventional inflation-targeting mandate, with no accompanying change to fiscal policy whatsoever, just as readily as it could be adopted by a more fiscally interventionist government. The reform is, in this specific sense, orthogonal not only to the dollar dominance question examined in Section 6 but also to the broader fiscal policy debates that MMT engages with directly. A central bank could adopt AVM accounting and remain exactly as conservative, or exactly as interventionist, in its monetary and fiscal posture as it was before — the accounting clarification carries no implied direction of travel on substantive policy.

3. A Reform Blueprint: What Implementation Would Actually Require

Setting aside the contested points above, it is worth taking seriously what the authors propose operationally, because it is more modest than the conceptual ambition might suggest. Three concrete steps comprise their blueprint.

Notably, none of these three steps requires international coordination to implement domestically. A single central bank could, in principle, adopt all three unilaterally. This is simultaneously the reform's greatest practical strength (no multilateral negotiation required) and the source of the adoption-incentive problem examined in Section 4: unilateral adoption by any single major institution creates a visible asymmetry with peer central banks that have not adopted the same convention, inviting exactly the comparative scrutiny smaller or credibility-constrained economies can least afford.

3.1 The Underdeveloped Question: Seigniorage Distribution

Step 3 of the blueprint above — seigniorage transparency — is treated by the original paper in a single sentence, and this brevity understates what is arguably the most consequential practical dimension of the entire reform. Under current accounting convention, seigniorage (the income a central bank earns from money issuance, principally interest on securities acquired through reserve creation) is typically reported as ordinary revenue when earned, then distributed to the treasury according to statutory profit-distribution rules. Under the AVM, that same income is recharacterised as the return generated by the equity that money issuance itself creates. The accounting logic is sound. The downstream consequences are not fully resolved by the original paper, and four specific questions deserve more attention than they receive.

• Distribution rules. If seigniorage is reframed as income from equity rather than ordinary operating revenue, does the legal basis for distributing it to the treasury change? In most jurisdictions, central bank profit distributions are governed by specific statute, often with formulas tied to operating profit or net income as conventionally defined. A reclassification of the underlying accounting category could require those statutes to be reopened and amended — a politically exposed process in any jurisdiction, and one that introduces exactly the kind of legislative risk the reform's modest, low-disruption framing elsewhere in this paper does not fully anticipate.
• Capitalisation incentives. Does the AVM imply that central banks should retain a larger share of seigniorage to build recorded equity positions, rather than distributing it to the treasury as before? If so, this creates a directly observable, politically sensitive trade-off: a finance ministry that previously received the bulk of central bank profits could see those distributions reduced in the name of strengthening the institution's equity buffer — an outcome any government would scrutinise closely, and one the reform's proponents have not yet had to defend in a live legislative setting.
• Reporting frequency. Seigniorage transparency is more meaningful, and arguably more useful for the credibility-building purpose the authors intend, if reported more frequently than once-a-year financial statements allow. But higher-frequency reporting of money-creation income introduces a new variable into financial markets that does not currently exist in this form — quarterly or even monthly seigniorage disclosures could become a market-moving data point in their own right, particularly for currencies already under speculative pressure, with consequences for market volatility that the original paper does not examine.
• Loss absorption. A question logically prior to the three above, and one this paper answers directly rather than leaving open: under the AVM, does the central bank's recorded equity position function as a genuine loss-absorption buffer, in the way corporate equity absorbs losses before creditors are affected — or is the equity classification purely presentational, carrying no such function? The answer, consistent with the AVM's own underlying logic, must be the latter. A sovereign fiat issuer's actual capacity to meet its obligations is not contingent on the recorded size of its equity position; it is contingent on the state's authority to issue further units of its own currency, a capacity that exists independently of any balance sheet figure. If the AVM's equity classification were treated as a genuine loss-absorption requirement — creating an expectation that central banks must maintain a positive recorded equity position — it would reintroduce, in a new form, exactly the solvency-constraint illusion the reform is designed to dispel. The authors' own framing supports this reading, though the original paper does not state it as explicitly as the practical importance of the distinction warrants: AVM equity is presentational, not prudential. Any jurisdiction adopting the reform should state this explicitly in its implementing legislation, precisely to avoid the kind of confusion the reform is intended to eliminate.

A further question the paper should address directly, and which prior drafts did not: if the AVM were adopted, what measurable improvement would actually occur? Four concrete benefit categories are identifiable, though each requires careful qualification. First, CBDC legal clarity: jurisdictions adopting custodial-asset framing for digital sovereign money would remove a genuine ambiguity in insolvency law — the question of whether CBDC holders have a priority claim over other creditors in a central bank restructuring scenario, which is currently unsettled in most legal systems. This is a concrete, legally-specified benefit, not a hypothetical one. Second, transparency of seigniorage income: under the AVM, the income central banks earn through money creation would be reported as the equity return it structurally is, rather than as ordinary operating revenue, potentially improving market participants' ability to assess the genuine profitability of central bank operations. Third, institutional credibility in credibility-constrained jurisdictions: this is the benefit the original paper emphasises most heavily, and it is real but difficult to quantify in advance; the Swiss, Czech, Chilean, and Israeli cases suggest that the benefit is achievable through track record and communication even without the accounting reclassification, which means the marginal credibility gain from formal adoption may be smaller than the paper's proponents claim. Fourth, the regulatory capital question identified in the Section 7.2 research agenda: if custodial treatment reduces the regulatory capital commercial banks must hold against CBDC-related exposures, this is a measurable benefit to bank profitability and credit availability, but one that would require jurisdiction-by-jurisdiction quantification under the applicable capital adequacy framework. The honest summary: the AVM's most quantifiable near-term benefit is CBDC legal clarity; its most important long-run benefit is seigniorage transparency; and its most frequently cited benefit — institutional credibility — is real but difficult to isolate from the many other determinants of market confidence in a central bank.

The presentational-not-prudential answer above raises an immediate follow-on difficulty that statutory language alone does not resolve: how should a central bank communicate this distinction to legislators, markets, and the public without the explanation itself undermining the credibility-building benefit the reform is meant to deliver? “This equity figure does not function as a buffer against loss” is, on its face, a statement that risks sounding like an admission that the number is meaningless — precisely the opposite of the reassurance the AVM's proponents intend the reclassification to provide. Resolving this communications challenge is a genuine, unresolved task for any adopting central bank's public engagement strategy, distinct from the legislative drafting question addressed above, and one this paper flags as an open practical question rather than attempts to resolve here.

None of these four questions undermines the reform's technical soundness. They do, however, suggest that “Step 3: seigniorage transparency” in the blueprint above is considerably more consequential, and more politically contested, than its single-line treatment in the original reform blueprint implies. Any jurisdiction seriously considering AVM adoption would need a fuller answer to these distribution questions — and an explicit statutory statement on the non-prudential nature of AVM equity — before legislative drafting could responsibly proceed.

4. Workability in the Current Geopolitical and Monetary Environment

This section addresses the question posed directly: is this reform realistically achievable in a “hot” geopolitical environment characterised by contested dollar dominance, active sanctions regimes, and competing CBDC infrastructure builds? Our assessment, set out below, diverges in emphasis from the original paper's relatively optimistic framing.

4.1 The Adoption-Incentive Mismatch

The paper's strongest practical claim — that emerging and developing economies stand to gain the most from adopting the AVM — is also where we find the clearest structural obstacle. Credibility-constrained monetary authorities are, by definition, the institutions whose policy choices face the closest external scrutiny from rating agencies, the IMF, and foreign reserve managers deciding whether to hold that country's debt. For such an institution, deviating first from globally standardised accounting convention is a higher-variance bet than the paper allows for: it could be read as the conceptual clarity the authors intend, or it could be read as an opportunistic redefinition undertaken precisely because the institution wants room to expand its balance sheet without the optics of “debt.” Markets, especially in stressed conditions, tend to assume the less charitable interpretation first and ask questions later.

By contrast, the institutions facing the least adoption risk — the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan — have correspondingly the least incentive to move. Sophisticated market participants do not currently treat Federal Reserve balance sheet expansion as a solvency signal regardless of the liability label; the dollar's status as discussed in NGE Investment Letter 109 rests on liquidity depth, network effects, and demonstrated crisis-liquidity provision, not on the semantic treatment of reserves. The institutions with the lowest political cost of reform are precisely those with the weakest motive to bear even that low cost first.

4.2 Orthogonality to the Real Drivers of Currency Dominance

This is the single most important point this white paper adds to the discussion, and it follows directly from our companion analysis in Letter 109. The structural advantages underpinning dollar dominance — a US Treasury market exceeding $28 trillion in outstanding depth, self-reinforcing network effects across 89% of global FX trading turnover, and the Federal Reserve's demonstrated capacity to provide dollar liquidity globally during the 2008 and 2020 crises — are entirely independent of how reserves are labelled on a balance sheet.

The AVM reform would not make the Chinese renminbi more freely convertible. It would not give the eurozone a unified fiscal treasury or a single deep sovereign bond market to rival US Treasuries. It would not alter capital controls in any jurisdiction that maintains them. It is, in the most precise sense, a domestic legal and accounting clarification with no direct bearing on a currency's external competitiveness as a reserve asset. Any expectation that this reform meaningfully shifts the multipolar currency competition described throughout the BRICS Cross-Border Payments Initiative, CIPS expansion, or mBridge settlement volumes would be a category error — conflating a balance-sheet presentation question with a capital-account and liquidity-depth question.

4.3 Where the Reform Could Plausibly Gain Real-World Traction

The most credible path to adoption is narrower and more technical than full statutory reform, and the authors gesture toward it without fully developing it: central bank digital currency design specifically, rather than the broader reserve-accounting question.

CBDC is a greenfield legal and technical architecture in every jurisdiction currently building it. Unlike reserve accounting, which carries decades of institutional inertia, CBDC legal frameworks are being drafted now, in real time, across dozens of central banks. This is the one context in which the custodial-asset framing for holders carries a genuinely lower adoption cost: there is no existing convention to displace, no historical balance sheet presentation to explain away, and a real practical benefit — bankruptcy remoteness and clearer ownership rights for CBDC holders — that legal drafters are already grappling with independent of this paper's framing.

4.4 The Swiss Precedent: A Working Two-Tier System That Already Half-Resembles the AVM

Switzerland offers the most useful real-world reference point available, not because the Swiss National Bank (SNB) has adopted AVM accounting — it has not, and continues to report sight deposits and banknotes as standard liabilities — but because the SNB's two-tier monetary architecture already operates, functionally, in a manner highly compatible with the custodial logic the AVM proposes, without requiring the relabeling exercise this paper has been assessing.

In the Swiss model, the SNB occupies a clearly bounded top tier: it issues banknotes and sight deposits (reserves), provides final settlement, and implements monetary policy through its policy rate and tiered remuneration on reserve balances. Commercial banks occupy a clearly bounded second tier: they create deposit money through lending, backed by and convertible at par into SNB money, and handle all customer-facing credit allocation and innovation. This division of labour is treated by the SNB not as an accounting question but as a financial-stability architecture — and it has proven durable through negative interest rate policy, large foreign exchange interventions, and balance sheet expansions that would, under the liability-illusion framing this paper has critiqued, have looked alarming on paper.

Two features of the Swiss approach are directly instructive for the broader AVM debate. First, the SNB has operated with negative recorded equity in past periods without triggering any genuine institutional crisis — markets, the Swiss Federal Council, and cantonal governments (the recipients of SNB profit distributions) have treated this as a pragmatic, well-understood feature of central bank accounting rather than a solvency signal. This is precisely the outcome the AVM's proponents argue their reform would more accurately reflect; Switzerland appears to have substantially achieved the desired market and political behaviour without needing the statutory reclassification, through institutional credibility and consistent communication rather than balance sheet relabeling. This is a meaningful qualification to the AVM's central practical claim: accounting clarity may be a sufficient but not strictly necessary condition for the credibility benefits the authors seek.

Second, and more directly relevant to the CBDC question examined throughout this paper, the SNB's Project Helvetia — its wholesale CBDC pilot conducted with the SIX Digital Exchange for settlement of tokenised assets — already operates as a form of central bank money issued specifically to regulated intermediaries, not retail holders, preserving the two-tier division of labour by design. Project Helvetia continues to record this wholesale CBDC as a conventional SNB liability. It has not adopted equity or custodial framing. But the underlying operational logic — intermediaries holding and administering claims that are, in substance, settlement-final central bank money rather than ordinary credit extended to the SNB — is functionally indistinguishable from the custodial model the AVM proposes. Switzerland demonstrates that the two-tier architecture and the AVM's preferred legal characterisation are entirely compatible; what is missing is only the accounting label, not any change to how the system actually operates.

4.4.1 A Necessary Qualification: Does the Swiss Case Travel?

Two qualifications temper how far the Swiss precedent can be generalised, and both deserve more weight than an uncritical reading of Section 4.4 might suggest. First, Switzerland's institutional credibility is not solely a function of SNB governance in isolation — it reflects a broader political and economic context of consensus-oriented politics, fiscal conservatism, and a multi-generational tradition of monetary stability that few other jurisdictions can readily replicate. The Swiss case is genuinely instructive as a demonstration that institutional credibility can substitute for accounting clarity; it is less reliable as a template for how readily that substitution would work in a jurisdiction with a shorter or more contested institutional track record.

Second, and more concretely, the scale comparison matters. The SNB's most-cited negative equity episode — a CHF 23 billion loss in 2015, following the abandonment of its franc-euro exchange rate floor — was significant but bounded. By contrast, the Bank of England's Asset Purchase Facility losses, crystallising through 2022–2023 as gilt yields rose sharply against the fixed low-coupon bonds the BoE had purchased during quantitative easing, were reported at approximately £50 billion — more than double the SNB's loss in relative terms once adjusted for the two institutions' respective balance sheet scale. The Bank of England absorbed this loss without an institutional crisis, drawing on its indemnity arrangement with HM Treasury rather than triggering any genuine solvency question — a result broadly consistent with the AVM's underlying claim that recorded losses do not threaten a fiat-currency-issuing central bank's actual capacity. But the BoE episode also demonstrates that the credibility-substitutes-for-accounting-clarity finding from the Swiss case holds at a meaningfully larger scale of loss than the SNB experience alone establishes — encouraging for the AVM's broader claim, but a separate data point that should be assessed on its own terms rather than treated as a simple extension of the Swiss precedent.

One distinction between the two cases deserves explicit acknowledgement rather than being absorbed into the scale comparison above. The BoE's APF loss was crystallised and absorbed through a contractual indemnity arrangement with HM Treasury — meaning the ultimate risk bearer was the UK taxpayer via the fiscal authority, not the Bank of England's own balance sheet in isolation. The SNB's 2015 loss, by contrast, was absorbed directly by the SNB without an equivalent treasury indemnity mechanism standing behind it. This means the BoE case is, strictly, a test of the credibility of the Treasury indemnity backstop as much as it is a test of the Bank of England's own institutional credibility — a meaningfully different mechanism from the pure central-bank-credibility test the Swiss case provides. Both cases support the same general conclusion (recorded losses, however large, do not threaten a fiat-currency-issuing central bank's actual capacity), but they support it through different institutional mechanisms, and the paper's broader claim is better evidenced by treating them as two distinct, mechanism-specific data points rather than a single generalised finding. Stated plainly: the Swiss case is, methodologically, the stronger test of the AVM's central proposition, precisely because the SNB absorbed its loss without a fiscal backstop standing behind it; the BoE case is better understood as corroborating a related but distinct proposition — that fiscal authorities can absorb central bank losses without precipitating institutional crisis — rather than as direct confirmation of the Swiss finding at larger scale.

4.5 The Bank of Japan's Digital Yen Pilot: The Most Concrete Live Test Case

Of every monetary authority examined in this paper, the Bank of Japan's (BoJ) digital yen programme is the closest real-world analogue to the empirical test this paper's research agenda calls for. The BoJ progressed through two proof-of-concept phases (2021–22 and 2022–23) before launching a formal pilot programme in April 2023, now involving approximately 60 private-sector participants spanning banks, payment providers, and technology firms. Published BoJ reports through May 2025 describe a hybrid, centralised-core architecture in which the BoJ manages the core settlement ledger while private intermediaries handle all user-facing accounts — a two-tier design directly analogous to the Swiss model discussed above, and tested at meaningful technical scale, with simulations reportedly reaching throughput above 50,000 transactions per second.

Critically for this paper's purposes, current BoJ pilot documentation treats the prospective digital yen as a conventional central bank liability, equivalent in accounting treatment to physical banknotes. The BoJ has been explicit and consistent that no decision to issue has been made; the institution's stated posture is preparation and technical readiness rather than commitment, a deliberately cautious sequencing consistent with its broader policy style (the same gradualism that characterised the introduction and unwinding of yield curve control and negative interest rate policy, both covered in this letter series' broader analysis of Japanese monetary policy in Letter 98).

This combination of features — a sophisticated, technically mature, intermediary-heavy hybrid architecture, conducted by an institution with a demonstrated preference for extended deliberation before formal policy commitment, currently using conventional liability accounting — makes the BoJ pilot the single most useful live case to monitor for any future evolution toward AVM-style custodial framing. Unlike a hypothetical future CBDC programme, the BoJ pilot already exists, already publishes periodic technical reports, and is already grappling in practice with exactly the ownership, holding-limit, and disintermediation questions the AVM literature addresses in theory. A future BoJ report that recharacterises pilot participants' digital yen holdings as custodial assets rather than BoJ liabilities — even informally, ahead of any statutory change — would be the clearest real-world confirmation available anywhere globally that the AVM's CBDC-specific adoption pathway, identified in Section 4.3, is moving from theoretical possibility to institutional practice.

One caveat deserves explicit statement: the same institutional gradualism that makes the BoJ a methodologically valuable test case also implies a long observation horizon. The BoJ's stated posture — preparation and technical readiness rather than commitment — is sound policy on its own terms, but it suggests that any meaningful evolution in the pilot's accounting treatment, should it occur at all, is more plausibly measured in years than in quarters. Readers using this paper's research agenda (Section 7) to track real-world AVM adoption should calibrate their expectations accordingly: the BoJ pilot's value lies in its being the best available case to monitor, not in any near-term likelihood of an observable shift.

A further dynamic worth noting, though it is speculative rather than near-term: a central bank that adopts custodial accounting for CBDC specifically, as the most plausible adoption pathway identified in Section 4.3 envisions, may over time face an internal consistency pressure to extend the same logic to banknotes and conventional reserves. Having drawn the custodial-asset distinction for one form of central bank money, maintaining a different, liability-based treatment for materially identical instruments (banknotes, reserves) becomes progressively harder to justify on principled grounds. This reverse pathway — from CBDC-specific custodial accounting toward fuller AVM adoption — is not a near-term scenario, and the same adoption-incentive mismatch identified in Section 4.1 would apply to it with equal force. But it is worth acknowledging as a plausible medium-term consequence of the CBDC-first adoption strategy this paper otherwise identifies as the most credible near-term pathway.

4.6 The External Auditor Bottleneck

A practical implementation constraint that the original paper does not address at all, and that this white paper's earlier drafts likewise underweighted, concerns the role of external auditors in any actual AVM adoption process. Central banks, notwithstanding their distinctive institutional character, are typically subject to external audit — whether by a national Supreme Audit Institution (the US Government Accountability Office, the UK National Audit Office, and equivalent bodies elsewhere) or, in some jurisdictions, by private-sector audit firms engaged for this purpose.

An external auditor asked to sign off on a central bank's financial statements following an AVM-style reclassification would need a defensible basis for concluding the reclassification complies with applicable accounting standards. Given the IASB applicability gap documented in Section 2.1.1 — the absence of specific IASB guidance on how central banks should classify reserves, banknotes, or CBDC — an auditor lacking clear standard-setter guidance might reasonably decline to issue an unqualified opinion on financial statements reflecting the AVM's equity treatment, absent either a supporting legal opinion establishing the reclassification's defensibility under existing standards, or an explicit IASB-level clarification resolving the gap directly. This creates a genuine practical bottleneck distinct from every other obstacle examined in this paper: a central bank could satisfy every other condition for AVM adoption — statutory authority, political will, technical readiness — and still find itself unable to proceed unilaterally if its external auditor will not accept the change.

The severity of this bottleneck is unlikely to be uniform across jurisdictions, and three sources of variation deserve explicit acknowledgement. First, the bottleneck is plausibly more acute where external audit is performed by a private-sector firm, which must be prepared to defend its audit opinion against potential challenge from regulators, shareholders of regulated banks relying on the central bank's published figures, or litigation, than where audit is performed by a national Supreme Audit Institution, which in many jurisdictions has greater latitude to interpret applicable standards in the public interest and faces a different, generally lower, liability exposure than a private audit firm. Second, a supporting legal opinion is not a uniform substitute for IASB guidance: legal opinions vary considerably in strength, are themselves subject to challenge, and a sufficiently cautious auditor might require an opinion considerably stronger than what is typically obtained for routine accounting determinations before accepting a genuinely novel reclassification of this kind. Third, and cutting across both of the above, jurisdictions where auditors face meaningful personal or firm-level liability for misstatements are likely to see a more binding bottleneck than jurisdictions where auditor liability exposure is more limited — making the prevailing auditor liability regime a relevant variable, not yet fully integrated into this paper's analysis, for any future attempt to map which jurisdictions are best positioned to move first on AVM adoption.

4.7 Brazil: A Laboratory of Implementation Friction

Brazil offers a case study that operates differently from the Swiss and Japanese cases examined above. Switzerland and Japan illustrate, respectively, that institutional credibility can substitute for accounting clarity, and that a technically mature CBDC pilot provides the clearest live test of the AVM's adoption pathway. Brazil illustrates something this paper has not yet examined directly: what happens when the exact legal and political questions the AVM seeks to resolve arise in practice, in a jurisdiction that has not adopted, and shows no sign of adopting, anything resembling the AVM's reclassification logic. Brazil is, in this specific sense, a laboratory of implementation friction — not a precedent for the reform, but a demonstration of the unresolved terrain the reform would need to navigate.

4.7.1 Drex and the Legal Status Question, Without the AVM

The Banco Central do Brasil (BCB) has spent several years developing Drex, its digital real initiative, originally conceived as a blockchain-based central bank digital currency issued as a direct liability of the central bank, consistent with the conventional BIS definition of a CBDC. By August 2025, the BCB had abandoned the distributed-ledger architecture entirely, citing persistent privacy and scalability difficulties — the project's own internal assessment described an unresolved “trilemma” among privacy, scalability, and programmability that the original design could not satisfy. The project's reorientation has been substantial enough that BCB Governor Gabriel Galípolo has since characterised Drex not as a textbook CBDC replacing commercial bank deposits with central bank liabilities, but as a tokenisation infrastructure layer intended to facilitate credit collateralisation — with at least one BCB official going so far as to state publicly that the project is, at this stage, “not a CBDC.” A separate BCB official has noted that Brazil's existing instant payment system, Pix, already satisfies most retail digital payment needs, reducing the urgency of a retail CBDC specifically.

This trajectory is instructive precisely because it demonstrates the legal interoperability question examined in Section 6.1 arising organically, without any AVM-adjacent reform being proposed or considered. Brazil's monetary authority has spent years building, then substantially redesigning, a digital instrument whose foundational legal characterisation — a liability of the central bank in its original conception, something closer to a tokenisation utility in its current form — has shifted under the project's own internal evolution. A jurisdiction does not need to have engaged with the AVM literature at all to encounter the exact classification difficulty the AVM exists to resolve. This is a genuinely useful corrective to any reading of this paper that treats the AVM's legal and accounting questions as abstract or academic: Brazil shows they are live, present-tense, operational questions that monetary authorities are already navigating, with or without a formal reclassification framework to guide them.

4.7.2 The Banco Master Crisis as a Live Test of Fiscal Dominance Optics

A second, more dramatic Brazilian development bears directly on the fiscal dominance risk examined in Section 5.3. On November 18, 2025, the BCB ordered the extrajudicial liquidation of Banco Master, a mid-sized Brazilian bank, after federal investigators uncovered what has since been described as the largest banking fraud in the country's history — a scheme in which credit securities lacking genuine financial backing were sold to other institutions, ultimately requiring Brazil's deposit guarantee fund to disburse approximately BRL 49.5 billion to reimburse depositors. The liquidation itself was a conventional exercise of central bank regulatory authority. What followed was not.

By December 2025, Brazil's federal audit court (Tribunal de Contas da União, the TCU) had opened a formal review of the BCB's liquidation decision, and a justice of the Supreme Federal Court signalled willingness to examine the central bank's exclusive regulatory jurisdiction directly — a degree of cross-branch judicial scrutiny of a central bank's core regulatory function that Brazil's largest banking federation (Febraban) and other financial industry associations described, in a December 27, 2025 public statement, as a direct threat to the BCB's institutional autonomy requiring active defence. By March 2026, the investigation had widened further still: Reuters reported that two former senior BCB supervision officials were themselves under investigation for allegedly providing informal counsel to Banco Master's controlling shareholder while occupying oversight roles directly relevant to the bank's supervision. Separately, congressional figures with documented financial ties to Banco Master's shareholder had, in the period before the liquidation, introduced legislation that would have both expanded deposit guarantee limits in ways analysts warned could jeopardise the guarantee fund's solvency, and granted Brazil's Congress the power to remove central bank directors directly.

The implication for this paper's broader argument is direct: AVM adoption in an environment already characterised by active judicial and legislative challenges to central bank authority would plausibly be read, by at least some political actors, as a further erosion of the conventional accounting discipline these critics already argue the BCB has insufficiently respected — regardless of the reform's genuine accounting merits, examined at length in Section 2. The Brazilian case suggests that a reform's political workability is inseparable from the broader, sometimes fast-moving battle for institutional credibility a central bank is fighting at any given moment — a dimension of timing and political context that the adoption-incentive mismatch identified in Section 4.1 does not fully capture in its more static, cross-jurisdictional form.

4.8 The Broader Negative-Equity Record: Chile, the Czech Republic, and Israel

The Swiss and Japanese cases examined above, and Brazil as a demonstration of live implementation friction, do not exhaust the empirical record relevant to this paper's central claim. A reviewer of this paper correctly identified a broader pattern that deserves explicit acknowledgement here: the Swiss National Bank is not the only central bank to have operated with negative recorded equity without suffering institutional crisis or monetary policy impairment. The Central Bank of Chile, the Czech National Bank, and the Bank of Israel have each done so for extended periods — in Chile's case, continuously since 1997 — and the BIS has cited all three as documented demonstrations that negative accounting equity does not constrain a central bank's operational capacity.

4.8.1 Chile: Negative Equity Since 1997

The Central Bank of Chile has carried negative equity on its balance sheet continuously since 1997, the result of sterilisation costs incurred during large capital inflow episodes in the 1990s and the interest burden of long-term bonds issued to finance reserve accumulation programmes. This is not a recent or temporary anomaly: as of the most recent public disclosures, the deficit persists and the institution continues to conduct orthodox inflation-targeting monetary policy. BIS Papers have documented that this negative equity position has not proved to be a problem for the conduct of monetary policy. Chile's experience is the longest-running documented case in the literature of a credible central bank operating in continuous negative equity, and it is directly relevant to this paper's claim that accounting presentation is separable from genuine institutional capacity.

4.8.2 Czech National Bank: Accumulated Losses Without Operational Impairment

The Czech National Bank (CNB) accumulated accounting losses reaching approximately CZK 200 billion at peak, primarily reflecting revaluation losses on foreign exchange reserves accumulated through exchange-rate interventions designed to prevent excessive koruna appreciation. At the time of the ECB's Convergence Report scrutiny of this position, the CNB responded publicly and directly: its accumulated losses had never had an adverse effect on monetary policy and had not curtailed its ability to perform any of its statutory functions. The CNB explicitly cited the BIS report “Issues in the Governance of Central Banks,” which named Chile and Israel alongside the Czech Republic as central banks that “for years operated successfully with negative capital.” The CNB's seigniorage income remained sufficient to provide confidence that capital would be rebuilt over time — which is, notably, the exact mechanism the AVM identifies as the source of central bank equity in the first place.

4.8.3 Implications: A Pattern, Not an Anomaly

BIS Bulletin No. 68, which examined central bank losses across 32 emerging-market and small open economies between 2002 and 2021, found that 10 of those 32 institutions carried negative equity at some point during that period, with three carrying it for more than 30 percent of the time. Throughout these episodes, the institutions continued to meet their monetary policy mandates. The pattern documented across Chile (since 1997), the Czech Republic (accumulated over decades), Israel, and Switzerland reinforces this paper's argument in Section 4.4 from a different angle: the claim that accounting equity is operationally significant for a sovereign fiat-currency issuer is empirically contradicted across multiple jurisdictions, multiple decades, and multiple institutional settings. The Swiss case identified in Section 4.4 as the methodologically stronger test — because the SNB absorbed losses without a fiscal backstop — is part of a substantially broader evidentiary pattern than the paper's earlier drafts acknowledged.

5. Central Bank Independence: Does the Reform Strengthen or Weaken It?

A question the original Bossone–Costa paper does not directly address, but which is central to any serious assessment of workability, is the reform's relationship to central bank independence (CBI). Independence is conventionally understood across three dimensions: instrument or operational independence (freedom to set rates and conduct operations in pursuit of a mandate); financial independence (the ability to fund operations without routine reliance on government appropriation, typically governed by profit, capital, and remittance rules); and personal or goal independence (tenure protection and statutory insulation from direct political interference).

5.1 The Conventional Concern, and Why It Is Overstated

Critics of large-scale central bank balance sheet expansion — quantitative easing, emergency lending facilities, crisis-era asset purchases — have periodically argued that the resulting accounting losses or negative recorded equity create genuine institutional vulnerability: the risk of forced recapitalisation requests from government, halted profit remittances inviting legislative scrutiny, or a more diffuse erosion of public and market confidence that indirectly pressures policy independence. Under conventional liability accounting, balance sheet expansion mechanically resembles growing debt, reinforcing this narrative regardless of the central bank's actual capacity to meet its obligations — a capacity that, for a sovereign fiat issuer, is definitionally unconstrained in nominal terms.

The AVM directly addresses this concern by reframing money creation as equity-generating rather than debt-accumulating: the assets acquired through reserve issuance (government securities, eligible loans) generate income, and this income, together with the seigniorage embedded in issuance itself, strengthens rather than weakens the issuer's recorded financial position. Properly understood, this does not change the central bank's actual capacity — which was never genuinely constrained by accounting presentation — but it removes a recurring source of misleading public and legislative narrative about that capacity.

5.2 Where the Reform Plausibly Strengthens Independence

Three mechanisms support a generally positive assessment. First, financial independence is strengthened in perception terms: a central bank operating under AVM accounting is less exposed to the narrative that its balance sheet “requires” government recapitalisation after a large asset-purchase programme, reducing one specific lever — the optics of fragility — that finance ministries have occasionally used, intentionally or not, to apply informal pressure. Second, the reform aligns accounting presentation with the operational reality that independence is actually grounded in legal mandate, institutional credibility, and demonstrated commitment to price stability, not in the appearance of a conventional corporate balance sheet — a point with direct support from the observation, examined in Section 4.4 above, that the Swiss National Bank has operated through periods of negative recorded equity without institutional crisis precisely because its credibility was never genuinely a function of its accounting presentation. Third, for central banks actively designing CBDC architecture, clearer custodial and ownership framing reduces legal ambiguity that could otherwise invite political or private-sector challenges to the central bank's authority over new payment infrastructure — a genuine, practical benefit independent of the broader reserve-accounting question.

5.3 Where the Reform Introduces Genuine Risk

Four risks deserve weight in any serious workability assessment, and are, in our assessment, underexamined in the secondary literature surrounding the AVM proposal. Of the four, the first — fiscal dominance optics — is, in our judgement, the single most consequential risk factor for the reform's real-world adoption prospects, and is treated first accordingly rather than as one item among equals.

• Fiscal dominance optics. If misread — whether in good faith or deliberately — as evidence that sovereign money creation is costless, the reform could invite political pressure for deficit monetisation that blurs the statutory separation between monetary and fiscal policy. The reform does not itself create this risk, which is structurally inherent to any fiat monetary system regardless of accounting convention; but accounting presentation is precisely the terrain on which this kind of political narrative is contested, and removing the (conceptually flawed) liability framing removes one rhetorical obstacle that has, however imperfectly, historically functioned as a brake on this argument in public debate. Critically, this risk is not symmetrical across jurisdictions: in countries with strong fiscal institutions and clear statutory separation between monetary and fiscal authority, the risk is comparatively contained. In jurisdictions where the finance ministry already exerts meaningful informal influence over the central bank, the same reform could measurably weaken one of the few rhetorical guardrails currently available against deficit monetisation pressure — making this the risk factor most likely to determine, in practice, whether AVM adoption is genuinely workable in any given jurisdiction.
• Political weaponisation in polarised environments. In any jurisdiction where central bank independence is already a contested political question, opponents of the incumbent monetary authority could characterise AVM adoption as enabling “unchecked spending” regardless of the reform's actual operational neutrality, generating public or legislative pressure that has nothing to do with the reform's technical merits. This risk scales with the degree of existing political polarisation around monetary policy — making it, somewhat paradoxically, highest in precisely the advanced economies (the United States foremost among them, per the domestic-risk discussion in Letter 109) where the reform's adoption-incentive case is otherwise weakest.
• Coordination and sequencing risk. Profit distribution and statutory capital rules would require updating alongside any reclassification to avoid creating conflicts with treasury expectations around central bank remittances — a coordination problem this paper's reform blueprint, and particularly the seigniorage distribution questions raised in Section 3.1, does not fully resolve. Poorly sequenced implementation, particularly remittance-rule changes implemented without corresponding statutory clarity, could create exactly the kind of fiscal-monetary entanglement the reform is intended to avoid.

5.4 A Fourth Risk: The Accountability Gap

A fourth risk merits its own treatment, distinct from the three above and, in our assessment, insufficiently weighed in the original paper's framing. Under current liability accounting, a central bank's balance sheet is subject to a relatively mechanical form of external scrutiny: a growing liability figure is, almost by accounting convention itself, a visible, auditable signal that invites questions about the scale and composition of the institution's asset purchases, however imperfect a proxy that signal may be for genuine risk. Reclassifying reserves as equity does not merely relabel this signal — it changes its character. Equity, in conventional corporate accounting, is subject to materially more valuation discretion and management judgement than liabilities, which are typically contractually fixed in nominal terms.

Applied to a central bank, this distinction has a genuine accountability consequence. A liability figure is comparatively difficult to obscure or present favourably through accounting choices; an equity position, by contrast, depends on valuation judgements (the recognised value of securities held, the timing and recognition of seigniorage income, the treatment of unrealised gains and losses) that involve meaningfully more institutional discretion. For a private corporation, this discretion is disciplined by external auditors answerable to shareholders with a direct financial stake in accurate reporting. A central bank has no equivalent shareholder base exercising that discipline. The paper's own proposed remedy — more transparent seigniorage and equity disclosures, per Step 3 of the reform blueprint in Section 3 — is a reasonable response, but it substitutes a new, less battle-tested form of disclosure for an old, conceptually flawed but comparatively well-understood one. Whether the new disclosure regime is held to a standard of scrutiny equivalent to what the (admittedly misleading) liability framing inadvertently provided is an open question this paper's reform blueprint does not yet answer, and one that deserves explicit attention in any statutory drafting that follows from the AVM's broader proposal.

6. Connection to the Dollar Dominance Question

Readers of NGE Investment Letter 109 (“The Currency That Refuses to Die”) will recognise the throughline. That letter argued, against two decades of premature de-dollarisation forecasts, that the dollar's structural advantages — Treasury market liquidity, network effects, and demonstrated crisis-liquidity capability — remain unmatched by any current rival, and that genuine erosion of dollar dominance, where it is occurring, is gradual, partial, and concentrated at the margins (notably reserve composition) rather than at the structural core (FX trading turnover, trade invoicing, offshore credit issuance, and payment settlement value).

The AVM proposal examined in this white paper sits entirely within the domestic accounting layer of monetary architecture, several steps removed from the international competitiveness layer examined in Letter 109. A useful mental model: Letter 109 addresses why money is held and used internationally; this white paper addresses how money is described on the issuer's own books. The two questions are related only at a considerable distance — a central bank's domestic accounting choices have no direct bearing on whether foreign reserve managers, trade counterparties, or crisis-stricken banks choose its currency over another. Conflating the two, which much of the secondary commentary surrounding the AVM proposal has tended to do, particularly around its claimed relevance to “monetary sovereignty” narratives, risks overstating the reform's geopolitical significance.

One nuance is worth adding to this otherwise firm orthogonality finding. While the reform does not directly affect reserve currency status through any of the structural channels examined in Letter 109, it could plausibly affect it indirectly, through institutional credibility channels that operate on a longer and less direct timescale. If an emerging market central bank were to adopt the AVM and communicate the change effectively, the reform could marginally enhance how foreign reserve managers and rating agencies perceive that institution's analytical sophistication — a soft, reputational effect distinct from anything in the liquidity-depth or network-effects analysis. The same mechanism cuts the other way: if the reform is poorly communicated, or read by markets as an opportunistic redefinition rather than genuine conceptual clarity, it could damage rather than build credibility. This is, in effect, the adoption-incentive mismatch identified in Section 4.1 restated in reputational terms — the emerging-market institutions with the most to gain from the credibility effect are also the most exposed to the communication risk that could produce the opposite outcome.

6.1 The Legal Interoperability Question — The Most Consequential Open Issue for CBDC Adoption

Among the research-agenda questions this paper raises (Section 7), legal interoperability across jurisdictions deserves elevation beyond a single bullet point, given how central the CBDC-specific adoption pathway (Section 4.3) is to this paper's entire assessment of the AVM's real-world adoption prospects. Consider a concrete scenario: Japan's digital yen pilot eventually adopts custodial-asset accounting for participant holdings, while China's digital yuan continues to treat holder balances as conventional liabilities of the People's Bank of China. If these two systems were to interoperate — whether through a BIS Innovation Hub framework, an mBridge-style platform, or direct bilateral arrangement — a single cross-border settlement transaction would have its two legs governed by fundamentally different legal characterisations of the underlying claim.

Should such a settlement fail, or become the subject of dispute, which legal framework determines the allocation of loss — the custodial-asset regime governing the yen leg, or the conventional-liability regime governing the yuan leg? Technical interoperability between CBDC systems, the explicit focus of BIS Project Dunbar and Project Agorá, may prove considerably more tractable than legal interoperability between two divergent accounting and ownership regimes applied to the same class of cross-border transaction. Given that cross-border CBDC interoperability is a stated priority of the BIS, the G20, and numerous individual central banks, this question is not merely a research curiosity — it may ultimately determine whether the AVM's most plausible adoption pathway is genuinely workable in a multi-jurisdictional payments environment, rather than only within a single domestic system.

This asymmetry is worth one further observation, offered cautiously as it ventures into geopolitical rather than purely legal-technical territory. Legal interoperability disputes of the kind sketched above are unlikely to be resolved symmetrically between two divergent regimes; the jurisdiction whose legal characterisation is more clearly specified, more thoroughly documented, and more consistent with established international legal principles is plausibly better positioned in any negotiation or dispute resolution process than a jurisdiction whose CBDC accounting treatment remains comparatively ambiguous or undeveloped. If Japan, for instance, were to adopt explicit, clearly drafted custodial-asset legislation for the digital yen, while a counterparty jurisdiction's CBDC legal characterisation remained underspecified, the more clearly specified regime would plausibly carry a structural advantage in any subsequent cross-border dispute — not because its substantive position is necessarily correct, but because legal clarity itself confers negotiating leverage in international settlement disputes. This dynamic, while speculative and not examined in any depth in the existing literature this paper has reviewed, suggests that early, well-drafted AVM-style CBDC legislation could carry strategic as well as purely domestic accounting value for the adopting jurisdiction.

6.2 A Possible BRICS-Adjacent Application: Sanctions-Resistance Through Shared Custodial Principles

One further connection to the multipolar currency competition examined in Letter 109 deserves cautious, explicit treatment, distinct from the broader orthogonality finding above. The BRICS Cross-Border Payments Initiative, referenced throughout this paper, is substantially a political project seeking to reduce dependence on dollar-denominated settlement infrastructure, and the original paper's finding that the AVM “would not make the Chinese renminbi more freely convertible” applies with equal force to the BRICS initiative as a whole — accounting labels do not resolve capital-account openness or liquidity-depth constraints, the structural barriers Letter 109 identifies as decisive.

There is, however, one narrower and more plausible application worth noting without overclaiming it. If BRICS member states were to adopt common custodial-asset principles for their respective CBDCs — building on the AVM's legal logic specifically, rather than its reserve-accounting logic broadly — they could establish a shared legal framework under which one member state's holdings of another's CBDC carry clearer custodial protections against unilateral seizure or freezing by the issuing state. This is precisely the kind of sanctions-resistance logic that has animated the broader BRICS payments agenda since at least the 2022 exclusion of Russia from SWIFT. We flag this as a genuine, narrow, legally plausible application of the AVM's custodial framing — distinct from, and considerably more modest than, any claim that the AVM itself advances de-dollarisation. The reform does not create this possibility; it could, at most, provide cleaner legal scaffolding for a political project that exists independently of any accounting question this paper examines.

7. Research Agenda: What Remains Genuinely Open

This white paper treats the AVM proposal as a serious, well-sourced academic argument deserving continued tracking rather than a settled conclusion. The following questions remain open and merit further primary research before any stronger claims about real-world adoption are warranted. The Bank of Japan's digital yen pilot, examined in Section 4.5, is treated as the lead case for ongoing monitoring given its combination of technical maturity, institutional gradualism, and direct relevance to the CBDC-specific adoption pathway identified throughout this paper.

7.1 Implementation Sequencing and Realistic Timeline

This paper has identified several constraints on AVM adoption — the adoption-incentive mismatch (Section 4.1), the external auditor bottleneck (Section 4.6), the legal interoperability question (Section 6.1) — without proposing a detailed sequence for how a central bank genuinely committed to AVM adoption might address them. A full implementation roadmap would overclaim a level of procedural precision this paper's analysis does not yet support; what can be offered, more modestly, is a sequencing logic. The auditor bottleneck (Section 4.6) suggests that engaging external audit standard-setters, and ideally the IASB itself, should precede rather than follow statutory drafting — a central bank that legislates first and seeks audit sign-off second risks discovering the bottleneck only after the political capital for statutory change has already been spent. The legal interoperability question (Section 6.1) suggests that any jurisdiction adopting AVM-style CBDC accounting unilaterally should anticipate, and ideally pre-negotiate, how its legal characterisation will interact with counterparty jurisdictions before formal cross-border settlement arrangements are finalised, rather than discovering the asymmetry described in Section 6.1 only when a dispute arises.

A timeline expectation deserves equally explicit statement. This paper's most actionable conclusion — that meaningful progress is more likely to come from IASB-level standard-setting engagement than from unilateral central bank action — should be read in light of how IASB standard-setting processes actually operate. Major IASB projects, from initial discussion paper through exposure draft, comment period, and final standard, have historically taken between five and ten years to complete; the Conceptual Framework review discussed in Section 2.1.1 itself ran from a 2013 discussion paper to a 2018 finalised framework, a five-year cycle for a project narrower in scope than full central bank reserve classification would require. Readers using this paper's research agenda to track real-world AVM progress should calibrate their expectations accordingly: this is not a multi-quarter monitoring exercise, nor even necessarily a multi-year one in the sense of producing a resolved outcome, but plausibly a multi-decade one, with the Bank of Japan pilot (Section 4.5) and the question of IASB agenda engagement (below) serving as the two clearest near-term indicators of whether that multi-decade process has meaningfully begun.

This timeline expectation should not be read as foreclosing a faster, narrower pathway. The IASB-led route described above is the primary pathway this paper's analysis points toward, but it is not the only logically available one. A jurisdiction whose external auditor is a Supreme Audit Institution with genuine interpretive latitude (Section 4.6), or one able to secure a sufficiently authoritative legal opinion establishing the reclassification's defensibility under existing standards absent IASB guidance, could in principle move considerably faster than the multi-decade horizon the IASB pathway implies. This unilateral route remains, in our assessment, a minority pathway rather than the central scenario this paper's research agenda is built to track — the adoption-incentive mismatch identified in Section 4.1 still applies to it with full force, since the jurisdictions most likely to find this faster route attractive are also those most exposed to the market-perception risk of moving ahead of global convention. But it is a real, logically distinct possibility this paper's timeline framing should not obscure, and any future revision tracking real-world AVM developments should watch for it specifically, alongside the BoJ pilot and IASB engagement questions identified below.

7.2 Specific Open Questions

• Does any Bank of Japan digital yen pilot report, current or forthcoming, move — even informally, ahead of any statutory change — toward characterising participant holdings as custodial assets rather than conventional BoJ liabilities? This is, in our assessment, the single most valuable indicator to monitor going forward.
• Has any G7 or G20 central bank, in any working paper, internal review, or statutory consultation, formally engaged with the AVM framework since its 2021 publication (Bossone & Costa, Economics, 15) or the November 2025 SSRN follow-up (“When Money is Equity for Its Issuer”)? No such engagement is documented in this paper; this is a genuine empirical gap, not an oversight.
• Does the Swiss National Bank's Project Helvetia documentation, in any future phase, adopt custodial or equity-adjacent legal language for wholesale CBDC participant holdings, building on the functional (if not yet formally labelled) compatibility identified in Section 4.4?
• Does BIS Project Dunbar's multi-CBDC settlement architecture, or any published design document from Project Agorá, adopt custodial-asset or equity-based legal language for participant holdings, even informally?
• How does India's Reserve Bank, given its stated 2026 BRICS summit interest in CBDC interoperability discussions and its existing UAE bilateral pilot, legally characterise digital rupee holdings in its public design documentation — as a liability of the RBI or as a holder asset in custody?
• What specific legal consequences would follow from applying standard custodial-asset case law (originally developed for broker-dealer securities custody) to sovereign digital currency, particularly regarding government attachment, freezing, or sanctions-enforcement powers over CBDC holdings — an area the original paper does not examine and which has direct relevance to the sanctions-driven de-dollarisation dynamics discussed in Letter 109?
• Is there empirical evidence, beyond the Swiss case examined in Section 4.4, that credible institutional communication can substitute for formal AVM reclassification in managing the “liability illusion” the authors describe — and if so, under what specific conditions does formal reclassification add value beyond what strong existing credibility already provides?
• The legal interoperability question between divergent national CBDC accounting regimes, elevated to a full discussion in Section 6.1 above given its centrality to the CBDC-specific adoption pathway, remains empirically unresolved: no current cross-border CBDC pilot documentation reviewed for this paper addresses how a settlement failure would be adjudicated across two legally divergent accounting treatments. This is the single research question we would prioritise above all others raised in this agenda.
• Would external auditors — national Supreme Audit Institutions or private-sector firms, per the bottleneck identified in Section 4.6 — accept an AVM-style reclassification absent specific IASB guidance? Direct engagement with audit standard-setters and practising public-sector auditors on this question would meaningfully advance this paper's assessment of the reform's practical adoptability, independent of the political and institutional questions examined elsewhere in this paper.
• Regulatory capital treatment. Under prevailing bank capital adequacy frameworks, how would commercial banks' regulatory capital requirements against CBDC holdings change if those holdings were reclassified as custodial assets rather than deposit-like claims on the central bank? If custodial treatment reduces the regulatory capital banks must hold against CBDC-related exposures, this could have unintended consequences for bank risk-taking and profitability that the original paper's CBDC analysis does not address, and that banking regulators would need to examine before any custodial CBDC framework could be safely implemented at scale.
• Public and legislative perception research. This paper's recurring claim that “accounting labels are not narrative-neutral” (Section 2.3) and that the reform's greatest beneficiaries face the highest market-perception risk (Section 4.1) is analytically plausible but remains, at root, an empirical claim about how market participants and legislators actually interpret central bank balance sheets. Direct research — surveys, market participant interviews, or natural-experiment analysis of how markets have historically reacted to central bank accounting changes — testing how these audiences would actually respond to AVM adoption would substantially strengthen this paper's central analytical claims, several of which currently rest on reasoned inference rather than direct evidence.
• Does Brazil's Drex initiative, examined in Section 4.7.1, ultimately settle on an explicit legal characterisation of tokenised instruments as liabilities, custodial assets, or some hybrid category as the project's redesign matures past 2026? Brazil's real-time navigation of this exact classification question, independent of any AVM-specific proposal, makes it among the most valuable jurisdictions to track for how this question resolves in actual institutional practice rather than in theory.

7.3 Testable Predictions: What Would Confirm or Disconfirm the Thesis

A reviewer of this paper correctly identified a gap in earlier drafts: the research agenda in Section 7.2 identifies what remains open without stating what the theory predicts. This section remedies that. The following are explicit, falsifiable predictions that follow from the paper's central argument. They allow future researchers — and future revisions of this paper — to assess whether the AVM thesis is gaining or losing empirical support over time.

Prediction 1: CBDC legislation will increasingly adopt custodial-asset framing.

If the AVM thesis is correct that the CBDC-specific adoption pathway is the most plausible route to real-world implementation, then CBDC legal frameworks drafted over the next decade should show a measurable shift toward custodial-asset characterisation of digital sovereign money holdings, and away from conventional deposit-liability framing. The Bank of Japan's digital yen documentation and the evolving legal architecture of the digital euro are the two highest-priority indicators. A shift in either would constitute meaningful positive evidence for the thesis; continued conventional liability framing in both by 2030 would constitute meaningful negative evidence.

Prediction 2: IASB will place central bank reserve classification on its agenda.

If the accounting argument identified in Section 2.1.1 — that the IASB's own Conceptual Framework was never designed for central banks — is correct and eventually recognised by accounting standard-setters, the IASB should at some point add the classification of central bank reserves, banknotes, or CBDC to its formal work programme. This is a prediction with a long time horizon (five to fifteen years, given the IASB's pace of standard-setting), but it is falsifiable: either it appears on the agenda or it does not. The BIS's engagement with the question through its Innovation Hub and research publications is an early indicator worth monitoring.

Prediction 3: Wholesale CBDC frameworks will precede reserve-accounting reform.

If the sequencing logic identified in Section 7.1 is correct — that the auditor bottleneck and adoption-incentive mismatch make unilateral full reserve reclassification unlikely as a first step — then any real-world AVM adoption should appear first in wholesale CBDC frameworks rather than in retail CBDC or general balance sheet reclassification. Project Helvetia (Switzerland), Project Dunbar (BIS multi-CBDC), and the BoJ pilot are the three most likely early sites of this. If wholesale CBDC frameworks adopt custodial language while retail CBDCs and reserve accounting remain unchanged, this would confirm the sequencing prediction. If a major central bank reclassifies general reserves before any CBDC framework adopts custodial language, this would disconfirm it.

Prediction 4: The negative-equity record will be cited in future accounting standard-setting discussions.

The cross-jurisdictional pattern documented in Section 4.8 — Chile (continuously since 1997), Czech Republic, Israel, Switzerland, and ten emerging-market central banks between 2002 and 2021 — constitutes a substantial empirical body of evidence that the liability label does not describe genuine constraint. If the AVM thesis is gaining traction, this body of evidence should increasingly appear in IASB consultations, BIS working papers, and central bank financial reporting discussions as grounds for reconsidering the classification. If this evidence base remains siloed in research literature without appearing in formal standard-setting discussions, it would suggest the institutional pathway to reform is less open than the thesis implies.

8. Conclusion

The Bossone–Costa Accounting View of Money makes a technically sound and underappreciated point: central bank reserves in a pure fiat system do not satisfy the standard definition of a financial liability, and the persistence of liability-style accounting is a legacy of a convertible-currency era that no longer exists. This finding is strengthened, not merely restated, by the observation in Section 2.1.1 that the IASB's own Conceptual Framework was never designed with central banks' distinctive institutional character in mind — the existing convention was inadequate from the outset, not merely misapplied over time. The reform the authors propose to correct this is operationally modest — a relabeling exercise that changes no mechanism of monetary policy — and therefore carries genuinely low implementation risk wherever it is adopted, though the seigniorage distribution questions examined in Section 3.1 suggest the reform's downstream legislative consequences are more consequential than its modest operational footprint implies.

Where this white paper departs from the original paper's framing is on the question of practical workability. The institutions with the strongest stated motive to adopt the reform face the highest political risk in doing so; the institutions facing the lowest risk have the weakest motive. The Swiss case demonstrates that strong institutional credibility can substitute, in practice, for much of the benefit the reform promises — the SNB has weathered negative recorded equity without crisis, suggesting accounting clarity is sufficient but not strictly necessary where trust is already well established — a finding corroborated, at meaningfully larger scale, by the Bank of England's experience absorbing approximately £50 billion in Asset Purchase Facility losses without institutional crisis. The reform's most plausible real-world foothold is not full statutory reclassification of existing reserves at a major central bank, but narrower, CBDC-specific legal architecture being drafted now in multiple jurisdictions — and the Bank of Japan's digital yen pilot, technically mature, methodically governed, and currently using conventional liability accounting, is the single most concrete and trackable live case available for monitoring whether this adoption pathway moves from theoretical possibility to institutional practice, notwithstanding the multi-year observation horizon the BoJ's characteristic gradualism implies.

On central bank independence, the reform's effects are conditionally positive: it more accurately grounds independence in legal mandate and credibility rather than balance sheet optics, but introduces four genuine, non-trivial risks — fiscal dominance optics (the most consequential of the four), political weaponisation, coordination and sequencing risk, and an accountability gap arising from the greater valuation discretion inherent in equity accounting — that require careful sequencing to manage. None of these four risks is examined in the original paper; this white paper treats their identification as a necessary addition to any serious workability assessment. A clean delineation from Modern Monetary Theory (Section 2.4) further clarifies that none of these independence considerations imply any change to fiscal policy stance — the AVM remains, throughout, a static accounting clarification rather than a policy programme.

Two further findings in this revision deserve emphasis as the paper's most actionable conclusions. First, the external auditor bottleneck identified in Section 4.6 is, in our final assessment, the most underappreciated practical constraint on AVM adoption examined in this entire paper — a central bank could satisfy every political and institutional precondition for reform and still be unable to proceed without auditor sign-off that current IASB guidance does not clearly support. Second, the legal interoperability question elevated in Section 6.1 is, in our judgement, the single most consequential open question for whether the CBDC-specific adoption pathway (identified throughout this paper as the most plausible route to real-world AVM adoption) is genuinely workable once more than one jurisdiction's CBDC system is involved. Both findings point toward the same practical recommendation, set out with an explicit sequencing logic and timeline expectation in Section 7.1: meaningful progress on AVM adoption is more likely to come from IASB-level standard-setting engagement and BIS-coordinated legal harmonisation work than from any individual central bank acting alone, however strong that institution's domestic case for reform may be — and given the historical pace of comparable IASB standard-setting projects, that progress is more realistically measured in decades than in years, notwithstanding the narrower, faster unilateral pathway acknowledged in Section 7.1.

Brazil's case, examined in Section 4.7, adds a dimension the Swiss and Japanese cases do not: a real-time demonstration that the AVM's central questions — the legal status of digital sovereign instruments, and the fragility of central bank credibility once political and judicial actors find an opening to challenge it — are not abstractions awaiting a formal reform proposal to become relevant. Drex's unresolved legal evolution and the Banco Master crisis's escalation into a multi-branch confrontation over BCB authority are both unfolding without any AVM-style reclassification on Brazil's policy agenda. This paper reads Brazil's experience as confirmation that the legal interoperability and fiscal dominance risks identified throughout this paper are not contingent on the AVM's adoption — they are already live features of the institutional terrain any such reform, in any jurisdiction with comparable political volatility, would need to navigate.

Most importantly for readers situating this question within the broader currency-dominance debate: this reform operates entirely within the domestic accounting layer of monetary architecture and has no direct bearing on the external, structural determinants of reserve-currency status — liquidity depth, network effects, and crisis-liquidity capability — examined at length in NGE Investment Letter 109, notwithstanding the secondary, reputational credibility channel identified in Section 6, and the narrow, explicitly caveated BRICS sanctions-resistance application identified in Section 6.2. Sound accounting and global monetary dominance are related only at a considerable distance. Conflating the two would be a mistake this paper has tried, throughout, to avoid.

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NGE · NextGen Economics · Long-horizon thinking on capital, technology, and the forces shaping the next decade of wealth creation. Written from first principles. Not consensus. Not noise.

— Pawan Bhatia · NextGen Economics · Bangalore, India · June 2026

Compiled with the assistance of AI tools for data synthesis and drafting, and rigorously reviewed and verified by human subject matter experts.