Gabriel R. Bizama, Researcher, University of Bern.
1. Introduction: Taxonomy of Money
Money can be classified along two dimensions: the nature of the issuer, public or private, and the form in which it circulates, physical or digital. This taxonomy, summarised in Figure 1, carries direct implications for the legal status of each instrument, the credit and liquidity risk borne by the holder, and the prudential or consumer-protection regime that applies to it. Distinguishing between these categories is a precondition for assessing how a jurisdiction’s payment system supports monetary sovereignty, financial stability, and the singleness of money.
Figure 1: Taxonomy of Money
Source: Prepared by author, adapted from Demertzis et al. (2023)
Public money is issued and backed by a public authority, typically the central bank. It constitutes legal tender, meaning creditors are legally required to accept it in settlement of debts, and it represents a direct liability of the sovereign rather than of any private intermediary (IMF, 2020). From a regulatory standpoint, this distinction is material: holders of public money bear no credit risk on the issuer, since claims to public money are honoured directly by the central bank irrespective of the financial condition of any commercial entity. A direct legal claim on the central bank entails that:
- The central bank bears the legal obligation to issue and honour the value of cash in circulation
- The holder’s claim does not depend on the solvency of a commercial bank or other private intermediary
- Cash is recorded as a liability on the central bank’s balance sheet
- A direct legal relationship exists between the holder and the central bank, regardless of whether the holder maintains an account with that institution
For example, banknotes denominated in Brazilian reais represent a direct claim on the Banco Central do Brasil, and their value is not impacted by the solvency of any financial entity holding the funds on behalf of customers. By contrast, funds held in a commercial bank account constitute a contractual claim against that institution, not against the central bank, a distinction that is central to the prudential treatment of deposit-taking institutions. Physical currency, the banknotes and coins issued by the central bank, remains the most familiar expression of public money, requiring no intermediary and representing universal legal tender status within the jurisdiction. A central bank digital currency (CBDC) extends this same legal and risk profile into digital form: it is a direct, credit-risk-free liability of the central bank, denominated in the national unit of account and convertible to cash at par.
Private money, by contrast, is issued and backed by private entities, including commercial banks, payment service providers, mobile money operators, and e-money issuers, and represents a claim against the issuer rather than against the central bank. Its enforceability depends on the issuer’s financial soundness and on whatever regulatory protections apply to holders. Commodities such as gold and silver, historically the dominant private form, now play a marginal role in modern monetary systems (CPMI, 2018). The dominant form of private money today is commercial bank deposits, a liability of the deposit-taking institution that, in the event of insolvency, ranks as an unsecured creditor claim, subject to whatever deposit insurance regime is in place. Digital assets, including stablecoins, sit further along the risk spectrum: their value depends on market conditions or on the adequacy of issuer reserves, they constitute a claim solely against the private issuer, and in most jurisdictions they remain outside deposit insurance schemes altogether, exposing holders to uncovered credit, liquidity, and operational risk.
Deposit insurance frameworks are the principal regulatory mechanism for mitigating the credit risk inherent in commercial bank money, guaranteeing repayment up to a prescribed limit irrespective of the issuing bank’s solvency. In the European Union, the Deposit Guarantee Schemes Directive (2014/49/EU) mandates coverage of up to €100,000 per depositor per institution; in the United States, the Federal Deposit Insurance Corporation provides an equivalent guarantee, funded through ex-ante contributions from participating institutions and, where necessary, public backstops. These schemes do not eliminate credit risk entirely, since they are bounded by coverage limits and by the fiscal capacity of the guarantee fund; however, they materially narrow the trust gap between commercial bank money and uninsured private instruments such as stablecoins. Extending comparable protections to digital assets, for instance through mandatory third-party custody of reserves or e-float schemes such as mobile money, is an emerging area of regulatory convergence that supervisory authorities are actively assessing.
Public Money: Central Bank Digital Currencies and Cash
a) Central Bank Digital Currencies
As of July 2026, three jurisdictions, Jamaica, The Bahamas, and Nigeria, have live retail CBDC schemes in operation, while eleven central banks are conducting retail CBDC pilots (CBDC Tracker). A CBDC is a digital liability of the central bank, denominated in the national unit of account and convertible to cash at par; it is frequently described …
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