Payment systems form the baseline infrastructure of the global financial system. To manage these platforms, architects must understand how different types of money clear across banking ledgers. Money functions as a payment instrument across a strict tier system that separates risk profiles based on the underlying issuer. [1]
The Central Bank vs. Commercial Bank Settlement Tier
[Central Bank Money (M0)] ----> Risk-free sovereign liabilities; used for ultimate wholesale settlement
[Commercial Bank Money (M1)] --> Private liabilities; carries credit risk; cleared via interbank netting

  • Central Bank Money: Consists of physical banknotes and digital reserve balances parked by commercial banks at the central bank. These reserves carry zero credit or liquidity risk, making them the standard asset for ultimate wholesale settlement. [1, 2]
  • Commercial Bank Money: Consists of digital deposit liabilities created through lending loops. These assets carry institutional credit risk and must be converted into central bank money to settle obligations between competing banks. [1]

 
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