The token model collapses every form of digital money into a single shape, a balance against an address, and the categories underneath get flattened. In TradFi, the money you are tokenising sits on one of two distinct balance sheets, with two distinct legal characters, two distinct risk profiles, and two distinct supervisory regimes. Whether the on-chain unit represents central bank money or commercial bank money is the load-bearing question for every tokenised cash conversation that follows. This chapter covers the two-tier system, how reserves and deposits actually work, why one is risk-free in domestic currency and the other is not, and how tokenisation maps onto each tier without changing the legal substrate underneath.
Definition
The modern monetary system runs on two tiers, by deliberate design and by long historical accident. The top tier is central bank money, which exists as direct liabilities of the central bank. The bottom tier is commercial bank money, which exists as deposit liabilities of commercial banks. The two tiers are not interchangeable, even when a unit of each notionally represents one dollar, one yen, or one Hong Kong dollar.
Central bank money in production today comes in two forms. Physical cash, which is a bearer claim on the central bank in paper or coin form, available to anyone. Reserves, which are electronic balances held at the central bank by institutions with settlement accounts there, almost always commercial banks and a small set of specialised non-bank participants. Reserves are the actual settlement asset for wholesale interbank flows. When one bank pays another in domestic currency, what moves between them, eventually, is a reserve balance at the central bank or its agent. Cash and reserves are the same liability of the same issuer, expressed in different forms.
Commercial bank money is the deposit you have at your bank. Legally, a deposit is an unsecured loan from the depositor to the bank. The bank owes you the balance. You are an unsecured creditor for the amount, ranking alongside other depositors and ahead of subordinated debt holders, but behind secured creditors and various preferred claims under most insolvency regimes. The deposit is your asset. It is the bank's liability. The accounting symmetry is exact, and a great deal of confusion in tokenisation discussions disappears once you hold the symmetry steady.
A working test for the tier of any digital money instrument. If the issuer is a central bank, the unit is central bank money. If the issuer is a commercial bank, the unit is commercial bank money. If the issuer is something else, an e-money institution, a fund, a trust company, a payment service provider, the unit is in a third category that sits outside both tiers and has its own regulatory regime, covered in Stablecoin types. The tier is determined by the issuer, not by the technology, the chain, or the wrapper.
The BIS articulates the two-tier model as the structural backbone of modern monetary systems in its Annual Economic Report 2024 chapter on tokenisation. The same framing runs through the joint research with Hyun Song Shin and Tommaso Mancini-Griffoli on the unified ledger, which proposes preserving the tiering when moving onto programmable rails rather than dissolving it.
Why the asymmetry persists
The two tiers exist because they solve two different problems. The top tier, central bank money, is the only domestic-currency settlement asset that carries no nominal credit risk, because the issuer is the lender of last resort and prints the currency. The bottom tier, commercial bank money, is where credit is created and where the economy gets its working medium of exchange. Banks lend by creating deposits, which is covered in the next part. The two tiers cooperate. Wholesale flows between banks settle on the top tier, in reserves. Retail flows between customers move balances on the bottom tier, between deposit accounts. Both layers exist for a reason.
A tokenised version of either tier preserves the legal character of the underlying. A tokenised reserve is still central bank money. A tokenised deposit is still commercial bank money. The token is a representation, not a re-classification, as the working test above makes explicit. Designers who try to merge the tiers on a single ledger without preserving the legal distinction tend to ship products that the regulator unwinds before launch.
What this chapter does not cover
Settlement finality is the question that this chapter implicitly points at every time it uses the word "settle". That gets its own treatment in Chapter IV. The full taxonomy of payment stablecoins, asset-referenced tokens, tokenised money-market funds, and algorithmic constructions sits in Stablecoin types. The detailed mechanics of tokenised deposits are in Chapter VII. The wholesale CBDC (central bank digital currency) versus tokenised deposit comparison is in Chapter VIII. This chapter is upstream of all of those, and the framing it sets is what the later chapters use.