A special-purpose liability that performs an important function in the process of converting our money system to a Sovereign Money System (SMS).
As part of a changeover to a sovereign money system, demand deposits held by banks will be converted to sovereign money held in transaction accounts at the central bank. This would mark a large decrease in the liability side of banks’ balance sheets. In order to offset this decrease in the liabilities of banks owed to costumers, demand deposits will be replaced by a new liability called the Conversion Liability which will be an asset of the central bank.
The purpose of the Conversion Liability is twofold: In the first instance, if banks’ liabilities were to decrease while their assets remained unchanged, that would amount to a huge paper profit for them and their shareholders. The Conversion Liability ensures that the net worth and balance sheets of the banks remain unchanged after the changeover by replacing what they owe to the public with a debt to the central bank. Secondly, the Conversion Liability would allow the government to retroactively reclaim seigniorage revenue from the banking sector.