P2.T10.22.7. The rise of digital money

David Harper CFA FRM

David Harper CFA FRM
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Learning objectives: Describe and compare different attributes of means of payment. Describe the risks faced by the banking sector as e-money adoption increases and identify means of mitigating those risks. Explain reasons for and characteristics contributing to rapid global adoption of e-money. Evaluate effects of different scenarios of e-money adoption on the banking sector. Discuss regulatory and policy actions that could be implemented in response to risks arising from increased adoption of e-money

Questions:

22.7.1. The IMF distinguishes among the different means of payments according to their four attributes. These attributes are: type, value, backstop and technology. Consider the following money. It is a claim rather than an object. It offers a guaranteed fixed-value redemption rather than variable-value redemption. It is backstopped privately (rather than "publicly" by a government). Finally, it settles via decentralized blockchain technology. To which form of money (aka, means of payment) does this set of attributes refer?

a. Bank money; aka, b-money
b. Stablecoin; aka, fiat token
c. Investment money; aka, i-money
d. Synthetic CBDC; aka, sCBDC


22.7.2. All means of payment are exposed to operational risks, especially cyber risk. In addition to this pervasive risk (operational risk), the IMF explains that electronic money (aka, e-money) is exposed to four risk types. What are these four risks?

a. Specific, issuer, transaction, and legal
b. General, concentration, regulatory, and commodity
c. Liquidity, default, market and foreign exchange risk
d. Macroeconomic, Issue, reputation, and technology


22.7.3. The IMF explains that there exist (at least) five different means of payment: central bank money, crypto-currency, b-money, e-money, and i-money. The most recognizable is central bank money, which refers to cash and its digital counterpart; aka, central bank digital currency (CBDC). In regard to CBDC each of the following statements is true EXCEPT which is false?

a. CBDC is an object-based (rather than claim-based) store of value that is (at least relatively) stable
b. CBDC is denominated (i.e., its value attribute is) in the domestic unit of account (e.g., dollar, Euro) and the concept of redemption does not apply
c. In the Synthetic CBDC (sBDC; aka, intermediated CBDC) model, nonbank private sector e-money providers can hold their central bank's digital liabilities (aka, reserves)
d. In the Synthetic CBDC (sBDC; aka, intermediated CBDC) model, nonbank private sector e-money providers issue credit default swaps (CDS) to gain synthetic exposure rather than fund liabilities

Answers:
 
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