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P2.T10.20.5. The Rise of Digital Money

David Harper CFA FRM

David Harper CFA FRM
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Learning objectives: Describe the characteristics of e-money that could propel a rapid global adoption of this type of money. Describe the risks faced by the banking sector as e-money adoption increases. Evaluate regulatory and policy actions that could be implemented in response to risks arising from increased adoption of e-money.


20.5.1. Most expect growth (if not rapid growth) in the adoption of digital money (aka, e-money) due to its attractive features. According to the International Monetary Fund (IMF), which of the following features (or functions) of digital money is the MOST important in order to enable its RAPID adoption?

a. Stable store of value
b. Centralized technology
c. Decentralized technology
d. Government backstopping

20.5.2. In order to evaluate the potential impact of digital money (aka, e-money) adoption on the banking sector, the International Monetary Fund (IMF) considers three scenarios: coexistence, complementarity, and takeover. Each presents a set of risks to the banking sector. A common (aka, cross-sectional) risk is disintermediation, to various degrees. Aside from disintermediation, according to the IMF each of the following is a key potential risk of rapid digital money adoption EXCEPT which is not?

a. Risks to consumer protection
b. Risks to market contestability
c. Risks to general ledger legibility
d. Risks to monetary policy transmission

20.5.3. As the International Monetary Fund (IMF) explains, "Fractional banks take deposits but only hold a fraction of these in liquid assets such as central bank reserves and government bonds; the rest is lent to households and firms and thus helps the economy grow." Which of the following is an example of a narrow bank?

a. A bank whose branches are mostly "narrow" in-store kiosks; e.g., inside a supermarket
b. An e-money provider who covers 100% of its liabilities (i.e., deposit) with central bank reserves
c. A b-money provider with centralized or decentralized technology but backstopped by the government
d. An e-money provider with centralized or decentralized technology but redemption guarantees are not backstopped by the government

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