Digital money & trade finance checkpoint
Check that you can tell central bank money from commercial bank money, place CBDC by variant and model, judge stablecoins and tokenised deposits as settlement assets, and follow how a letter of credit and the MT7xx family settle a trade payment. Forward-looking digital-money content is illustrative.
QUESTIONS AS TEXT
Q1. What is the essential difference between central bank money and commercial bank money?
Answer: A: Central bank money is a claim on the central bank (cash, and banks' reserve balances); commercial bank money is a claim on a commercial bank (the balance in your account).
Every form-of-money question comes back to one word: claim. Central bank money is a liability of the central bank, which cannot run out of its own currency, so it carries no settlement-institution credit risk — that is why wholesale systems settle in it. Commercial bank money is a liability of your bank, and depends on that bank staying sound and on par being preserved across banks.
Q2. Why does a payment system care which settlement asset it uses?
Answer: A: The settlement asset determines the credit and liquidity risk participants carry between each other — settling in central bank money removes settlement-institution credit risk.
A settlement asset is what finally extinguishes an obligation between participants. Central bank money removes settlement-institution credit risk because the issuer is the central bank; commercial bank money leaves participants exposed to the settlement bank. Tokenised money forms raise exactly the same question, which is why the settlement-asset lens matters when reading claims about new digital money.
Q3. In one sentence, what is a central bank digital currency (CBDC)?
Answer: A: A digital form of central bank money — a digital liability of the central bank rather than of a commercial bank.
A CBDC is central bank money in digital form. It is discussed along two axes: retail versus wholesale (who may hold it), and account-based versus token-based (how a transfer is authorised). Designs vary widely by jurisdiction and mostly sit at the research or pilot stage, so this academy treats them as illustrative rather than as live schemes.
Q4. What distinguishes a wholesale CBDC from a retail CBDC?
Answer: A: A wholesale CBDC is limited to banks and eligible institutions for settling between themselves; a retail CBDC is available to the general public alongside cash.
The retail-versus-wholesale split is about access. Wholesale CBDC — often framed as tokenised reserves on a programmable platform — keeps settlement in central bank money among supervised institutions, and is usually seen as the nearer-term strand. Retail CBDC gives the public a digital claim on the central bank and raises broader questions about holding limits, privacy, and effects on deposits.
Q5. What is the difference between an account-based and a token-based CBDC model?
Answer: A: Account-based turns on identity — a transfer verifies you are the rightful account holder; token-based turns on validity — a transfer verifies the value object is genuine and unspent.
The models differ in what a transfer must prove. Account-based holdings sit against verified identities, so the check is 'are you the account holder' — close to today's bank accounts and KYC. Token-based value moves like a bearer object, so the check is 'is this token genuine and unspent' — closer to cash. The distinction is a teaching device; real designs often blend the two.
Q6. A stablecoin claims to keep a steady one-to-one value with a national currency. As a settlement asset, what is the key question to ask?
Answer: A: Whether it is truly redeemable at par on demand and who bears the credit and liquidity risk of the reserves said to back it.
A stablecoin's value rests on a backing arrangement, usually a pool of reserve assets against which the token is meant to be redeemable. That reopens the classic settlement-asset questions in a new form: is redemption at par real and prompt, who holds the reserve risk, and does the token trade reliably at one-to-one — the singleness-of-money test. No issuer or market claims are made here.
Q7. How does a tokenized deposit differ from a stablecoin?
Answer: A: A tokenized deposit is ordinary commercial bank money in token form — still a claim on the issuing bank — whereas a stablecoin is a separately issued token relying on its own reserve arrangement.
A tokenized deposit keeps commercial bank money as it is — a claim on the issuing bank — but records it as a token so it can move on a programmable platform. Its supporters argue that, because it is still a supervised, protected deposit, it is more likely to hold par across banks than a standalone token. The open question is how tokens from different banks settle against one another; it is illustrative here.
Q8. What does atomic settlement achieve?
Answer: A: Two linked transfers either both complete or both fail, so there is no state where one side has paid and the other has not — removing principal risk.
Atomic settlement binds two connected movements so both succeed or neither does, removing principal risk — the danger of paying and receiving nothing in return. The non-token version of this idea is delivery-versus-payment or payment-versus-payment; tokenized platforms extend it by holding both legs on linked ledgers. A live question is whether legal finality truly matches the technical all-or-nothing behaviour.
Q9. What does a letter of credit do for two trading parties who do not trust each other?
Answer: A: A bank promises to pay the exporter against compliant documents, so the exporter relies on the bank's credit rather than the importer's promise to pay.
A letter of credit substitutes a bank's creditworthiness for the importer's. The exporter ships and presents documents; if they comply with the credit's terms, the issuing bank must pay, so the exporter no longer depends on the buyer's willingness. Crucially it works on documents, not the goods themselves — which is why document examination is the heart of the process. In Swift traffic it is carried by the MT700 family.
Q10. In a letter of credit, what is the difference between the issuing bank and the advising bank?
Answer: A: The issuing bank opens the credit and carries the primary promise to pay; the advising bank passes the credit to the exporter and confirms it looks genuine, without itself owing payment unless it also confirms.
The issuing bank, acting for the importer, takes on the primary obligation and later examines the documents to decide whether they comply. The advising bank, usually in the exporter's country, checks the apparent authenticity of the credit and passes it on — a trusted messenger. It owes payment only if it also confirms the credit or is nominated to act. Keeping the roles apart is what makes the chain intelligible.
Q11. An exporter presents documents under a letter of credit, but the issuing bank finds the shipment date is later than the credit allows. What happens?
Answer: A: The documents are discrepant, so the bank may refuse payment; the usual path is to notify the discrepancy so the importer can waive it or the exporter can correct and re-present in time.
Because a credit is satisfied by documents rather than by the goods, a term that is not met — here a late shipment date — makes the documents discrepant and gives the issuing bank grounds to refuse. Refusal is rarely the end: the bank notifies the discrepancies, and payment can still follow on the importer's waiver or a timely, corrected re-presentation. In Swift traffic the discrepancy is advised using MT750.
Q12. Which statement about the MT7xx trade-finance message family is correct?
Answer: A: MT700 issues the documentary credit and heads a category 7 family — amendments, advices, payment and discrepancy messages such as MT707, MT750, and MT754 travel alongside it.
MT700 is where an issuing bank issues a documentary credit, and it anchors the category 7 family that carries the whole lifecycle: amendments (MT707), advices (MT710), discrepancy notices (MT750), and payment or acceptance messages (MT754), among others. Operations teams route and reconcile on these exact names, which is why the message names are quoted verbatim rather than paraphrased.