‘The digital euro is imminent’

I previously wrote an article in Al Rai Newspaper on March 6, 2022, discussing the digital dinar. In that article, I expressed my belief that central banks were late in issuing their official digital currencies, providing an opportunity for cryptocurrencies to dominate digital transactions. It’s unfortunate that these encrypted digital currencies, despite being liabilities rather than financial assets, have attracted many young people. Christine Lagarde, the president of the European Central Bank, recently acknowledged this in an interview and now recognises the need for a digital euro to keep up with global digital transformations. It is expected that the digital euro will be introduced in the mid-2020s, if not earlier.

The introduction of the digital euro is a significant step towards reducing reliance on the fiat euro currency. While it may not immediately replace fiat currency entirely, it establishes the foundation for future digital transformation. The digital euro will simplify transactions within the eurozone, making them faster, more convenient and cost-effective. It can also facilitate cross-border payments and reduce transaction complexities.

Undoubtedly, the digital euro will enhance financial inclusion by providing access to digital payment services for individuals who do not have bank accounts or face difficulties in accessing banking services. It offers a secure and accessible payment option for a wide range of individuals.

Regarding the impact of the digital euro on monetary policy and supervision, its introduction will equip central banks with additional tools to implement monetary policy. However, concerns exist about individuals shifting from bank deposits to central bank digital currencies, which may result in money being removed from the economic activity cycle. Central banks are aware of this issue and will address it to ensure their digital currencies can be used and traded alongside other forms of liquidity in the economy, within well-regulated mechanisms.

The issuance of digital currencies allows central banks to have better monitoring and control over the circulation of funds. Digital transactions can be tracked and analysed effectively, providing more direct oversight. However, the introduction of the digital euro, like other central bank digital currencies, raises privacy and security concerns. It is crucial to establish robust measures to safeguard user data and financial transactions while maintaining necessary safeguards against illegal activities.

To monitor and verify digital currency trading and payments, various mechanisms can be utilised. Blockchain technology, or ledger technology, is particularly important as it enables transparent and tamper-proof record-keeping in digital currency transactions. Blockchain technology operates on a de-centralised system that can be monitored and verified by multiple participants.

Clear regulations and compliance requirements are vital for cryptocurrency trading and payments. Regulators can oversee cryptocurrency service providers, enforce anti-money laundering measures, and ensure adherence to consumer protection standards.

Implementing stringent Know Your Customer and Anti-Money Laundering measures can aid in monitoring and verifying digital currency transactions. By verifying participants’ identities and employing transaction monitoring systems, suspicious activity can be detected and prevented.

Cryptocurrency service providers should undergo regular audits and reporting requirements to ensure transparency and compliance. Independent audits can verify transaction accuracy and assess compliance with regulatory standards.

It’s important to note that the specific monitoring and verification mechanisms for digital currency trading and payments may vary from country to country, depending on the design and implementation of the digital currency system and the regulatory frameworks established by relevant authorities.