Digital Euro: Legislation Nearing Breakthrough

In late March 2026, the European Parliament (EP) broke the months-long political deadlock in negotiations over the digital euro. The agreement on a dual system – online and offline – removes the final major hurdle before the formal vote in the ECON committee (Committee on Economic and Monetary Affairs), expected before the summer recess of 2026. In parallel, the European Central Bank (ECB) is advancing technical implementation: European technical standards are to be finalised by summer 2026, and a twelve-month pilot phase could begin in the second half of 2027. The digital euro is thus moving from a theoretical concept to a concrete infrastructure project – with far-reaching consequences for the European banking sector.

The scale of the undertaking is considerable. The ECB estimates total investment costs for the European banking sector at EUR 4 to 5.8 billion over four years – equivalent to EUR 1 to 1.44 billion annually. At first glance a substantial sum, yet the ECB puts it into perspective: the costs represent just 3.4 per cent of significant institutions' annual IT budgets and amount to one-fifth to one-sixth of the figures projected by external studies. Additionally, the Eurosystem's own development costs total approximately EUR 1.3 billion through the potential first issuance in 2029, followed by roughly EUR 320 million in annual operating costs.

The Legislative Roadmap

From Deadlock to Breakthrough

The regulation establishing the digital euro has undergone a remarkably bumpy legislative process. The European Commission presented its proposal in June 2023. What followed was a two-and-a-half-year negotiation period during which Parliament debated fundamental design questions – above all, whether the digital euro should be restricted to offline payments only.

The breakthrough came on 27 March 2026, when centre-right rapporteur Fernando Navarrete dropped his position to restrict the digital euro exclusively to offline payments. The agreement now enables a dual system: the digital euro will function both online and offline – a prerequisite the ECB had always regarded as essential for practical viability.

The Council of the European Union has already adopted its negotiating position. Once Parliament agrees its final text, trilogue negotiations between Parliament, Commission and Council will begin. The target: complete adoption of the regulation by end of 2026. Only upon the legal framework entering into force can the ECB Governing Council take its final decision on issuing the digital euro.

Two Open Questions

Despite the breakthrough, two critical points remain unresolved and will be decided in trilogue negotiations. First: the precise level of the holding limit – the maximum amount individuals may hold in digital euros. The ECB has analysed scenarios up to EUR 3,000 per person and assessed the impact on financial stability as manageable. Second: the compensation model for commercial banks that operate digital euro accounts and handle distribution. Both questions are decisive for banking sector acceptance.

Architecture and Design: What the Digital Euro Can Do

Online, Offline and Accessible

The digital euro is designed as electronic cash issued by the ECB, functioning as legal tender alongside physical banknotes. The technical architecture distinguishes two modes: online payments processed through Eurosystem infrastructure, and offline payments where value is stored directly on the user's device and transferred locally between devices – similar to a cash transaction.

For the offline solution, the Eurosystem concluded a framework agreement in October 2025 with a consortium led by G+D, partnering with Nexi and Capgemini for development, implementation and partial operation. The technology relies on secure elements in smartphones enabling transactions without internet connectivity. Pilot data suggests the system can process thousands of proximity payments per second using blind signatures and hardware-level locks, without a single byte reaching ECB servers.

Privacy as a Design Principle

The digital euro's privacy architecture differentiates by payment mode. For offline payments, only the payer and payee know the transaction details – a cash-like privacy that neither banks, payment service providers nor the central bank can access. For online payments, transactions are pseudonymised: the Eurosystem cannot attribute payments to specific individuals; account-holding payment service providers identify users solely to fulfil anti-money laundering (AML) obligations.

This combination addresses one of the public's greatest concerns – the complete traceability of digital payments – and structurally distinguishes the digital euro from private-sector digital payment instruments, where transaction data is typically used for commercial purposes.

Implications for Bank Business Models

Fee Structure: Relief and Risk in Equal Measure

The Eurosystem has taken a pivotal decision shaping the digital euro's cost structure: it will waive scheme and processing fees entirely. In a traditional four-party card system – with issuer, acquirer, scheme operator and processor – fees accrue at every level. With the digital euro, two of these cost layers are eliminated outright. The ECB bears the costs in a manner similar to banknote production, funded through seigniorage revenues.

For merchants, this delivers tangible relief: digital euro payment fees will be capped below Visa and Mastercard levels. Small merchants are expected to pay roughly half of what they currently spend on digital payments, according to ECB estimates. Moreover, banks retain the full interchange fee when a transaction is processed via digital euro infrastructure.

However, this is offset by a structural risk: if the digital euro captures meaningful market share in payments, banks' annual fee revenues could decline by EUR 2.1 to 4.2 billion – a substantial erosion of existing revenue streams, particularly in the card business.

Customer Relationship: Who Holds the Account?

The regulation stipulates that commercial banks will manage their customers' digital euro accounts. The Eurosystem will not act as a direct account provider to citizens – a deliberate concession to the banking sector that preserves the existing two-tier architecture of the monetary system. Banks thus retain direct customer contact and – crucially – access to creditworthiness data essential for lending.

Nevertheless, the digital euro fundamentally alters the customer relationship. Until now, central bank money has been available to individuals exclusively in the form of cash. With the digital euro, citizens can for the first time hold digital central bank money – risk-free, requiring no deposit guarantee, backed by the central bank. The psychological dimension should not be underestimated: in times of crisis, the ability to convert bank deposits into central bank money at the tap of a finger could reshape existing trust dynamics.

Liquidity Management: The Waterfall Mechanism

Automatic Top-Up and Sweep

The digital euro's design features a waterfall mechanism that operationally enforces the holding limit. Two scenarios are managed automatically: if a user's digital euro balance is insufficient for a payment, the shortfall is instantly topped up from the linked bank account. Conversely, if an incoming payment would push the balance above the holding limit, the excess is automatically swept to the recipient's bank account.

For banks' treasury management, this mechanism has far-reaching consequences. It creates potentially unpredictable liquidity flows between bank deposits and digital central bank money. In normal times, the impact is likely limited – the ECB's analysis confirms "limited impact on deposits and liquidity during normal conditions". In stress scenarios, however, the waterfall mechanism could generate pro-cyclical dynamics: if many customers simultaneously increase their digital euro holdings – for instance, out of concern about their bank's stability – substantial deposits could flow out within a short period.

Special Rules for Businesses

Businesses and public authorities face a zero holding limit. Every digital euro received as payment is instantly and automatically converted into commercial bank money. This provision prevents the digital euro from competing with banks' deposit-taking business, but raises operational questions for firms: how does instant conversion affect cashflow planning? Which systems need adapting to correctly book the automatic inflows?

Risk Dimension: What Banks Must Consider

Deposit Outflow: The Core Risk

The central risk the digital euro poses to commercial banks lies in potential customer deposit outflows. The Bundesbank has analysed this scenario and reaches a nuanced conclusion: with an appropriate holding limit, the digital euro could actually strengthen financial stability and improve welfare. At the same time, it warns of an extreme scenario: citizens could convert their bank deposits into central bank money "within seconds" during financial system stress – a digital bank run infrastructure that has not existed in this form before.

The holding limit of EUR 3,000 per person is designed to contain this risk. Extrapolated across the eurozone's approximately 340 million inhabitants, the theoretical maximum that could be withdrawn from the banking system amounts to just over one trillion euros. In practice, the effect would likely be considerably smaller – not everyone will hold the maximum, and the waterfall mechanism ensures continuous reflux. Nonetheless, the order of magnitude is relevant for banks' liquidity planning.

Asymmetric Burden: Small Banks Under Pressure

Implementation costs and deposit risks affect institutions of different sizes with vastly different force. Large universal banks can fund the investments from ongoing IT budgets and maintain diversified deposit bases. For regional cooperative banks and savings banks with limited IT resources and high dependence on retail deposits, the digital euro represents a potentially existential challenge.

The Association of German Public Banks (VÖB) published a position paper in March 2026 consolidating the sector's concerns. Critics argue the digital euro creates a "state-backed opportunity" to shift funds into central bank money, generating a structural pull away from decentralised local banks towards central-bank-adjacent structures. The consequence: fewer regional lending decisions, fewer financing opportunities for small and medium-sized enterprises.

Strategic Dimension: European Sovereignty

Dependence on Non-European Providers

Behind the digital euro lies an industrial policy motive that often receives insufficient attention in public debate. Today, two US companies – Visa and Mastercard – control the majority of European card payments. The European Payments Initiative (EPI), Europe's attempt at an independent payment infrastructure, has so far achieved only limited market penetration.

ECB Executive Board member Piero Cipollone emphasised the geostrategic dimension in his speech of 1 April 2026: in a "fragmenting world", Europe must ensure its resilience and autonomy in payments. The Eurosystem's payment strategy, published on 31 March 2026, provides the formal framework and addresses existing dependencies on non-European service providers. In this logic, the digital euro is not an isolated project but a cornerstone of European payment infrastructure.

The fact that all five external technology components of the digital euro – from the alias lookup service through risk and fraud management to the offline solution – were awarded to EU-controlled companies underscores this sovereignty claim.

Impact Overview

Area	Impact of the Digital Euro
Payments	New payment channel with capped merchant fees; potential decline in card revenues of EUR 2.1–4.2 billion annually
Deposit Business	Potential outflows through digital euro holdings; EUR 3,000 holding limit mitigates but does not eliminate risk
Treasury / ALM	Waterfall mechanism creates new, potentially volatile liquidity flows between bank deposits and central bank money
IT Infrastructure	Integration of the digital euro into core banking systems, onboarding processes and wallet solutions; REST API to PSD2 standard
Customer Relationship	Banks operate digital euro accounts, retaining customer contact; value-added services offer differentiation potential
Compliance / AML	Online transactions pseudonymised, user identification by banks for AML; offline payments offer cash-like privacy
Lending	Deposit outflows could increase funding costs; smaller institutions with high deposit reliance particularly affected

Recommendations for Action

The adoption of the regulation will fire the starting gun on an implementation phase comparable in scope to DORA (Digital Operational Resilience Act) or PSD2 (Payment Services Directive 2) – with the distinction that the digital euro requires not merely compliance but touches the business model itself. Five areas demand priority attention:

The digital euro is no longer a theoretical thought experiment. With the legislative breakthrough in March 2026, ongoing provider procurement and technical standards due by summer, the project has reached a momentum that makes reversal unlikely. For the European banking sector, this means: the question is no longer whether the digital euro will arrive, but how well prepared institutions will be when it does. Those who use the remaining preparation time to review business models, adapt treasury processes and develop new revenue models will secure their strategic position. Those who wait until the regulation enters into force will find that preparation time is shorter than it appears today.