Amid promises of modernization, “privacy by design,” and offline transactions, the ECB’s project moves forward. But Europeans are not interested.
The digital euro represents one of the flagship projects of the European Central Bank in the era of financial digitalization. According to the institution, in a context of increasing influence from stablecoins and U.S. payment technologies, the digital euro is presented as a countermeasure, aiming to safeguard Europe’s financial autonomy in an increasingly fragmented geopolitical environment. For the bank, “it would be a central bank digital currency, an electronic equivalent of cash, that would complement banknotes and coins, offering people more choice in how to pay.”
However, the digital euro will remain tied to the centralized control of the ECB, raising questions about the true innovative nature of the project and its implications for the privacy of European citizens.
State of development
The project has made progress in recent years. After an exploration phase concluded in October 2023, the Eurotower began the preparatory phase, expected to last about two years. During this phase, the focus has been on finalizing the rules for the distribution of the digital euro and developing the necessary technological infrastructure.
The latest two progress reports published by the Central Bank in June and December 2024 highlight advancements in defining the technical architecture and implementation models. Particular attention has been paid to designing a system that balances functionality, security, and privacy, although the latter remains a point of strong skepticism.
The ECB has established collaborations with several European financial institutions to test the interoperability of the digital euro with existing payment systems. From a pool of 54, the ECB selected five providers for specific use cases:
- Worldline for offline peer-to-peer payments;
- CaixaBank for online peer-to-peer payments;
- Epi for PoS payments initiated by the payer;
- Nexi for payments initiated by the payee;
- Amazon for e-commerce payments.
According to some statements, the ECB may opt for a hybrid model, in which the underlying infrastructure remains under the direct control of the central authority, while distribution and certain ancillary services are delegated to supervised intermediaries, such as commercial banks. However, the ECB has not confirmed the use of a Distributed Ledger Technology (DLT) as the main technology for the system. The Eurosystem is experimenting with various technologies, both centralized and decentralized, but no decision has been made yet.
Technical features
UTXO model
The UTXO (Unspent Transaction Output) model is one of the technical approaches being studied for the functioning of the digital euro. This structure, made famous by Bitcoin, tracks funds through a series of unspent transaction outputs rather than using a balance system like in a traditional bank account. In the context of the digital euro, the UTXO system would allow for efficient payment management, supporting conditional transactions without the use of smart contracts. The ECB tested a UTXO-based settlement engine, called N€XT, during the prototyping phase. This technological component processes payment transactions, wallet funding, and outflows of the digital euro, and is designed to be horizontally scalable, leveraging technologies such as sharding and a microservices-based architecture to ensure low latency and high resilience, even in the case of high transaction volumes.
Holding limit of €3000
One of the most controversial features of the digital euro is the proposed holding limit of €3000 per individual wallet. Frankfurt justifies this restriction as a necessary measure to prevent capital flight from the traditional banking system and preserve financial stability. According to the ECB, such a limit ensures that the digital euro remains primarily a payment instrument, avoiding it becoming a form of savings that could siphon liquidity from commercial banks.
The proposed technical solution includes a “reverse waterfall” system, which would automatically transfer excess digital euros into traditional bank accounts, ensuring compliance with the maximum limit.
Zero fees and offline transactions
According to various ECB reports, the digital euro will be a “public good,” like cash and coins, ensuring fee-free payments for end users. One of its distinctive features is the ability to operate offline, allowing transactions without the need for an internet connection, anywhere and anytime, with a level of privacy comparable to cash, according to Frankfurt. This offline mode will be made possible by a direct communication system between devices (peer-to-peer), which occurs without the intermediation of central servers or banks, using proximity technologies such as NFC (Near Field Communication).
The mechanism will rely on a system for preloading the digital wallet, which can be done online or at dedicated ATM terminals, allowing a portion of digital euros to be transferred directly to the user’s device. Transaction validation will be managed by integrated security elements, such as cryptographic chips already present in smartphones and contactless cards (secure element), ensuring the authenticity of the transaction while keeping transaction data solely on the involved devices.
Regarding distribution, the ECB has proposed a cost-sharing scheme that would offer payment service providers, such as banks, fair economic incentives to cover operational expenses related to the distribution of the digital euro. As with other payment systems, service providers may charge merchants fees, but these would be subject to a cap, as outlined by the European Commission in the legislative proposal. The Eurosystem will support the costs necessary to develop the infrastructure, aiming to minimize additional investments for intermediaries by leveraging existing infrastructures as much as possible.
Privacy by design?
In its reports, the ECB reiterates that the architecture of the digital euro will be designed with a strong focus on privacy protection, offering differentiated solutions for various usage scenarios. In offline transactions, the system would replicate the discretion typical of cash, keeping information confined exclusively to the devices of the parties involved, without the need for an internet connection.
For online transactions, the Eurosystem is developing infrastructure that, while ensuring the necessary traceability for the system’s functioning, would introduce technological barriers to prevent direct correlation between transactions and specific identities. This outcome would be achieved through the integration of cryptographic methodologies such as pseudonymization, which would replace personal identifiers with codes that cannot be linked to an individual; hashing functions, which would convert data into irreversible alphanumeric sequences; and encryption protocols, which would make the informational content inaccessible to unauthorized observers.
However, it is important to note that the Central Bank describes these measures in an extremely generic manner, without providing specific technical details. It is unclear, for example, which hashing algorithms or encryption protocols will actually be used, or how the true non-correlation of transactions with users’ identities will be ensured. In other words, there is no transparency regarding the technological tools being developed by Frankfurt, and citizens currently have no way of knowing the operational details of the system.
According to statements, intermediaries providing payment services will only have access to the information necessary to comply with regulatory obligations, such as anti-money laundering and counter-terrorism financing requirements. Any further use of the data for commercial purposes will only be possible with the explicit consent of the user, according to the ECB.
However, it is unclear which data is considered “indispensable,” nor how the separation between strictly necessary information and potentially invasive data will be ensured. The Eurotower has not provided specific details on which information will be accessible to intermediaries.
Models under study: wholesale vs retail
Wholesale – for banks and institutions
The wholesale model of the digital euro will be specifically designed for interbank and institutional transactions, with the goal of optimizing liquidity transfers between central banks, commercial banks, and other financial institutions. This approach aims to reduce operational costs and settlement times.
The ECB has emphasized that the wholesale implementation will allow real-time settlement (RTGS – Real-Time Gross Settlement), ensuring the finality of transactions through direct control by the central authority. The system will be designed to integrate with TARGET, the Eurosystem’s interbank settlement platform, and other existing payment systems.
Retail – for citizens
The retail model, aimed at citizens and businesses, represents the most visible and potentially impactful aspect of the new digital currency. This model promises direct access to a form of currency issued by the central bank, available through digital wallets, with the ability to make payments both online and offline. The ECB has emphasized that the retail digital euro will be designed to be inclusive, ensuring access for currently unbanked populations.
Account opening and use
Access to the digital euro will be ensured through various institutional channels, allowing citizens to open a digital wallet with their trusted bank, public entities, or directly via an official app provided by the ECB. The wallet can be funded through transfers from traditional bank accounts, cash deposits at enabled ATMs, or services offered by local public entities.
Potential benefits
With the introduction of the digital euro, the ECB promises to increase efficiency in cross-border payments, reducing the time and costs associated with international transactions.
From a macroeconomic perspective, the bank argues that the digital euro would strengthen European monetary sovereignty in an increasingly global landscape threatened by foreign digital currencies, stablecoins, and U.S. payment methods. As highlighted by Philip Lane, ECB’s chief economist, the rise of dollar-linked stablecoins could undermine the ECB’s control over its own currency and limit the effectiveness of its monetary policy.
Criticisms and concerns
Privacy is the main concern regarding the introduction of the digital euro. Despite the ECB’s assurances about protecting user data confidentiality, the centralized nature of a digital currency implies the possibility of large-scale financial surveillance. President Christine Lagarde‘s statements on the commitment to privacy are not entirely convincing given the traceable and centralized architecture of the proposed system.
As Agustín Carstens, head of the Bank for International Settlements (BIS), pointed out in the past:
“The central bank’s digital currency will not be like cash; the central bank will have absolute control over what happens to the money.”
Unlike Bitcoin, where pseudonymity is ensured by the protocol’s design, the digital euro requires users to trust that the ECB will not misuse its access to transactional data.
Moreover, the impact on the traditional banking system is another concern. Despite the holding limits, the introduction of a secure digital alternative to bank deposits could accelerate the outflow of funds from commercial banks during periods of financial instability.
Although the ECB has explicitly ruled out the possibility of a programmable digital euro, the risk of arbitrary restrictions on how and where citizens can spend their money remains a delicate issue. A programmable digital euro could become a tool for social control, limiting spending on “non-essential” items or imposing consumption models aligned with political goals. This could pave the way for potential abuses, such as financial surveillance, purchase-based discrimination, sudden taxation, or, in the worst-case scenario, the implementation of a system similar to China’s “Social Credit System.”
The digital euro could also become a more direct monetary policy tool, enabling the implementation of measures such as negative interest rates or helicopter money more effectively.
Another critical aspect is cybersecurity. As CBDCs are entirely digital and centralized, they could be a target for cyberattacks. The concentration of all citizens’ financial data in the central banks’ digital infrastructures would increase the risk of breaches, with possible consequences for economic security. A potential breach could expose millions of people to large-scale identity theft.
Finally, the integration of the digital euro with existing payment systems and its actual usefulness in an already digital-rich private solution context remain open questions. With the wide range of fintech tools available, is there really a need to introduce a digital euro? What would the real benefits of the digital euro be compared to already available private payment systems? One of the ECB’s stated objectives is to reduce reliance on U.S. payment infrastructures like Visa, Mastercard, Apple, Google, and PayPal.
Despite Frankfurt’s stated goal, the actual need for a digital euro remains doubtful. This uncertainty is also reflected in the lack of interest from European citizens: a study by the ECB showed a strong preference for traditional payment methods and widespread indifference toward the new currency. In a sample of 19,000 people across 11 countries, only a minimal portion had hypothetically allocated funds to the digital euro, preferring cash and traditional bank accounts instead.
This is for a project estimated to cost between €400 million and €1 billion, as revealed by Piero Cipollone, member of the ECB’s Executive Board.
Future developments and timeline
As stated by President Lagarde, the ECB’s timeline aims to conclude the preparatory phase by October 2025, followed by a formal decision on the issuance of the digital euro. If approved by the European Parliament, the European Council, and the European Commission, the project would enter a gradual implementation phase, with a full roll-out expected no earlier than 2027-2028.
The ongoing pilot tests will provide data to refine the technical architecture and implementation policies. Special attention is being given to the scalability of the system, with the goal of potentially supporting hundreds of millions of users and billions of transactions annually. The roadmap initially foresees the introduction of basic functionalities for retail payments, gradually expanding to more complex use cases, such as conditional transactions for commerce and integration with European digital identities.
