Europe seeks appropriate legal framework for the digital euro

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It is now up to the European co-legislators

The ECB's development path for a retail digital euro, issued directly by the central bank as a 'public' currency, went through several stages. In October 2020, the ECB published a feasibility study. Then, in 2021, the ECB started the preparatory work. Specifically, a research phase followed from July 2021 to October 2023, followed by the preparation phase from November 2023 to October 2025 (see also the KBC Economic Opinions of 22 January 2021, 4 April 2023 and 27 October 2023). Since the end of 2025, the ECB has continued its technical preparations, but mainly awaits the adoption of a legal framework by the European co-legislators, in particular the Council of the EU and the European Parliament.

The first proposal for that legal framework by the European Commission dates back to June 2023. Now it is the turn of the Council of the EU and the European Parliament. On 19 December 2025, the Council of the EU took a positive position on it. The European Parliament also expressed broad support for the digital euro in a resolution on 10 February 2026, but it has yet to vote finally on the legal text. Only when the Council and Parliament agree on a common legal framework (most likely during 2026) can the ECB make the final decision on the introduction. According to the ECB's most recent communication, the introduction could then be operationally possible during 2029.

Remaining discussion points

The main remaining discussion points in the legislative process relate to the impact on financial stability and the monetary transmission mechanism in the euro area. In addition, there are also still concerns about privacy, among others, the danger of possible restrictions and controls on the use of the digital euro (so-called 'programmability'), and guarantees that physical cash will continue to exist.

First, the proposed digital euro has a number of features that may have implications for financial stability and monetary policy transmission in the euro area. By construction, the digital euro will be 'public' money, i.e. issued directly by the ECB which is part of the government. The digital euro will compete in payments and savings with 'private' euros held in accounts with commercial banks, which legally represent 'private' claims by customers on the banks concerned.

This different risk profile gives the digital euro a competitive advantage over the 'private' euro.  The advent of such a completely risk-free digital euro could therefore encourage bank disintermediation. The collection of deposits, which are the basis for commercial banks' lending to businesses and households, could therefore be compromised. Moreover, via an obstruction of that credit channel, the transmission of the ECB's interest rate policy to the real economy would also be disrupted. That transmission channel plays a relatively important role in the eurozone economy compared to, say, the US economy.

In moments of crisis, there is a risk of such disintermediation occurring suddenly and quickly. In the draft design of the digital euro now on the table, the ECB is aware of these risks. The digital euro is intended only as a means of payment and not as a form of savings or investment. Therefore, there would be a limited cap on holding digital euros. Moreover, like physical cash, the digital euro would not earn interest. In any case, this would be the first time that the ECB has entered the field of (cashless) payments.

However, while these two measures (the cap and the zero interest rate) reduce the risk of disintermediation, both remain policy parameters, which could be adjusted by the government in the future, with all the associated risks. It is therefore important that the legal framework for the digital euro unambiguously establishes the two parameters mentioned.

In addition, it is important that the legal framework explicitly establishes the continued existence of physical cash, in line with the ECB's design. Admittedly, the privacy of the digital euro will never be completely the same as for physical cash. However, that need not be an insurmountable problem as long as the use of the digital euro does not become mandatory and the option to use physical cash remains. A ban on imposed restrictions or 'steering' of the use of digital euros (so-called 'programmability') is also best explicitly included in the legal framework. In any case, the same applies to this as to privacy concerns: the digital euro is 'only' an additional payment option to the others, including physical cash.

Strategic role of the digital euro

Besides the aforementioned concerns, there are also unambiguous opportunities associated with the digital euro. First, there is the monetary policy need for an effective monetary anchor in a digital environment where physical cash is being used less and less. It is of fundamental importance for the stability of the monetary system that cashless 'private' money remains exchangeable for 'public' money.

Such a monetary anchor is important for two reasons. First, cash, together with bank reserves at the ECB, forms the monetary base money on which the ECB bases its monetary policy. If the link between 'private' and 'public' money weakens significantly, it will inevitably affect the central bank's grip on the total money supply in the economy, and thus on inflation. Moreover, without practical convertibility to 'public' money, 'private' money would actually be based on nothing anymore. The central bank would then no longer be able to act as the ultimate liquidity provider ('lender of last resort') in case of any liquidity problems.

Besides the importance for the functioning of monetary policy, there is also the danger for the strategic autonomy of the euro area (see also KBC Economic Opinion of 19 May 2022). In a recent speech, ECB board member Cipollone described the geopolitical risk to the euro area, which he said could manifest itself through three mechanisms. First, through an effective decoupling of (part of) the euro area from the international payment system under non-European control. Even the mere threat of such a decoupling could be a solid geopolitical lever of pressure.

The creation of a European payment system via the digital euro would then ensure European autonomy. The question remains, however, whether the most efficient route there is through the government (ECB) or through the private sector (e.g. through the further development of initiatives such as the European Payment Initiative (EPI)). According to the ECB, it is looking for synergies with existing national payment systems. It believes this can be done through so-called 'co-badging' with existing national systems and through the creation of European standards for the public payment infrastructure, on which private providers can build.

A related geopolitical risk is that reliance on non-European financial infrastructure may not prevent sanctions by a non-European government against European residents. A recent example of this are some International Criminal Court judges who could no longer use their bank cards or conduct financial transactions as a result of non-European sanctions. A financial infrastructure under European control, based on the digital euro, would avoid this problem.

Third, there is the economic argument that Europe has become an economic colony of a dominant non-European oligopoly in payments. This dominant market position creates a higher cost structure, resulting in wealth losses for European users.

The international role of the euro

The advent of both 'public' and 'private' digital currencies potentially also has implications for the international monetary system. It is likely that sooner or later these currencies will compete for a dominant role in global financial markets. These need not necessarily be 'public' digital currencies, but could also be, for example, so-called stablecoins denominated in US dollars. In such an environment, where a non-European digital currency would be used as a de facto means of payment (or even as a savings or credit vehicle) in the euro area, there is a risk to the ECB's monetary sovereignty. This could be safeguarded by the availability of a digital 'public' euro.

Finally, in time, the digital euro could also promote its international role. Initially, the legal framework is likely to restrict the use of the digital euro to euro area residents. However, to respond to further geopolitical developments, such use could be extended to users outside the euro area if desired.