The establishment of a digital euro: Another step forward
Recently, the European Parliament adopted its annual review of the European Central Bank's (ECB) policies, together with its recommendations for 2026. Of particular note is the Parliament's backing of the digital euro. It welcomed the continuing discussions on the digital euro, and seemingly, aligning with the Council of the European Union's (Council) position on having the digital euro be available both online or offline, stating that this "should contribute to safeguarding universal access to payments and broad acceptance by merchants across the EU, while fully respecting privacy and data protection standards". This legislative momentum complements the Council's negotiating mandate, which aims to finalise the legal framework by 2026, enabling issuance of the digital euro by 2029. The proposal for the establishment of a digital euro must also be situated within the broader legislative architecture through which the European Union is seeking to modernise its monetary framework. In particular, it forms part of the Commission's 2023 Single Currency Package, which combines the digital euro proposal with parallel initiatives addressing the provision of digital euro services by payment service providers established outside the euro area and, more broadly, the legal tender status of euro banknotes and coins. Read together, these measures reflect an attempt to consolidate the core attributes of central bank money, both physical and digital, within a coherent body of secondary legislation, while preserving the retail focus of the digital euro as a means of payment rather than an investment instrument. This article aims to provide a comprehensive overview of these latest developments, focusing on the current draft of the "Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro" (Regulation) and its convergence with upcoming payment legislation, specifically the third Payment Services Directive (PSD 3) and the Payment Services Regulation (PSR). What is the digital euro? The digital euro aims to be a central bank digital currency (CBDC), being a digital form of central bank money issued by the ECB and the national central banks of the Eurosystem. It would be a central bank liability that is offered in digital form, which would be used by citizens and businesses for retail payments. Rather than replacing euro banknotes and coins, it would be a public, universally accessible means of payment that complements traditional fiat money. Thus, it would be exchanged at par against euro banknotes and coins, whilst also ensuring the privacy of end-users up to the largest extent possible. Its introduction also serves as a way to further enhance the digital autonomy of the European single payment area from global payment service providers, whilst also adding to the current spectrum of payment instruments. Key features of the Digital Euro Regulation One of the key features of the digital euro is that it would hold the status of legal tender, which "shall entail its mandatory acceptance, at full face value, with the power to discharge from a payment obligation". The Regulation provides only narrow exceptions from the obligation to accept the digital euro, such as when the payee is a natural person acting in the course of a purely personal or household activity or when prior to the payment, the payee agrees with the payer on a different means of payment. To ensure financial inclusion and resilience, the Regulation also mandates that the digital euro must be available in both online and offline functional modalities. Online payments would resemble digital transfers, whereas offline payments would allow local, device-to-device settlement without third-party involvement, with records synchronised once connectivity is restored. By using this dual-mode approach, it intends to maintain payment resilience during outages, provide cash-like privacy for low-value transactions, and ensure digital payment inclusivity, including for individuals that lack continuous internet access. Quantitative holding limits will be set by the ECB to prevent deposit outflows from commercial banks. In turn, the holding limits are subject to an overall ceiling for legal persons and for natural persons. Such limits will apply to both online and offline holdings, but legal persons may be subject to stricter caps. Additionally, waterfall and reverse-waterfall mechanisms will automatically sweep funds between a user's digital euro account and their bank account, ensuring that payments go through even when holding limits are reached. A growing body of analytical and policy work suggests that these design features can significantly moderate adverse systemic effects. Model‐based analyses indicate that appropriately calibrated individual caps may reduce the likelihood and severity of systemwide stress events (including run dynamics), while policy assessments have suggested that aggregate digital euro holdings, if kept within a range broadly comparable to existing banknote circulation, could be absorbed without materially impairing financial intermediation. While such estimates are inherently sensitive to assumptions and calibration, they support the Regulation's proportionality oriented approach to safeguards as a condition for a widely accessible CBDC. Interaction with PSD 3 and the PSR The digital euro is not intended to exist in a legal vacuum, but will converge with other regulations, particularly the upcoming PSD 3 and the PSR, which together are set to replace the current PSD 2 framework. The Regulation explicitly makes it clear that the digital euro should be considered as "funds" under the PSD 3 and PSR, ensuring that payment service providers distributing the digital euro are subject to the requirements laid down under both the Directive and Regulation However, targeted derogations might be introduced by the Regulation. Most notably, the Regulation makes it clear that payment initiation service providers should not benefit from an automatic right of access to digital euro payment accounts. This constitutes a deliberate departure from PSD 2's open banking regime, whilst also reflecting concerns related to security, operational resilience and the integrity of the digital euro infrastructure. This contrasts with account information service providers, which the Regulation indicates that they should continue to retain access rights to digital euro payment accounts, preserving user access to consolidated account information and continuity with the EU's data-sharing framework. In terms of supervision, the Regulation aims to have a shared responsibility model. National competent authorities will continue to supervise PSPs for compliance with the upcoming PSD 3 and the PSR, while the ECB will oversee those aspects of the digital euro that fall within its monetary and operational remit. The dual-layered supervision model aims to strike a balance between financial stability, consumer protection, and the ECB's constitutional mandate. PSD 3's enhanced transparency obligations, fraud protection rules, and redress mechanisms will also apply to digital euro payment services. The Regulation mandates that mandatory digital euro payment services for consumers must be provided free of charge, continuing to reinforce the public-service nature of the digital euro. PSPs that distribute digital euro may charge only for optional or value-added services. During a five-to-ten year transitional period, merchant service charges and inter-PSP fees will be capped by reference to levels observed in comparable payment instruments across the EU. Following the transitional period, any service charges and inter-PSP fees cannot exceed the relevant costs incurred by PSPs for the provision of digital euro payment services. Conclusion The digital euro project has moved decisively from conceptual debate to concrete regulatory design. With the Council's negotiating mandate in place, the Parliament's scrutiny ongoing, and the ECB's technical preparatory phase concluded, the EU is closer than ever to establishing a legal tender CBDC capable of meeting the evolving needs of Europe's digital economy. While significant policy questions remain, particularly concerning privacy, merchant costs, and the calibration of holding limits, the emerging regulatory framework demonstrates a clear ambition: to create a resilient, privacy‐preserving, accessible, and future‐proof public payment instrument that strengthens Europe's strategic autonomy. As trilogue negotiations unfold throughout 2026, the convergence between the digital euro proposal, PSD 3, the PSR, and the new AML framework will define not only the legal architecture of the digital euro itself but the broader trajectory of EU payments law for the decade ahead. Disclaimer: This article is for informational purposes only and does not contain or convey legal advice. The information contained in this article should not be used or relied upon in regard to any particular facts or circumstances without first obtaining legal advice. Steve Vella is an Advocate within Ganado Advocates
2026-07-01 06:09:00
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