Strengths and limits of the Central Bank’s digital euro

In Octo­ber 2025, the Euro­pean Cen­tral Bank could take a deci­sive step for­ward with the intro­duc­tion of the dig­i­tal euro, the cen­tral bank dig­i­tal cur­ren­cy (CBDC). This project, which is intend­ed to com­ple­ment exist­ing cash and elec­tron­ic pay­ments, has recent­ly made sig­nif­i­cant progress. In Decem­ber 2024, the ECB pub­lished its sec­ond progress report¹, detail­ing the progress made in the prepara­to­ry phase of the dig­i­tal euro. The report high­lights key aspects such as pri­va­cy pro­tec­tion, hold­ing lim­its and offline pay­ments. At the same time, a study pub­lished in March 2025 reveals that 58% of Euro­pean cit­i­zens think that they are “unlike­ly or very unlike­ly” to use the dig­i­tal euro for their every­day pay­ments².

How will this inno­va­tion fit into Europe’s finan­cial archi­tec­ture? What impact will it have on the tra­di­tion­al bank­ing mod­el, which relies heav­i­ly on deposit-tak­ing? Can it real­ly offer a cred­i­ble alter­na­tive to pri­vate ini­tia­tives and dig­i­tal cur­ren­cies from oth­er eco­nom­ic powers?

Under­ly­ing these ques­tions is the need to rede­fine the bal­ance between finan­cial sta­bil­i­ty and inno­va­tion, reg­u­la­to­ry con­trol and pub­lic accep­tance. Beyond the tech­ni­cal chal­lenges, the dig­i­tal euro is part of a broad­er trans­for­ma­tion of mon­e­tary and bank­ing mech­a­nisms, in which the dynam­ics of trust, access and inter­me­di­a­tion are being fun­da­men­tal­ly rethought.

These issues require a nuanced approach, com­bin­ing analy­sis of mar­ket struc­tures with an under­stand­ing of mon­e­tary and reg­u­la­to­ry poli­cies. It is pre­cise­ly in this area that the insights pro­vid­ed by Julien Prat, an econ­o­mist spe­cial­is­ing in decen­tralised mar­kets, and Jéz­abel Coup­pey-Soubeyran, an expert in mon­e­tary pol­i­cy and bank­ing reg­u­la­tion, converge.

The intro­duc­tion of a CBDC rais­es ques­tions about its impact on finan­cial sta­bil­i­ty, par­tic­u­lar­ly through the risk of dis­in­ter­me­di­a­tion. If a sig­nif­i­cant pro­por­tion of deposits is trans­ferred to the CBDC, banks’ lend­ing capac­i­ty could decline, affect­ing the financ­ing of the real econ­o­my. A report by the Banque de France indi­cates that, in an extreme sce­nario, the sub­sti­tu­tion of deposits would reduce bank financ­ing resources by 10% to 15%³.

“The main risk is that indi­vid­u­als will pre­fer to deposit their mon­ey direct­ly with the ECB rather than with com­mer­cial banks. If too large a share of bank deposits shifts to the ECB, this could weak­en the eco­nom­ic mod­el of banks, which use these deposits to finance their loans,” explains Julien Prat. He also points out that “in the event of a bank run, peo­ple could want to trans­fer their mon­ey en masse from com­mer­cial banks to the ECB, which would increase the insta­bil­i­ty of the system.”

To lim­it this risk, the mon­e­tary insti­tu­tion plans to intro­duce a cap on dig­i­tal euro accounts, “which would pre­vent a total shift of funds and lim­it the impact on finan­cial sta­bil­i­ty,” adds the researcher.

How­ev­er, this pre­cau­tion is not with­out con­tro­ver­sy. Jéz­abel Coup­pey-Soubeyran points to the influ­ence of the bank­ing sec­tor in these deci­sions: “The idea that the dig­i­tal euro could under­mine finan­cial sta­bil­i­ty is pri­mar­i­ly put for­ward by com­mer­cial banks, which are reluc­tant to adopt it, par­tic­u­lar­ly for the gen­er­al pub­lic.” She regrets that this cap pre­vents the dig­i­tal euro from offer­ing direct access to cen­tral bank mon­ey, which “could restore a gen­uine pub­lic ser­vice for money.”

Fur­ther­more, CBD­Cs could improve the trans­paren­cy and trace­abil­i­ty of trans­ac­tions. Thanks to the inte­gra­tion of tech­nolo­gies such as blockchain, finan­cial flows would be record­ed in a decen­tralised and secure man­ner, mak­ing it eas­i­er for reg­u­la­to­ry author­i­ties to detect fraud and mon­i­tor sys­temic risks. This improved trace­abil­i­ty could strength­en con­fi­dence in the finan­cial sys­tem, pro­vid­ed that pri­va­cy issues are also tak­en into account⁴.

How­ev­er, this is a major point of con­cern, as Julien Prat points out: “The main issue is trans­ac­tion con­fi­den­tial­i­ty. With a dig­i­tal euro, pay­ments could be tracked direct­ly by the ECB, rais­ing con­cerns about finan­cial sur­veil­lance.” This point is tem­pered by Jéz­abel Coup­pey-Soubeyran, who believes that “trans­ac­tion trace­abil­i­ty already exists today, since most pay­ments are made by bank trans­fer or bank card. The loss of con­fi­den­tial­i­ty asso­ci­at­ed with the dig­i­tal euro would there­fore be marginal.”

In terms of mon­e­tary pol­i­cy, CBD­Cs offer new levers for inter­ven­tion. For exam­ple, they could enable direct cash trans­fers to house­holds in times of cri­sis, there­by improv­ing the trans­mis­sion of ECB poli­cies. “The dig­i­tal euro would open up the pos­si­bil­i­ty of imple­ment­ing “heli­copter mon­ey” oper­a­tions, which involve trans­fer­ring cen­tral bank mon­ey direct­ly to house­holds or busi­ness­es in the event of a cri­sis, par­tic­u­lar­ly dur­ing peri­ods of defla­tion­ary pres­sure,” explains Jéz­abel Coup­pey-Soubeyran. How­ev­er, she believes that “one lim­i­ta­tion of this mech­a­nism is the lack of con­trol over the use of the funds. Some of the mon­ey dis­trib­uted could finance expen­di­ture that is con­trary to the green tran­si­tion. How­ev­er, heli­copter mon­ey could be envis­aged to finance cer­tain invest­ments nec­es­sary for the tran­si­tion, in par­tic­u­lar those whose lack of prof­itabil­i­ty jus­ti­fies sub­sidy financ­ing. This opens up new horizons.”

Fur­ther­more, by com­ple­ment­ing tra­di­tion­al instru­ments, CBD­Cs could facil­i­tate the imple­men­ta­tion of mea­sures such as effec­tive neg­a­tive inter­est rates, although this would require an adap­ta­tion of exist­ing reg­u­la­to­ry frame­works⁵. In addi­tion, Jéz­abel Coup­pey-Soubeyran express­es reser­va­tions about “this argu­ment for tax­ing deposits, which is very dif­fi­cult to defend.”

The Cen­tral Bank, in col­lab­o­ra­tion with Euro­pean insti­tu­tions, is devel­op­ing a strict reg­u­la­to­ry frame­work for the dig­i­tal euro, includ­ing data pro­tec­tion and cyber­se­cu­ri­ty stan­dards that are essen­tial for main­tain­ing user con­fi­dence. Pub­lic con­sul­ta­tions have been con­duct­ed, par­tic­u­lar­ly with banks⁶, to ensure an inclu­sive approach⁷.

A major chal­lenge is man­ag­ing the risk of dis­in­ter­me­di­a­tion, i.e. the pos­si­bil­i­ty that CBD­Cs could bypass tra­di­tion­al banks. To address this, the ECB is con­sid­er­ing cap­ping indi­vid­ual hold­ings of dig­i­tal euros at around €3,000⁸. This mea­sure aims to pre­serve the role of banks in financ­ing the econ­o­my, while offer­ing a secure and effi­cient dig­i­tal alter­na­tive. Fur­ther­more, it is worth remem­ber­ing that it is lend­ing that cre­ates deposits, not the oth­er way around.

For Julien Prat, this mea­sure guar­an­tees a cer­tain bal­ance: “With a deposit lim­it set at €3,000, the impact will remain min­i­mal.” He states that “banks will retain most of their deposits and there­fore their lend­ing capac­i­ty. The risk for them will there­fore be contained.”

Jéz­abel Coup­pey-Soubeyran, on the oth­er hand, con­sid­ers this approach restric­tive: “This is unfor­tu­nate, because a dig­i­tal euro with­out lim­its could re-estab­lish the role of mon­ey as a gen­uine pub­lic ser­vice. As for the sta­bil­i­ty of bank deposits, it is impor­tant for liq­uid­i­ty, but it is wrong to assume that a decline in deposits will lead to a decline in lend­ing. In fact, it is lend­ing that cre­ates deposits, not the oth­er way around.”

Trans­ac­tion secu­ri­ty is a key pri­or­i­ty. The dig­i­tal euro promis­es faster and cheap­er pay­ments, par­tic­u­lar­ly for cross-bor­der trans­ac­tions. To ensure the integri­ty and con­fi­den­tial­i­ty of pay­ments, the ECB is explor­ing and con­sid­er­ing the adop­tion of advanced tech­nolo­gies, such as cryp­tog­ra­phy⁹.

While this elec­tron­ic cur­ren­cy appears to be a strate­gic tool for mon­e­tary sov­er­eign­ty, get­ting the pub­lic on board remains a major challenge

Sev­er­al Euro­pean coun­tries are con­duct­ing exper­i­ments and pilot projects to assess the inte­gra­tion of CBD­Cs into their exist­ing finan­cial infra­struc­tures. These ini­tia­tives are help­ing to iden­ti­fy tech­ni­cal and oper­a­tional chal­lenges, while gath­er­ing valu­able data to refine the dig­i­tal euro model.

In France, the Banque de France is assess­ing the use of this form of dig­i­tal cur­ren­cy in spe­cif­ic mar­ket sce­nar­ios. Tests on the set­tle­ment of tokenised secu­ri­ties are explor­ing the appli­ca­tions of this inno­va­tion to mod­ernise finan­cial infra­struc­tures¹⁰. At the same time, col­lab­o­ra­tions with the pri­vate sec­tor are exam­in­ing the fea­si­bil­i­ty of blockchain for inter­bank set­tle­ments, antic­i­pat­ing changes in the sec­tor¹¹.

In Swe­den, the Riks­bank, through the e‑krona project, is study­ing the inte­gra­tion of a CBDC into the nation­al pay­ment sys­tem. Tests are eval­u­at­ing its coex­is­tence with cur­rent sys­tems and its abil­i­ty to meet user needs in a dig­i­talised envi­ron­ment¹².

At the Euro­pean lev­el, the ECB is test­ing the use of this form of cur­ren­cy to set­tle trans­ac­tions on tokenised assets. The aim is to improve inter­op­er­abil­i­ty between TARGET ser­vices and DLT plat­forms, facil­i­tat­ing the inte­gra­tion of finan­cial mar­kets and cross-bor­der trade¹³.

The intro­duc­tion of a dig­i­tal euro for the gen­er­al pub­lic (retail) is part of a strat­e­gy to reduce Europe’s depen­dence on pay­ment infra­struc­tures dom­i­nat­ed by for­eign play­ers such as Visa and Mas­ter­card. Philip Lane, Chief Econ­o­mist at the ECB, has empha­sised that this depen­dence could lim­it Europe’s room for manoeu­vre in the event of geopo­lit­i­cal ten­sions, mak­ing a domes­tic alter­na­tive nec­es­sary¹⁴.

Giv­en this real­i­ty, the dig­i­tal euro could the­o­ret­i­cal­ly act as a bul­wark against the influ­ence of non-Euro­pean pay­ment sys­tems. By offer­ing a pub­lic means of pay­ment acces­si­ble to all, it would strength­en the resilience of the Euro­pean finan­cial sys­tem by reduc­ing depen­dence on for­eign infra­struc­ture. At the same time, the emer­gence of new ini­tia­tives, such as the dig­i­tal dol­lar backed by the Fed­er­al Reserve or sta­ble­coins issued by dig­i­tal giants, is height­en­ing the need for Europe to assert its mon­e­tary auton­o­my. The ECB sees these devel­op­ments as a poten­tial threat to the eco­nom­ic sta­bil­i­ty of the euro­zone¹⁵. How­ev­er, Jéz­abel Coup­pey-Soubeyran tem­pers this view: “The dig­i­tal euro, as it is cur­rent­ly envis­aged, will not direct­ly strength­en the inter­na­tion­al role of the euro, as it is intend­ed for euro­zone cit­i­zens and banks for euro pay­ments with­in the euro­zone.” In her view, “in order to increase the euro’s inter­na­tion­al influ­ence, Europe should instead make progress on fis­cal union, which would lead to the emer­gence of a Eurobond that would be in demand from Euro­pean and inter­na­tion­al investors.”

Nev­er­the­less, while this elec­tron­ic cur­ren­cy appears to be a strate­gic tool for mon­e­tary sov­er­eign­ty, get­ting the pub­lic on board remains a major chal­lenge. A sur­vey con­duct­ed by the ECB in 2024 revealed that the major­i­ty of Euro­pean cit­i­zens do not see the point of using it for their every­day trans­ac­tions¹⁶. Julien Prat rais­es a key ques­tion in this regard: “Is there a real demand for a dig­i­tal euro?” After all, “cur­rent pay­ment meth­ods work well, and con­sumers are not express­ing any urgent need for this new tool.”

Aicha Fall