The Digital Euro: next steps following the ECB’s third progress report
Despite the summer break, there has been significant movement in the context of the Digital Euro. Following the publication of the ECB’s third progress report in July 20251 , numerous panel discussions, interviews, and statements have reignited interest and discussion around a European digital currency – and signal that positive momentum is continuing to build behind the introduction of the Digital Euro.
This latest report shows clear advances in preparing for the Digital Euro’s launch. The ECB is currently selecting providers for the Digital Euro platform and infrastructure, while also developing the rulebook with input from the Rulebook Development Group. Technical tests, including offline functionality, are being carried out to ensure practical usability. Moreover, the ECB is engaging various stakeholders, such as small merchants and consumer groups, to make the Digital Euro inclusive and user-friendly.
The preparation phase is expected to be completed by the end of 2025. However, the final decision on the launch of the Digital Euro will only be made once the European legislative process is completed in early 2026.
Why is there a need for a Digital Euro?
According to the ECB, the Digital Euro is the answer to the questions raised by an evolving payments landscape and the decline of cash usage across the EU. As consumer preferences shift toward fast, convenient digital payment methods, the Digital Euro ensures continued access to central bank money in a format that meets modern demands. In this sense, the Digital Euro closes the gap between cash and digital payment methods.
It is designed as a complement to cash and enables both online and offline transactions to the same extent. At the same time, it meets the same requirements for security and privacy as cash. This sets the Digital Euro apart from today’s common payment methods, which are always linked to a dependence on commercial banks, payment service providers, or crypto providers, and which do not offer the same level of stability, inclusiveness, or privacy.
Beyond consumer needs, it also plays a critical role in preserving monetary sovereignty and maintaining financial stability by safeguarding the central bank’s authority over public money amidst the rise of private alternatives. The Digital Euro aims to strengthen the EU’s strategic autonomy by reducing reliance on non-European payment systems, ensuring greater control over its financial infrastructure. By offering a unified, secure, and efficient solution, it is supposed to facilitate seamless pan-European payments, promoting integration across the euro area.
In doing so the EU is following the global trend where 134 countries – representing 98% of Global GDP – are exploring Central Bank Digital Currency (CBDCs) and 11 countries have already launched their own CBDC. In Europe, work on the Digital Euro began in 2020 with the exploration phase, followed by the investigation phase from 2021 to 2023. 2025 marks the end of the preparation phase, where the ECB set out to define technical usability, regulatory compliance, and harmonized implementation across the euro area.
At the core of this effort lies the Digital Euro Scheme Rulebook, which offers a standardized framework for payment service providers to ensure consistency, innovation, and interoperability in Digital Euro services and to build a prototype.2
The Digital Euro is powered by the N€XT settlement engine. The difference between N€XT and traditional settlement systems is that traditional systems use booking logic and maintain account balances, while N€XT uses an Unspent Transaction Output (UTXO)-based model inspired by blockchain technology, where each transaction output is recorded and tracked, and employs a microservice architecture to enable fast, scalable, and private transactions.
The ECB's prototype tested both online (e.g. e-commerce, P2P) and offline payments. Offline usage on secure hardware (e.g. JavaCard) enables settlement without third-party validation. While the system showed strong performance and integration, further work is needed to meet security and scalability targets – especially for offline use.
The diagram below illustrates this architecture, with N€XT at the core and use cases connected via the Digital Euro Scheme Rulebook.3
On the regulatory side, the Digital Euro aligns with existing legislation such as PSD2, DORA and the Digital Euro Regulation Proposal. Risk management frameworks have been proposed to address fraud, cyber risk, and third-party dependency. Payment service providers will need to be certified to make sure they follow the rules and start safely.
Equally important to regulation is privacy protection. The ECB’s design prevents the tracking of user balances or payment patterns by the Eurosystem. Furthermore, checks based on transactions allow for privacy-preserving payments, especially for low-value transactions, within regulatory boundaries.
Impact on market actors
And while the preparation phase is continuing, one thing is clear: the Digital Euro will impact core market actors across the financial services, commerce, and public sector domains. For banks and payment service providers (PSPs), the most significant change will be the redefinition of their role as intermediaries. As the Digital Euro gains traction, these institutions will be required to distribute and manage digital euro wallets for their clients, taking on a new responsibility in providing access to central bank-backed money.
To ensure smooth operations, they will also need to ensure infrastructure readiness, integrating the ECB’s settlement layer with their existing front-end systems. This will demand significant technical adjustments to guarantee compatibility with the new digital currency framework. At the same time, compliance responsibilities will increase, as banks and PSPs must navigate complex regulatory requirements, including Anti-Money Laundering (AML) obligations, privacy protections, holding limits, and various reporting duties.
For merchants and retailers, the Digital Euro will require significant upgrades to their point-of-sale (POS) and checkout systems. These systems will need to support new forms of digital euro transactions, including QR codes, NFC payments, and potentially offline payment options, ensuring compatibility with the evolving payment landscape.
Additionally, the cost model for merchants could shift in their favor, as the Digital Euro may offer lower transaction fees compared to traditional card schemes, potentially reducing payment processing costs. As with other actors in the ecosystem, merchants will need to navigate these technical and financial adjustments while adapting to the new regulatory environment surrounding digital currencies.
Preparing for the Digital Euro: what market players need to do now
As the Digital Euro ecosystem continues to evolve, successful implementation will require strict regulatory compliance along with strategic coordination across technology, operations, and governance. Below we set out the four focus areas market players need to address to get ready for the Digital Euro.
1. Legislative & Regulatory Compliance
- Monitor and analyse EU and ECB regulations (e.g. GDPR, PSD2/3, AMLD5/6, DORA)
- Conduct compliance gap assessments between internal policies and regulatory requirements
- Adapt AML/KYC processes for digital euro wallets.
2. Operational Business Process Readiness
- Design payment flows for P2P, POS and e-commerce transactions
- Set up reconciliation processes with the Digital Euro Settlement Platform (DESP)
- Ensure alignment with ISO 20022 payment standards for transaction formats and messaging.
3. Technical Infrastructure & Integration
- Perform technical gap analysis and architecture review across core banking, middleware, mobile/POS, and DESP interfaces
- Optimize API gateways and middleware for scalability, resilience, and monitoring
- Manage certification and testing programs for systems and devices
- Ensure systems support ISO 20022-compliant transaction messaging and data exchange.
4. Risk & Fraud Controls
- Map ECB fraud taxonomy to internal risk and fraud control frameworks
- Integrate with the ECB Risk & Fraud Management (RFM) platform
- Implement geolocation and behavioral anomaly detection to prevent fraud.
Conclusion
The third progress report on Digital Euro showed clear advances in preparing for its launch. According to the ECB, the Digital Euro represents a modern, flexible payment system that combines innovation with traditional methods, preparing the EU for the evolving digital payments landscape. The ECB is selecting platform providers, developing the Rulebook, and testing technical functionality, including offline payments, to ensure usability. Stakeholder engagement ensures the Digital Euro is inclusive and user-friendly, while cash will continue to remain central in the payment system. In this view, it complements cash and strengthens the EU’s financial sovereignty by providing a secure, pan-European digital payment solution.
Banks, PSPs, and merchants will need to adapt their systems, upgrade payment flows, and comply with new regulatory requirements. At Capco, we can support you by helping with regulatory compliance, operational readiness, technical infrastructure integration and risk & fraud management. Please contact us to find out more.
References
1 https://www.ecb.europa.eu/euro/digital_euro/progress/html/ecb.deprp202507.de.html#toc2
2 https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf/ecb.derdgp250409_RDG_progress_report_April_25.de.pdf?7cd03cef4dad7cc637a46e3976c688be
3 https://www.ecb.europa.eu/pub/pdf/other/ecb.prototype_summary20230526~71d0b26d55.en.pdf