The Digital Euro: Legal Challenges in the EU’s Path Towards a Central Bank Digital Currency

The debate on the future of money in Europe is no longer theoretical. With the acceleration of digital payments, the decline in cash use, and the rise of privately issued cryptoassets and stablecoins, the European Union (EU) and the European Central Bank (ECB) are advancing plans for the digital euro — a Central Bank Digital Currency (CBDC) that could transform the euro area’s monetary and regulatory landscape.

This article examines the legal, regulatory, and economic dimensions of the digital euro, focusing on the ECB’s design proposals, the European Commission’s 2023 legislative package, and the challenges for privacy, financial stability, and inclusion.

The Rationale for a Digital Euro

The ECB has consistently argued that the digital euro would serve three principal objectives:

1. Preserving monetary sovereignty: By ensuring citizens retain access to central bank money in a fully digitalised economy, the digital euro would reinforce the euro’s role as a safe and uniform anchor of value.

2. Fostering innovation and competitiveness: Acting as a neutral settlement asset, the digital euro could enable a more competitive ecosystem for private financial service providers, supporting the EU’s global positioning in digital payments.

3. Strengthening resilience and inclusion: With the potential to enable offline transactions and guarantee widespread accessibility, the digital euro could add redundancy to Europe’s payment systems while ensuring financial access across diverse demographics.

The Legal Framework

The legal foundation of the digital euro lies in Article 128 of the Treaty on the Functioning of the European Union (TFEU), which grants the ECB the right to issue euro banknotes and the EU the competence to regulate coin issuance. Whether this mandate extends naturally to a CBDC or requires explicit legal reform has been a matter of scholarly debate.

In June 2023, the European Commission proposed a Regulation on the establishment of the digital euro, aiming to:

• Confer legal tender status on the digital euro across the euro area, obliging merchants to accept it with limited exceptions.

• Guarantee privacy and data protection rights equivalent to those of existing digital payments, in line with the General Data Protection Regulation (GDPR).

• Ensure interoperability with existing payments infrastructures, consistent with the EU’s Digital Finance Strategy.

The proposal confirms that the introduction of a digital euro requires legislative approval by the European Parliament and Council, reflecting the constitutional significance of this innovation.

Risks and Challenges

Despite its promise, the digital euro raises complex risks, many of which mirror those identified in the UK’s digital pound debate:

1. Financial Stability

The migration of deposits from commercial banks into digital euros could undermine the traditional banking model, especially in times of crisis. The ECB has therefore suggested holding limits of €3,000 per individual, balancing usability with financial stability concerns.

2. Monetary Policy

Unlike bank deposits, the proposed digital euro would be non-interest-bearing, avoiding direct competition with banks. However, scholars highlight that introducing interest-bearing features in the future could strengthen monetary policy transmission — a possibility the ECB has not excluded for later phases.

3. Privacy and Data Governance

Perhaps the most sensitive issue concerns privacy. The ECB insists the digital euro will not be anonymous (to comply with AML/CFT rules) but will ensure a “cash-like level of privacy.” The European Data Protection Supervisor (EDPS) and consumer groups have demanded strict safeguards against both state surveillance and private monetisation of transaction data by wallet providers.

4. Financial Inclusion

While the EU benefits from high digital banking penetration, an estimated 13 million adults remain financially excluded. The ECB therefore stresses the importance of offline functionality and universal access to basic services. Yet, critics warn that if poorly designed, the digital euro could accelerate the decline of cash, marginalising vulnerable populations.

The Way Forward

The ECB’s preparation phase (2023–2025) will define the technical design and operational framework of the digital euro. A final decision on issuance will follow parliamentary and Council approval of the Commission’s legislative proposal.

The stakes are high: a digital euro would be critical EU infrastructure, demanding not only technical resilience but also:

• Clear limits on governmental and commercial data use.

• Robust consumer protection and wallet provider regulation.

• Effective integration with cross-border CBDCs and private stablecoins under the Markets in Crypto-Assets Regulation (MiCA).

The digital euro embodies both opportunity and risk. It could secure the euro’s place in the digital age, foster innovation, and enhance resilience. Yet, without robust legal safeguards, it risks unsettling Europe’s financial system and eroding fundamental rights.

For policymakers, the challenge is clear: balance innovation with constitutional principles of democracy, privacy, and financial stability.

At Tsamichas Law Firm, we monitor these developments closely, advising clients across fintech, banking, and international finance on navigating the regulatory uncertainties of CBDCs, data governance, and EU digital finance law.