Digital euro moves closer to reality as ECB launches first wholesale system

Europe’s push towards a more digital form of money has taken a big step forward, with the European Central Bank (ECB) launching a new system allowing financial institutions to settle transactions involving tokenised assets using central bank money.

The system, known as Pontes, went live on Monday and represents the first operational part of the Eurosystem’s strategy for tokenised finance. However, it is important to distinguish it from the better-known retail digital euro, which remains under development and would eventually be available to households and businesses for everyday payments.

European policymakers are attempting to modernise the euro for an increasingly digital financial system, while reducing Europe's reliance on private and non-European payment infrastructure.

So, what exactly is a digital euro?

For consumers, the proposed digital euro can essentially be understood as digital cash. Money held in an ordinary bank account is commercial bank money – effectively a claim on the bank. Cash, meanwhile, is central bank money issued by the Eurosystem.

The retail digital euro would bring that second form into the digital world. It would be issued by the ECB and national central banks and could be used to pay in shops, online or between individuals.

It would not be a cryptocurrency such as Bitcoin, nor would its value fluctuate against the euro. One digital euro would simply be worth one euro. It is also intended to complement physical cash rather than replace it.

Users are expected to access digital euros through banks and other authorised payment providers, potentially through a digital wallet. Basic services would be free to consumers, while payments could work both online and offline.

The ECB currently envisages the digital euro as a means of payment rather than an investment. It would therefore pay no interest and limits would be imposed on how much an individual could hold.

What happened this week?

The latest development concerns the other side of the equation: wholesale finance.

Pontes allows financial institutions to settle transactions involving tokenised assets in central bank money.

Tokenisation involves representing assets such as bonds digitally, typically using distributed ledger technology (DLT). The technology can potentially combine processes including issuance, trading and settlement while automating certain activities through smart contracts.

Pontes connects DLT-based market platforms with the Eurosystem's existing TARGET infrastructure. In practical terms, this gives banks and financial-market operators a way of experimenting with newer tokenised markets without having to abandon central bank money as the settlement asset.

An initial group of 13 market participants has joined, including Deutsche Bank, Santander, Société Générale and the European Investment Bank, alongside four DLT operators. The system's functionality and operating hours are expected to expand progressively, with full implementation targeted for 2028.

The ECB is itself preparing to invest a small portion of its own funds in tokenised securities, initially focusing on euro-denominated securities issued by euro-area governments, agencies and European supranational institutions. The move is intended to give the institution practical experience of using the technology.

Why is Europe pursuing it?

One argument is efficiency. Tokenisation could make parts of financial-market infrastructure quicker and more automated by allowing different stages of a transaction to take place within connected digital systems.

But there is also a geopolitical consideration, as European policymakers have become increasingly concerned about the region's dependence on foreign payment providers and the possibility that dollar-denominated stablecoins could become more important as financial markets become tokenised.

The ECB argues that providing central bank money for these markets can ensure that European tokenised finance does not become dependent on foreign currencies or privately issued settlement assets.

The same argument is being made for the retail digital euro. Europe currently has no universally accepted European digital payment instrument covering the entire euro area, while international providers play an important role in card and online payments.

A digital euro would therefore create a public European alternative that could be used throughout the euro area.

Why are some people wary?

For the retail digital euro, privacy is one of the most sensitive questions. The prospect of central bank-issued digital money has led to concerns about whether authorities could monitor how individuals spend their money.

The proposed system is being designed specifically to address this. The ECB says it would not be able to directly identify individuals from their payments. Offline transactions are intended to provide privacy closer to cash, with transaction details known only to the payer and recipient. For online payments, payment providers would still need information to comply with requirements such as anti-money laundering rules.

Cybersecurity is another consideration. Like other major digital payment infrastructure, a digital euro system could become a target for cyberattacks, meaning resilience would have to be built into its design and regularly tested.

What happens to bank deposits? If consumers were able to move large amounts of savings from commercial banks into digital euros held directly in central bank money, banks could potentially lose an important source of funding.

This is one reason policymakers intend to introduce holding limits and prevent the digital euro from paying interest. The ECB has tested hypothetical individual limits of between €500 and €3,000 and concluded that the resulting impact on financial stability would be manageable, although no final holding limit has yet been decided.

There is also the question of cost. The ECB has estimated, based on analysis involving banks, that investment costs for the banking sector could range between €4 billion and €5.8 billion as institutions adapt their systems.

Does this mean people will soon be paying with digital euros?

Not yet. Pontes can proceed within the Eurosystem's existing framework because it deals with wholesale financial-market settlement. The retail digital euro still requires legislation before the ECB can decide whether to issue it.

The European Parliament agreed its negotiating position this summer, backing provisions covering privacy, holding limits, free basic services and widespread merchant acceptance. Negotiations with EU member states are now part of the legislative process.

Meanwhile, technical preparations are continuing. A pilot involving a beta version of the retail digital euro is planned for 2027, while the ECB has indicated that, assuming the necessary legislation is adopted, a digital euro could potentially be issued in 2029.

For consumers, little changes immediately, for financial markets, Pontes marks the point at which part of Europe's digital-money strategy has moved from testing and discussion into live infrastructure.