Digital euro – Technology and security – IT integration, data protection and innovative business models

In the first part of my blog post, we looked at the broad outlines of the digital euro: the regulatory framework, the maximum holdings, the pilot projects and also the exciting question of how a digital euro could work offline. Now it’s time to get technical – and rightly so, because the success of this project depends very much on how robust and future-proof the technical implementation is. The ECB is working hard to develop an architecture that is not only secure and robust, but also allows enough scope for innovations that we may not even be able to imagine today.

Architectural models: striking a balance between control and innovation

Technically, the digital euro is a balancing act: it must be stable and controlled – after all, it is digital central bank money – but at the same time it must not be too rigid. The ECB is therefore pursuing a hybrid approach. The central core ledger, operated by the ECB, is essentially the “digital central book” in which all transactions are recorded reliably and in real time. This is where the main responsibility for the money supply and compliance with all legal requirements comes together.

At the same time, distributed ledger technologies (DLT) come into play, complementing the core ledger. This technology makes it possible to programme payments, use smart contracts and, above all, enable offline payments. What makes this special is that in the ‘N€XT’ prototype, the ECB is relying on the UTXO (unspent transaction output) model, which many people are familiar with from Bitcoin. Put simply, payments are not represented as simple entries in an account, but as individual digital tokens that can be spent – similar to individual banknotes. This has the advantage of protecting users' privacy, as account balances are not disclosed; only individual transactions are visible.

At the same time, the ECB is opting for a two-tier model: the central bank controls the main system, while banks and payment service providers act as intermediaries, issuing digital euro wallets to customers. This is not only clever, but also realistic – it maintains stability in the system and allows market participants to contribute their strengths. There is great potential here, particularly in the area of business-to-business (B2B) payments, as many companies want more efficient, automated payment processes. However, the maximum limits for wallets currently under discussion, mostly in the lower four-digit euro range, pose a challenge for business transactions. The possibility of dynamically linking wallets to reference accounts that can be used for larger amounts is therefore being examined intensively.

In addition, the digital euro is facing a fundamental overhaul of the payment infrastructure. Traditional settlement systems such as TARGET2 or SEPA could be replaced by an API-driven platform on which banks act more as service providers for wallets. For many banks, this means redefining their role – a challenge, but also a great opportunity to reposition themselves and play a leading role in European payments.

Data protection: the fragile balance between privacy and supervision

When it comes to the digital euro, we are in the midst of a dilemma: on the one hand, many users want the anonymity we are familiar with from cash – at least for small amounts. On the other hand, legislators require that money laundering and terrorist financing be prevented. The ECB understands this and is pursuing the concept of privacy by design.

In concrete terms, this means that offline payments are anonymous up to a certain threshold because they are stored locally on secure hardware wallets and only synchronised with the core ledger when an online connection is established. This gives a sense of freedom without sacrificing privacy.

However, the following applies online: users must identify themselves via their bank or a payment service provider. These providers carry out the KYC (Know Your Customer) checks, while the ECB only sees pseudonymised transaction data. This reconciles data protection with regulatory obligations.

It is important to note here that complete anonymity does not come for free and is not unlimited. EU money laundering regulations require that the identity of users be verified for cross-border payments exceeding £50. This means that anyone moving large sums of money will also be identified digitally. Privacy applies to ‘small’ everyday payments – and that is already a major step forward.

One source of hope for data protection-friendly identification is the EU Digital Identity Wallet (known as eIDAS 2.0), which should make digital identities secure, valid throughout Europe and easy to use in the future. This will make many things easier – from opening a bank account to making everyday payments.

Of course, there remains a residual risk: experts warn that usage profiles can still be identified over time if patterns are analysed cleverly. The ECB needs to do more here – and do so transparently and openly, because trust is essential for a digital means of payment.

Security: more than just technology – a holistic concept

Security is not a side issue for the digital euro. It starts with the hardware: wallets use hardware security modules (HSMs) that protect private keys and ward off attacks. In addition, the system is preparing for a future with quantum computers – with algorithms that can also cope with these new threats.

The network infrastructure is highly available and redundant. The ECB conducts regular penetration tests and engages independent experts to identify vulnerabilities at an early stage. At the same time, it focuses on training and raising awareness among users, because even the best technical protection is of little use if people are careless.

The ECB is also mindful of the limits of technology: the CAP theorem states that in distributed systems, maximum consistency, availability and fault tolerance cannot be achieved simultaneously. The ECB therefore sets priorities to avoid double payments in the event of network failures, for example, even if this can sometimes lead to restrictions in availability.

It is important to add that central banks have invested heavily in resilience in recent years following disruptions to existing systems such as TARGET2. For example, the Trans-European Interbank Real-time Payment Settlement System (TIPS) has been moved to the cloud and expanded with multiple backup locations. Decentralisation and centralisation are therefore being combined to achieve the best possible level of security.

Programmable payments: opening doors to the future

The digital euro will be much more than just a digital version of our cash. It will be a tool for completely new types of payments and business models:

• In retail, smart contracts can automatically award cashback or activate customer programmes – without customers having to collect coupons or use apps. The payment “thinks for itself” and rewards immediately.
• In logistics, IoT sensors will report the arrival of goods and automatically trigger payments, reducing storage costs and improving cash flow.
• In industry, a machine can independently order and pay for consumables, increasing flexibility and efficiency. This reduces capital commitment costs and enables pay-per-use models, where companies only pay for what they actually use.
• Insurance will become faster and fairer when payments are automated in the event of flight delays or damage. For customers, this means less bureaucracy and faster assistance.

Important to note: The ECB has made it clear that the digital euro itself will not have any programmable features in order to ensure its fungibility. All automation will take place at the application or intermediary level. This is an important point in order to maintain the euro as a widely accepted means of payment.

IT integration: those who start now will secure a head start

The introduction of the digital euro requires adjustments at many levels: banks and retailers must make their IT systems fit for real-time transactions and wallet connectivity. Apps and web portals will get new features for digital euro payments.

Sandboxes and pilot projects are the best way to gain practical experience and put the technology through its paces. It is important to remain agile and incorporate feedback early on to avoid unpleasant surprises later.

Certifications such as ISO 27001 and the use of hardware security modules create trust and are also a prerequisite for compliance with legal requirements.

Governance and interoperability: common rules are key

The Digital Euro Rulebook ensures clear standards and uniform interfaces. The ECB handles settlement, while banks and service providers take care of customers. The clear division of roles prevents chaos and promotes competition.

Cooperation between the ECB, regulators and industry is essential in this regard. Only in this way can the digital euro function as a European joint project.

European sovereignty: more than just money

The digital euro is a strategic project to strengthen European digital sovereignty. It will reduce Europe's dependence on non-European payment systems such as Visa and Mastercard.

In addition, a uniform, innovative payment system could strengthen the European economic and financial system while accelerating the digital transformation.

Conclusion: actively shaping the future

The digital euro is on the verge of ushering in a new era for payments. For decision-makers in banks, retail and industry, this means not waiting and seeing, but actively shaping the future.

Those who analyse their IT architecture today, prioritise data protection and security, launch pilot projects and seek partnerships will reap the benefits tomorrow – in the form of efficiency gains, new business models and a head start in digital payments.

The clock is ticking – Europe's digital future is in our hands.