The European Central Bank plans to enable onchain settlements in central bank money as soon as 2026 while the final legal framework for the digital euro remains under debate in Brussels. The digital euro is positioned as both a modernization of euro-area payments and a strategic layer for sovereign settlement, but lawmakers are pressing the ECB on privacy and the risks of disintermediating commercial banks.
The ECB says its preparatory technical work for a digital euro is largely complete, including a scheme rulebook and the selection of key service providers. Executive Board member Piero Cipollone signalled the next step: the institution intends to “make it possible to settle transactions based on DLT in central bank money next year,” marking a move to integrate Distributed Ledger Technology with central bank infrastructure. DLT is a shared ledger technology that records transactions across multiple nodes.
The bank is pursuing a dual-track approach: a short-term pilot to link DLT platforms to existing TARGET services (Project Pontes) and a long-term program to build an integrated digital asset ecosystem (Project Appia). These efforts aim to provide a risk-free settlement layer for tokenized assets and to reduce reliance on private or foreign settlement rails.
Adoption depends on agreement among the European Parliament, the European Commission and the European Council; the Council has set its negotiating position and the ECB expects legislation by the second quarter of 2026. If enacted on that timetable, pilot transactions could begin in mid-2027 and full issuance remain possible toward 2029 after three years of infrastructure testing. Privacy is central to the debate.
The ECB proposes offline features intended to mimic cash anonymity for payer and payee via local device storage and secure elements, while online transactions would use pseudonymization so the Eurosystem would not identify individuals.
ECB technical roadmap and pilot projects
Pseudonymization replaces direct identifiers with codes that intermediaries can link to identities under strict access rules. Anti-Money Laundering and Counter-Terrorist Financing checks would continue to be performed by regulated intermediaries, mirroring current practices. Lawmakers, citing broader concerns about state surveillance and recent EU data initiatives, remain skeptical and have flagged risks that the digital euro could shift deposits away from commercial banks; the ECB has proposed holding limits and no interest on the digital euro to limit disintermediation.
For market participants, a central-bank settlement layer on DLT could materially alter custody, settlement finality and cross-border liquidity. A risk-free settlement medium reduces counterparty settlement risk and could compress basis and funding spreads in tokenized markets. It may also change hedging and margining practices if post-trade settlement times shorten and interoperability with TARGET services improves.
Tokenization fragmentation is a stated ECB concern; a common settlement layer aims to mitigate fragmentation, but commercial banks’ evolving role in distribution and AML checks will affect credit intermediation and short-term deposit liquidity. Traders should monitor operational pilots, service-provider contracts and supervisory guidance to reassess custody and counterparty models.
