Afaik the legislation will force communication service providers (WhatsApp, MSN Messenger, ...) to scan any chat message for illegal material before it is encrypted and sent. The scanning happens against a known database of data fingerprints.

So what happens with self-hosted or decentralized services? Like matrix.

Depends entirely on how the law itself will be phrased. Maybe there is an exception to services below a certain size. But I don't expect the politicians behind this initiative to have matrix on the radar or even understand decentralized chat protocols.

You could program the clients to look for blacklisted URLs or picture hashes or whatever and still have end to end encryption I guess. Would defeat the point though and the eavesdropping could just aswell be on the server with no end to end encryption.