The Dilemma of the Digital Rupee: Legal and Regulatory Challenges for the Central Bank Digital Currency (CBDC) in India

When, in 2022, the RBI launched a pilot for Digital Rupee, or e₹, many hailed it as a landmark moment in monetary history. A CBDC will modernize the way money works: it fuses the best of a sovereign currency with the efficiency of digital payments. But this ingenuity also begets hard questions: how can India adopt the future of money without undermining legal certainty, privacy, and financial stability?

Understanding the Digital Rupee

A Central Bank Digital Currency is a digital version of fiat money issued by the central bank. Unlike virtual cryptocurrencies, such as Bitcoin, a CBDC is centralized, stable, and legally recognized. The Digital Rupee holds the same value as a physical rupee but is in electronic form, transferable instantly through RBI-controlled platforms.

India's push for a CBDC also forms part of the country's larger digital transformation-e.g., the government's objective to decrease cash dependency, improve efficiency in payments, and advance financial inclusion. At the same time, the shift toward digital money creates gaps in India's legal and regulatory architecture.

The Policy Rationale

The RBI introduced the Digital Rupee to achieve three key objectives.

First, it reduces the cost of managing currency that otherwise consumes a lot of public resource. Second, it improves financial inclusion for all citizens, especially those that don't have access to formal banking. Third, monetary sovereignty is preserved, whereby private cryptocurrencies cannot water down the government's control over money supply.

However, each of these goals intersects with a set of untested legal and ethical challenges—raising questions about legitimacy, privacy, and state power.

Legal and Regulatory Dilemmas

The monetary laws of India were made for an era of paper money, not programmable currency. While the Reserve Bank of India Act, 1934, and the Payment and Settlement Systems Act, 2007, provide the foundation for issuance and regulation of currency, it makes no explicit mention of digital legal tender. The Finance Act of 2022 introduced a broad definition of digital currency, but operational clarity remains limited.

1. Legal Tender Status

As per Section 22 of the RBI Act, only paper currency and coins constitute legal tender. In order to make e₹ at par, the law should acknowledge digital issuance as valid currency. Failure to do so would allow a person to refuse payment in e₹ on valid legal ground, which may lead to disputes on contract and ambiguity in enforcement.

2. Privacy and Data Protection

Every digital transaction leaves digital footprints that can be traced. Though transparency supports anti-fraud actions, it also provides the state with unparalleled visibility regarding spending behavior. The Digital Personal Data Protection Act, 2023, provides a general framework but does not place any clear limits on State access to financial data. Keeping in view Justice K.S. Puttaswamy v. Union of India (2017), wherein privacy was held to be a fundamental right emanating from Article 21, CBDC architecture must embed privacy by design to avoid financial surveillance.

3. Cybersecurity and Technological Risks

Digital currencies are susceptible to hacking, identity theft, and technical failure. The Information Technology Act, 2000, offers basic cyber protections but is not tailored to the peculiar risks of CBDC systems. If compromised, the integrity of the Digital Rupee would suffer a severe reputational setback, jeopardizing citizen confidence in the whole monetary system.

4. Cross-Border and Regulatory Overlap

A digital rupee that can engage in cross-border payments raises questions of compliance with foreign exchange laws and international data standards. There has to be coordination between the RBI, the Ministry of Electronics and Information Technology, and SEBI to avoid regulatory overlap. India also needs to work toward international interoperability and security as being considered in various countries under the leadership of the Bank for International Settlements.

Global Lessons

Other jurisdictions provide useful lessons. China's Digital Yuan and Sweden's e-krona both began with pilot projects under strict legal supervision. The European Union's Digital Euro proposal places strong emphases on privacy-by-design and transparency about data use. India can draw from these experiences to frame its balance between innovation and protection.

The Way Forward

In order to manage these dilemmas, both legislative clarity and institutional coordination are required in India. CBDCs must be legally mandated and formally recognized as legal tender through the amendment of the RBI Act. A holistic data protection protocol must be the governing framework on storing, sharing, and anonymizing transactional data. This could also entail a dedicated CBDC cybersecurity unit within the RBI to oversee encryption standards, risk audits, and digital forensics.

Moreover, rights, redressal, and security best practices need to be communicated to the citizens regarding the use of digital currency. It is only public trust that can help Digital Rupee emerge as a trusted national innovation rather than just a state-controlled experiment.

Conclusion

The digital rupee is more than a new way of paying-it is a constitutional and economic experiment that is redefining what "money" is in a digital democracy. Success would, therefore, hinge on how a balance is achieved between three forces: technological progress, individual freedom, and legal certainty. Ultimately, the digital rupee will be truly tested by how well it fosters greater public trust without sacrificing the privacy, self-determination, and accountability at the root of India's financial system.

This article is authored by Likitha Sri Meka, who was among the Top 40 performers in the Quiz Competition on International Human Rights organized by Lets Learn Law.