Author: Pranav Kumar, National Law University, Assam
Abstract
The emergence of Central Bank Digital Currencies (CBDCs), particularly the Digital Rupee in India, marks a transformative moment in financial technology and legal architecture. The Reserve Bank of India’s pilot initiatives on wholesale and retail digital currency transactions signal a paradigm shift in how monetary instruments are conceived, distributed, and regulated. This article examines the legal challenges surrounding the deployment of digital currency in India, focusing on issues of monetary sovereignty, statutory mandates, cybersecurity, privacy, and financial inclusion. It also traces the broader evolution of banking law—from colonial frameworks to contemporary regulatory reforms shaped by digital innovation, financial scandals, and fintech disruptions. The article concludes by analyzing how India’s legal and policy frameworks must adapt to safeguard financial integrity without stifling innovation.
Digital Rupees and Legal Dilemmas: Tracing the Evolution of Banking Law in India
The Indian banking system is undergoing a silent revolution. In order to place India in the global race to digitize national currency, the Reserve Bank of India (RBI) introduced the Central Bank Digital currency (CBDC), also known as the Digital Rupee.However, this innovation is not just a technological leap but a legal and regulatory challenge. As the boundaries between fiat currency, cryptocurrency, and digital tokens blur, the question arises: is Indian banking law equipped to handle this transformation?
From Colonial Codes to National Banking Structures
The origins of India’s banking legislation may be traced back to the colonial period, specifically the Banking Regulation Act of 1949 and the Reserve Bank of India Act of 1934. These laws laid the foundation for the creation, governance, and supervision of banking institutions. With economic liberalization in 1991, the sector experienced significant deregulation, allowing private and foreign banks into the system. Over time, these statutes were amended to address new challenges—Non-Performing Assets (NPAs), frauds, and governance lapses.
The RBI Act persists in delineating legal tender in India. Section 22 empowers RBI to issue currency notes, while the legal status of digital currency now falls under the interpretive lens of these provisions. Until recently, “money” was tangible. The Digital Rupee challenges that very definition.
What is the Digital Rupee?
The RBI characterizes the Digital Rupee as the electronic manifestation of sovereign money, issued by the central bank and equivalent to cash at par. The Digital Rupee is centralized, regulated, and supported by the government, in contrast to cryptocurrencies like Bitcoin or Ethereum.
It exists in two versions:
- Wholesale CBDC (e₹-W) – aimed at interbank settlements and securities.
- Retail CBDC (e₹-R): used in everyday transactions by the general population.
The pilot programs were launched in late 2022 and 2023 in cities like Mumbai, Delhi, and Bengaluru. Yet, legal scholars and economists alike remain divided over its legal positioning, impact, and enforceability.
Legal Dilemmas Surrounding the Digital Rupee
1. Statutory Ambiguity
While the RBI Act, 1934 authorizes the central bank to issue currency, the term “currency” historically implies physical cash. Whether this statutory authority extends to issuing digital tokens remains legally unclear. A purposive interpretation may support CBDCs, but the absence of explicit legal backing invites judicial scrutiny.
Amendments to the RBI Act or a standalone legislation for CBDCs may become necessary to clearly define:
- The nature of digital currency (whether it’s ‘money’ or merely a substitute medium),
- The legal tender status, and
- Penalties for counterfeiting or digital fraud.
2. Privacy and Data Protection
The Digital Rupee poses serious concerns regarding user privacy and data surveillance. Every transaction made with the Digital Rupee leaves a digital footprint. In a country where data protection is still in a nascent stage—despite the Digital Personal Data Protection Act, 2023—there’s anxiety about how transaction data will be stored, accessed, and used by state agencies.
Moreover, unlike cash, which ensures anonymity, the Digital Rupee can be programmed to track and restrict spending. Critics argue this can be misused for mass surveillance or financial exclusion.
3. Cybersecurity and Fraud
Banks and payment service providers (PSPs) have long been targets of digital fraud, phishing attacks, and ransomware. The Digital Rupee infrastructure, particularly its wallet-based framework, must be resilient against state-sponsored cyberattacks and insider threats. Legal responsibilities for breaches remain unclear:
- Will liability lie with the RBI, intermediaries, or the user?
- What is the application of Information Technology Act Sections 43A and 72?
There’s a pressing need for RBI regulations that define duty of care, cyber hygiene, and redress mechanisms.
4. Financial Inclusion or Exclusion?
The RBI argues that the Digital Rupee promotes financial inclusion by offering low-cost, secure transactions. But there is a noticeable digital gap in India. Over 400 million Indians lack reliable internet access. Additionally, adoption is hampered by digital illiteracy in rural areas.
Without clear legal mandates ensuring equal access, the Digital Rupee may become an instrument of exclusion rather than empowerment.
Comparative Legal Frameworks: Global Models
India is not alone in facing these dilemmas.
- China’s e-CNY has been deployed at scale, yet it lacks transparency on data surveillance.
- The European Central Bank is actively working on a Digital Euro with strong data protection guidelines.
- The Bahamas’ Sand Dollar project includes laws pertaining to consumer protection, grievance resolution, and interoperability.
India can learn from these models while crafting a legal ecosystem that balances innovation with rights.
The Legal Status of Cryptocurrencies and Its Impact
India’s regulatory hostility toward private cryptocurrencies indirectly influences CBDC deployment. The Supreme Court reversed the RBI’s total ban on cryptocurrency services in the 2020 case of Internet and Mobile Association of India v. RBI. The Court held that in absence of legislation, RBI cannot use its powers under the Banking Regulation Act to impose disproportionate restrictions.
This precedent strengthens the argument that CBDCs require explicit legislative authority rather than administrative fiat. Furthermore, the Finance Act, 2022 introduced a 30% tax on crypto profits, and TDS rules—but stopped short of granting legal recognition.
Financial Frauds and Institutional Failures
Recent banking scandals—such as the Yes Bank crisis, PMC Bank scam, and the flight of high-profile defaulters like Vijay Mallya and Nirav Modi—have eroded public trust. These events spotlight the limitations of existing banking law in dealing with:
- Regulatory forbearance,
- Corporate governance failures,
- Accountability mechanisms within RBI and SEBI.
In response, the Insolvency and Bankruptcy Code (IBC), 2016 and the strengthening of the SARFAESI Act have been helpful, but not sufficient. The challenge is greater in the digital era, where financial transactions are rapid and opaque.
Case Law Integration
Several key cases shape the legal contours of banking law in India:
- Internet and Mobile Association of India v. RBI, 2020
- Held that RBI’s circular banning crypto dealings was unconstitutional.
- Highlighted the need for proportionality and legislative clarity.
- P.J. Irani v. State of Madras, AIR 1961 SC 1731
- Stressed on the interpretation of ‘money’ and legal tender under statutory frameworks.
- Jayantilal Ratanchand Shah v. RBI, AIR 1996 Bom 362
- Emphasized RBI’s wide regulatory powers, but within legal limits.
These judgments reaffirm that financial regulation must be grounded in clear statutory mandate, not executive discretion alone.
Future of Indian Banking Law
India needs a comprehensive Financial Technology (FinTech) Regulation Act or a Digital Currency Act that:
- Clearly defines digital currency as legal tender,
- Ensures data privacy and cybersecurity compliance,
- Assigns liability and sets up a grievance redressal mechanism,
- Mandates financial literacy and inclusion, especially in rural areas.
Additionally, the role of regulators like SEBI, IRDAI, and TRAI must be aligned with RBI’s fintech strategy to ensure cross-sectoral consistency.
Conclusion
The Digital Rupee is not just a financial product—it is a legal experiment. Its success depends as much on technological robustness as on the strength of legal safeguards that underpin it. As banking law in India transitions from ledger books to blockchains, the legal system must evolve to address emerging challenges around privacy, surveillance, fraud, and inclusion. Without a proactive legal framework, the promise of digital currency risks becoming another paperless illusion.
Frequently Asked Questions (FAQs)
1. Is the Digital Rupee the same as cryptocurrency?
No. The Digital Rupee is a Central Bank Digital Currency (CBDC), issued and regulated by the RBI. Cryptocurrencies like Bitcoin are decentralized and privately created.
2. Is there a law that governs the Digital Rupee?
Currently, there is no standalone law. The RBI is operating under its powers granted by the RBI Act, 1934. However, legal experts suggest the need for a dedicated statute.
3. How does the Digital Rupee affect consumer privacy?
Digital Rupee transactions are traceable, raising concerns about data surveillance and privacy. The application of the Digital Personal Data Protection Act, 2023 remains unclear in this context.
4. Can the Digital Rupee help prevent banking fraud?
Potentially yes, due to traceability. But it also opens new cybersecurity risks, including hacking and digital fraud, which need new legal and technical safeguards.
5. Will the Digital Rupee replace cash?
Not immediately. It is designed to coexist with cash and digital payment systems like UPI. Full replacement would require extensive infrastructure and legal changes.
