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KB #240070: Error “The specified file is not encrypted” when starting SQL
You secured the instance of SQL specifying “Master must be encrypted” and either master.mdf is not encrypted, or Encryptionizer could not access master.mdf.
First, use the Encrypt/Decrypt Wizard(secncrpt.exe) to verify that master.mdf is actually encrypted.If it is, that means that Encryptionizer cannot access the directory that master.mdf is located in (permissions issue for the startup account).
Start Control Panel, Administrative Tools, Services (or run services.msc). Locate the Service entry for your instance of SQL Server. This is usually MSSQL$instance_name if a named instance, or MSSQLSERVER if the default instance.
Select the Log On tab. If the “this account” button is selected, make sure that the account specified has at least Read access to the SQL Data directory (or whichever directory master.mdf is located in, if different.)
Special Tip for SQL Express
By default, SQL Express uses the NETWORKSERVICE account. We recommend that you change this to the Local System Account.