The Reserve Bank of India may have barred all regulated entities from facilitating cryptocurrency transactions, but the ban has not deterred the exchanges from devising new ways of continuing virtual currency trade. The apex bank had in April directed all the banks to stop dealing with individuals and businesses dabbling in virtual currencies in next three months - the deadline ends on July 5.
But ahead of the central bank's deadline, it has emerged that the two cryptocurrency exchanges -- WazirX and Koinex Loop -- are working on peer-to-peer model to facilitate virtual currency trade without using normal banking channels. These exchanges are ready to launch P2P service which will be based on escrow - a contractual arrangement in which a third party keeps the financial instruments on behalf of two primary transacting parties.
In the P2P system, if a person is interested in selling cryptocurrency then s/he will have to inform the exchange which will lock the currency for sale. Then exchange will wait for the buyer who will have to pay the seller directly through his or her normal banking accounts. Once the seller confirms the payment to exchange, the currency platform will release the currency to the buyers. In this system, transaction will happen between buyer and seller directly with exchange being just a facilitator.
So far, the cryptocurrency investors were buying and selling the digital currencies through exchanges in rupee. Come July 5, all banks and other regulated entities will stop their services to the cryptocurrency exchanges.
This year in April, the Central Bank had asked all the regulated entities to stop providing services to any individual or business entities dealing with virtual currencies. The move came after it was observed that the several companies had started dealing in over thousands of digital currencies which, the government and the RBI claim, had no intrinsic value - therefore leaving the investors at risk. The RBI's move was an attempt to ring-fence regulated entities from the risks associated with cryptocurrencies. Since December 2013, the RBI had issued four warnings against bitcoin and other crypto-currencies.
The RBI and the Finance Ministry have on multiple occasions made it clear that virtual currencies are not legal tender and such currencies have no protection. The government has not authorised any virtual currency as a medium of exchange. It has also not given license to any agency for working as exchange.
In a statement issued last year in December, the Finance Ministry said: " Virtual currencies are not backed by government fiat. These are also not legal tender. Hence, VCs are not currencies. These are also being described as 'Coins'. There is however no physical attribute to these coins. Therefore, VC are neither currencies nor coins."
Some of the major virtual currencies are Bitcoin, Ethereum, Zcash, Dash and Ripple.