As of the time of publishing, the Supreme Court of India has refused to put a stay on the Reserve bank of India circular directing all regulated entities from dealing with individuals involved in the cryptocurrency business. This has led to multiple initiatives and workarounds by the existing Indian cryptocurrency exchanges.

Some are carrying on, business-as-usual. Others have decided to shift to being pure crypto-to-crypto exchanges that do not handle any fiat currency, helping them circumvent any RBI-related regulations.

Another method is to convert all fiat currency handling to peer-to-peer and reduce the exchange to functioning as cryptocurrency escrow provider.

Fig 1: A typical cryptocurrency exchange

Figure 1 illustrates how typical cryptocurrency exchanges operate.

Crypto buyers deposit money into a wallet that is maintained by the exchange. Crypto sellers deposit their cryptocurrency into a wallet that is also maintained by the exchange. At any given point in time, the exchange is holding both fiat currency and cryptocurrency on behalf of all its members.

When a buyer and seller are matched, a new transaction entry is made in the exchange's ledgers modifying its members balances. Buyers and sellers can then choose to withdraw their cryptocurrency or fiat currency to their own accounts.

Due to the RBI Circular, however, the exchange's bank accounts are at risk. The exchange will not be allowed to access the banking system (consisting of "RBI-regulated" entities). Some exchanges, therefore, are doing away with the handling of any fiat currency.

Fig 2: A peer-tp-peer(P2P)-based exchange

In Figure 2, observe the following possible scenario:

The Seller deposits his/her crypto assets on the exchange, and the selling price they would like to receive.
Buyers will then browse the exchange, and if they wish to purchase the crypto assets at the price, they will click "buy".
At this point - the exchange will inform the buyer to either contact the seller directly to arrange payment (or provide the buyer with the seller's bank details to enable the buyer to transfer payment in fiat directly to the seller).
Once the seller receives payment from the buyer, the seller will notify the exchange. The exchange will then release the crypto assets to buyer

This allows the exchange to keep operating, and still be in compliance with Indian regulations. The one issue this system does present, however is of possible fraud.

What if the seller receives payment, but continues to insist that payment wasn't received? In this case, the exchanges will need to have a dispute resolution mechanism in place that would allow the transaction to remain frozen until the disputes are resolved, coupled with a rating system, such as the one that Uber uses for its drivers and customers. This information will help signal the trustworthiness of buyers and sellers in the absence of a third party.

While we await the 20th July ruling from the Supreme Court, the P2P solution will alow many exchanges to continue operating.