Risks Associated with Peer to Peer Crypto Currency Trading

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Apurva Joshi
Apurva Joshi
Apurva Joshi is independent director on the board of Quickheal Technologies and Minda Rinder P Limited. She is the author of Students Handbook on Forensic Accounting - one of the first textbooks on the subject of forensic accounting. She was featured as Outstanding Entrepreneur in the Book "Arise Awake".

The Bank for International Settlements (BIS) has recently warned that the emergence of cryptocurrencies has become a combination of a bubble, a Ponzi scheme and
an environmental disaster, and calls for policy responses. Following the footsteps, Indian Banking Regulator, Reserve Bank of India, on 29th August Published their Annual Report which expressed the concerns about the cryptocurrency trading in India. In its annual report RBI mentions the following 

Developments on this front need to be monitored as some trading may shift from exchanges to peer-to-peer mode, which may also involve increased usage of cash,and possibilities of migration of crypto exchange houses to dark pools/cash and to offshore locations, thus raising concerns on AML/CFT (anti-money laundering/combating the financing of terrorism) and taxation issues, require close watch.

In the wake of the fears expressed by the regulators, it is important to understand some jargon associated with Digital Currencies and the model of the cryptocurrency exchanges.

Background of CryptoCurrency Trading

A regular bitcoin exchange, use an order book approach to match buy and sell orders placed by the crypto currency traders. However, neither the buyer nor the seller has any idea who the other party is, and this provides all users with a certain level of anonymity and privacy protection. Most of the Indian Crypto Currency Exchanges were started on this principle. Reserve Bank of India asked the banking institutions to stop all the banking services provided to the Crypto Currency Exchanges. This forced the exchanges to change their business model from regular to peer-to-peer.

Defining Peer-to-Peer cryptocurrency trading

In peer-to-peer trading, the cryptocurrency exchanges don’t hold any funds on their platform. Rather these exchanges introduce the buyers of the cryptocurrency with the sellers of the currency. Buyer and seller get enough information to identify each other, unlike the regular exchanges where buyers and sellers are in dark.

Fear of Increased cash transactions

There are different options provided for completion of the transaction such as wire transfer to the seller, PayPal transaction or cash. Though not all of the buyers and sellers would be interested in sitting across the table to complete the bitcoin trade, there would be a few who are from the same locality and would be interested in buying the bitcoins in cash.

No “Know Your Customer” regulations

The absence of a central platform in peer-to-peer exchanges could make the buyers and sellers exempt from traditional laws, and could also make it tougher for regulators to probe trading activity. Generally, peer-to-peer trades do not require any KYC documentation regarding your identity and offer a reputation system in order to track your own trading history. The central cryptocurrency exchanges on the other hand force the buyers of the virtual currencies to complete their KYC.

Hence the regulator fears that there would be increased laundering activity due to the exchange business models shifting towards the Peer-to-peer model.


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