New way to buy or sell crypto in rupees, but trade at your own risk

On 6 July, the banking transaction door shut on crypto currency exchanges in India. As the three-month window that the central bank had given to all banks and RBI-regulated entities to wind down transactions with crypto exchanges came to an end, the crypto market in India suffered a setback and crypto money enthusiasts were left without a cash-out of their investments.

The never-say-die Indian entrepreneurs shifted to crypto trading only, allowing investors to continue to trade in crypto currencies but without the facility of exchanging their holdings for rupees through a bank. But that, it appears, was only the first step. At least two crypto exchanges—WazirX and Koinex—have now come up with another way to enable crypto-rupee trading.

Before we tell you what’s the facility and how you can use it, remember that despite several rounds of discouragement by the government and the RBI, crypto currencies are still not illegal. In fact, a high-level committee headed by Subhash Chandra Garg, secretary, department of economic affairs of the ministry of finance, is expected to firm up some recommendations for crypto regulations soon.

While the new facility is innovative and may boost the crypto market, the system is fraught with risk.

The new crypto-rupee trading facility

WazirX and Koinex have launched peer-to-peer platforms to facilitate entry and exit in crypto currency using Indian rupees.

“If you are a new entrant to the crypto ecosystem, you can purchase a crypto asset directly by transferring INR to a seller. That is your first entry point. Similarly, you can exit by selling it in exchange for INR,” said Rahul Raj, co-founder and CEO, Koinex, whose P2P platform is called Koinex Loop.

Until now, a buyer would transfer money to an exchange and then buy crypto. “Now you will transfer the money to another individual and that individual’s crypto will be transferred to you by the exchange. This would bypass the need of dealing with an exchange through a bank account. You will deal with the bank account of the buyer or the seller,” said Nischal Shetty, founder and CEO, WazirX. Koinex and WazirX are offering the P2P service free of cost.

The exchanges claim that the buyer or seller won’t need to interact with the other party. The exchange will facilitate the sharing of information required for the transfer.

When the seller places a sell request, her crypto asset will go into the exchange’s custody. The exchanges already have the seller’s bank account details as they take that information upfront when a person opens an account with them. The seller has the option to choose among online modes of payment, including NEFT, IMPS and UPI, through which she wants to receive the payment in exchange for crypto holdings. The exchange then shares the required information with a prospective buyer, and asks the buyer to transfer a certain amount to a specific bank account (the seller’s account) through the chosen mode of payment.

However, the asset will be released to the buyer only when she informs the exchange that the required amount has been transferred from her bank account and the seller acknowledges the receipt of the transferred amount.

Tackling risks and disputes

Though the mechanism is fraught with risk, the exchanges claim they have foolproofed it. It’s possible that the seller does not acknowledge receipt of the transferred amount from the buyer. “If the seller says that he has not received the amount, then a dispute resolution mechanism kicks in where our teams hear out both the parties to resolve the issue,” Shetty said.

Exchanges are also trying to implement measures to disincentivize default scenarios—wherein the buyer lies about transferring the money without actually doing it or the seller lies that she has not received the money, despite actually receiving it.

One important aspect is that both the exchanges are allowing the transactions only between KYC-verified users, which includes Aadhaar and permanent account number (PAN) disclosure. So in case of a default, at least the exchanges know the identities of the parties in the trade.

“Then there is also a ratings mechanism. A rating that goes up and down. The user will also be able to see before entering into a trade with another party whether the other party has been in default cases in the past or how many trades has he matched or the average rating of the user. So before you enter the trade, you should be able to validate that the person you are entering the trade with will not cheat you. The users will able to make a conscious choice,” Raj said.

Is this good enough?

In the run-up to the deadline for banks to stop services to banks, many Indian participants in the crypto ecosystem exited their positions. Ashish Singhal, co-founder and CEO of CoinSwitch, an aggregator of crypto exchanges, said trade volumes have clearly gone down in the Indian market. “People who held crypto currencies for short-term gains have exited, the ones holding despite all these developments are those who believe in the underlying technology and its potential in the long term,” he said.

The P2P option “is not a very elegant solution”, said Singhal. “There is an element of friction when it comes to a P2P transaction. Most large and well-known exchanges have not adopted the P2P model till now. The reason could be that even P2P transactions might appear to be in a grey area to some. But it is possible that they might also come up with a P2P solution in the near future. We think that the solution lies in proper regulations by the RBI,” he said.

While the P2P platforms appear to give a solution to those who want to exit or enter the crypto world, users should tread cautiously as the system is still being tested. It might appear to be a good option for those who want to exit their holdings, but buyers should be extra cautious before transferring rupees to a stranger on the internet.