meanwhile, have a look at bitcoin.de , they dont ask for a money deposit, only a BTC deposit from the seller. So in case the buyer doesnt actually pay, nothing is lost and and the BTC can be returned to the seller; on the other side, the BTC from the seller is frozen when a transaction starts, so when a buyer did transfer the money but the seller doesnt confirm, then the exchange-owners can always check and release the frozen amount of BTC.
It is slow (because of banks), but it works.
How can they (the exchange owners) check whether the fiat money was transferred? This is the key. If the BTC seller denies receiving the money, and is lying, he gets to keep the BTC and the fiat.
First of all, the exchange does not deal in "dollars" but "dollar IOUs" that are backed by BitShares with a 2x margin. Therefore, when someone 'shorts' dollars they 'owe the network' the dollars and so long as they do not cover they are incurring opportunity cost in lost dividends. Likewise, if the exchange rate moves against them the network will automatically cover their position.
The end result is that the exchange never has to confirm any fiat transfers.
The 'fiat' is exchanged for crypto-USD either in-person, via Nash X, via OTC, or via Escrow. The *purpose* of this exchange is not to facilitate actual fiat transfers so much as to create crypto-USD that tracks the value of USD and thus enables people to exchange it without risk and thus increase the viability of 'local-bitshares' as well as the demand for the currency. Once you have crypto-USD you can trade it for crypto-Gold, BitShares and BitCoin.
I want to clarify how this works: Why you short crypto-USD you are 'creating' crypto-USD. To 'cover' you must buy back crypto-USD with BitShares and thus 'destroy' the crypto-USD. End result, no fiat ever had to exchange hands and yet someone was still able to take a position in USD. Thus trading paper-fiat is entirely outside the scope of this exchange, but the presence of this exchange makes it easier to trade paper-fiat for crypto-fiat.