The basic idea is that nobody has any incentive to cheat, as it will lead to losses on both sides. Only economically irrational people would cheat.
Which economically rational person buys unbacked digital assets?
Anyways, if you for example have stolen money or Bitcoins, you don't need to be economically rational. Also paying a price for hurting your competition can be economically rational.
This scheme won't work, is exploitable (buy BTC from stolen bank accounts and screw Bob), does require trusting banks and has loopholes all over the place.
Can you elaborate you criticism?
It leaks private data (cash in mail: mail address, bank transfer: bank account data) all over the place. I described one problem (stolen bank data which will lead to later reversed USD transactions) already, also there can be indefinite lock-ins, the extra funds at stake (in your example 10%) can lead to people implicitly taking a short/long position, it requires trust to begin with (who wants to trade with a newbie in your system?), both traders need to be online and do manual tasks outside of the system...
I mean, feel free to try this out in practice, it's not even hard to do - just post an offer in this forum for the mean time, put some funds on the table and get trading. It took less than 2 weeks each for 2 different new Ripple gateways, until they had a few 1000 USD bank transfers reversed each. Maybe you can beat them to it?