If that is so, what do you do with I Peter 2:9,10?
I understand it in the context in which it is written.
1Pet 1:1 (AKJV/PCE)
(1:1) Peter, an apostle of Jesus Christ, to the strangers scattered throughout Pontus, Galatia, Cappadocia, Asia, and Bithynia,
Jas 1:1 (AKJV/PCE)
(1:1) James, a servant of God and of the Lord Jesus Christ, to the twelve tribes which are scattered abroad, greeting.
Peter and James were writing to the same group of people, the twelve tribes of Israel.
Peter is clearly addressing Gentiles for the Jews cannot fit the description of the people in verse 10, so he is calling the Gentiles who accept Christ "a royal priesthood".
Peter is clearly NOT addressing gentiles:
1Pet 2:11-12 (AKJV/PCE)
(2:11) Dearly beloved, I beseech [you] as strangers and pilgrims, abstain from fleshly lusts, which war against the soul; (2:12) Having your conversation honest among the Gentiles: that, whereas they speak against you as evildoers, they may by [your] good works, which they shall behold, glorify God in the day of visitation.
The Gentile are called THEY and Peter's audience is called YOU. Israel was scattered into Gentiles lands, many of which are listed in 1 Peter 1:1
Now, I will give you the fact that there is no longer a sacrificial system so the priesthood offers no sacrifices, but the real function of the priests in the OT was to teach the people the plan of salvation through the ceremonial laws given by God through Moses. So, that means that the current priesthood is to teach the plan of salvation to the world. That is it's function.
God is not currently using a priesthood and a nation, He's using ambassadors that are neither Jew nor Greek.
2Cor 5:20 (AKJV/PCE)
(5:20) Now then we are ambassadors for Christ, as though God did beseech [you] by us: we pray [you] in Christ's stead, be ye reconciled to God.
Once again, if we were priests Paul would have said so.
You already posted the verse Exodus 19:5,6 saying the entire nation of Israel was to be a royal priesthood, so there must have always been a priesthood that was always outside of the ceremonial laws given to Israel to which all the people of Israel belonged.
They were to be priests to the Gentiles.
Isaiah tells us that God designed His temple to be a "house of prayer for all people", so it seems God's design for Israel was to spread the good news of salvation to the entire world. This lesson is taught by Moses quite frequently in the first five books of the Bible. He told the Israelites time and again that anyone who wanted to worship with them could. All they had to do was to be circumcised, and once that was done they were to be to the Israelites as one born into Israel.
Yes, that was what God was doing before the dispensation of the grace of God and will be again later.