Some of the important differences between Bitcoin and cash are that all transactions are recorded, all transaction records are kept for eternity, and all transaction records can be seen by anyone.
The NSA probably has a copy of the blockchain somewhere.
This makes the Bitcoin network actually much less attractive for money laundering purposes as both cash and bank transfers. From the point of view of the criminal, the above characteristics are highly undesirable.
While it is true that people can use the Bitcoin network anonymously if they know what they’re doing, it is also true that many criminals are stupid. It is also true that the government may have undercover agents infiltrating money laundering networks. One false move can be enough to tie some address to a real person.
Anyway, for the reasons above I think it would be not appropriate to outlaw the Bitcoin network. For those who insist that that can’t be done anyway, you are wrong. States can outlaw bitcoins mining (they are already outlawing printing traditional money). They can outlaw running an exchange. They can outlaw accepting bitcoins as a payment for a legitimate Internet business. They could even make it a crime holding bitcoins.
If you want the Bitcoin network to succeed, you don’t want any of the above to happen in any country.
But it may well happen. People who stand to lose from the Bitcoin network’s success may argue that Bitcoin is an evil instrument of money laundering.
The point of this post is to show that even if that discussion starts in some country or other, there are three possible outcomes. Not two.
Obviously, one can leave it at the present state of affairs, where the Bitcoin network is not illegal (though exchanges might need some license or other already under existing law in some jurisdictions).
Obviously, one could imagine a country going all out in a fight against the Bitcoin network and adopt all of the possible measures discussed above.
But there is a third possibility. One could make black bitcoins illegal and leave white bitcoins untouched.
That, of course, would need a definition. I’ll provide it right now.
A white bitcoin would be one tied to a real person. For example, I use the address “1KfLenzmpCEjNhdNs2Y6txuaJAFLUNzfjZ”. I display that fact on this blog. I want it to be public knowledge, for various reasons.
Obviously there are other addresses where the holder of the address is known to the public.
So any bitcoins on this address would be “white” under my definition. That’s because this address is completely unsuited for use in a money laundering scheme. The three differences between the Bitcoin network and cash I mentioned at the beginning make any transactions involving this address traceable for anybody, including law enforcement.
On the other hand, Bitcoin addresses that are not associated with any real person would be “black” under my definition. They pose some problems with money laundering. People can move funds with them without attaching their real identities. This is not possible with bank transfers, since under the recommendations of the Financial Action Task Force anonymous bank accounts are not allowed.
The third alternative of allowing only “white bitcoins” would be the equivalent of allowing only bank accounts with real names attached. It would be less restrictive than the second alternative mentioned above, which would ban the white coins with the black coins.
If you want the Bitcoin network to succeed, you should hope that there is a large amount of white bitcoins in usage, and that the criminals are only a small percentage of the whole user base.
Just to be clear, using an address without attaching a name can have legitimate reasons of privacy protection. I’m all for privacy protection. But that does not mean you need to keep all payments anonymous. For most payments, no one cares either way.
And anyway, this post is not so much about discussing whether a law against the Bitcoin network restricted only to black bitcoins would be desirable or not. The main point was to show that there are actually three possible outcomes. Not two. Three.