Also, if you solely receive and send bitcoin outside of an exchange, you can easily remain pseudo-anonymous in that anyone can see that wallet X has received Y bitcoins and send W bitcoins but without a person attached to the wallet, it's useless information.
This is way crypto currencies are regulated at the edges, if fiet to crypto is watched just like any other bank/exchange, then criminal activity has a hard time getting money out. At the end of the day, it's difficult to buy 'real' things; food, clothing, housing with bitcoin.
If this thing were a big enough problem, the government could easily require you to provide a ledger of all the parties you've transacted with (Your wallet is doing book-keeping, how hard would it be for a legitimate user to enter a small memo for every transaction, anyways?)
Failure to provide a ledger, or for your ledger to fail to cross-correlate with that of your counterparty would, of course, imply that you're a criminal.
Unlike cash, bitcoin leaves a very obvious breadcrumb trail, that can, with a bit of legislature, be turned into an incredibly useful tool for LE.
there was a submission here a bit ago regarding canadian banking systems wanting to go no cash, and mandate electronic purchase and payment.
we have seen economic collapse and what it looks like. if physical banknotes are not available, we use cigarettes, vodka, and tampons.
I think those things are fairly untraceable
If bitcoin was more widely used - wouldn't it be a dream come true for every wannabe Stasi/Gestapo organization ?