Yes but there is no existing way to poison illegitimately gained bitcoins as not eligible for use with legitimate purchases even though it's totally possible to trace each and every bitcoin used to pay a ransom.

In addition there is no 3rd party verification of the wallet owners so in practice there is plenty of ways to whitewash dirty bitcoin into clean currency, especially in economies with an large black/gray sector.

Add to that that any international investigation into cyber crime becomes an instant political hot potato due to the prevalent political rhetoric around state sponsored actors and you have an environment where the treat of actual capture/punishment is extremely low.

> Yes but there is no existing way to poison illegitimately gained bitcoins as not eligible for use with legitimate purchases

I am curious about this. If Uncle Sam serves Coinbase notice that it considers the contents of XYZ wallet to be stolen goods, then haven't they created lower-value coloured coins, and won't other exchanges start creating lists of those pretty quickly?

No criminals involved in this kind of nefarious activities use Coinbase. The blockchain is all over the world and you can setup an exchange in your back yard if you wish, in middle of nowhere in Africa, for example. Good luck having Uncle Sam go there.

Sure, but they're still going to want to _spend_ those coins at some point, and coins that can't be redeemed in the US are worth less than ones that can.

Pretty sure the USD can be redeemed anywhere in world, not just US.

This is why blockchains really only make this slightly more convenient.

Any USD retrieved from TotallyLegitExchangeLLC up in Belarus could still be marked as tainted if most of its blockchain transfers volume originate from illegal activity, so I feel in practice you would be limited to a narrow band of exchanges popular enough to have legitimate traffic and yet still unknown enough that they're still under the radar of their parents countries and/or the US' financial institutions.

Yes, but it's not happening yet. It takes a while for things to progress from protocol-as-designed to protocol-as-exploitable. But the lack of fungibility is a serious design flaw in Bitcoin, and eventually it's going to have to change to a completely different protocol, or there will be no such thing as a Bitcoin.

This points to the heart of the issue. A single BTC key is not fungible in the proper sense as it can be tracked.

There are ways around this on BTC that do not require protocol changes. For example, you can use a coin mixing service like whirlpool to essentially `wash` your BTC. However, this solution is incomplete unless everyone agrees to use it and in doing so `taint` their own BTC supply.

> "If we are all using stolen BTC then none of us are."

The proper way to fix this is with a protocol change as mindslight said. This already exists in a half-way form called ZChash. This is a fork of the BTC blockchain that updates to protocol to allow for `shielded` transactions. These protect anonymity and, I believe, transaction amount as well.

However, ZChash only gives the option to perform a `shielded` transaction. Most transactions on the ZCash blockchain do not utilize this function since it is slower than a standard BTC transaction.

The actual proper implementation of `shielded` transactions that I know of is called PirateChain.

This always fascinates me. If you have wallets you know are bad, and wallets you know are good, how can you launder anything if you can trace every transaction down?

You cannot fully trace every transaction. Transactions can happen off-chain, and transactions can be mixed.

If I have an output of 1 BTC, and I want to send you 0.3 BTC, then that 1 BTC gets split up in 0.3 and 0.7BTC the 0.3 goes to your address, the 0.7 goes to a new address belonging to me. If that 1 BTC was "known bad" is the 0.3 BTC now also "known bad"? Also, for the outside it is a guess whether the 0.3BTC or the 0.7BTC transaction was my "change".

You cannot fully trace every transaction. You can just find every other transaction it was linked to. That list grows somewhat big.

It is relatively easy to obfuscate the origin of your Bitcoin with multiple interpretations. The term to search for this is "CoinJoin" [1].

"CoinJoin requires multiple parties to jointly sign a digital smart contract to mix their coins in a new Bitcoin transaction, where the output of the transaction leaves the participants with the same number of coins, but the addresses have been mixed to make external tracking difficult."

For example, the service Whirpool [2] cycles users' Bitcoin numerous times; the end result is one which can be interpreted 1,496 different ways.

[1]. https://www.investopedia.com/terms/c/coinjoin.asp

[2]. https://samouraiwallet.com/whirlpool

This is negated the moment someone generates a reasonable double entry accounting visualization. I wouldn't recommend on something that degenerates to a UI/UX or data presentation problem to ensure your own security and ongoing freedom from prosecution, especially when the evidence trail is everywhere and forever for all to see.

> where the output of the transaction leaves the participants with the same number of coins, but the addresses have been mixed to make external tracking difficult

Wouldn’t the simple solution be tagging coins that exited such a tumbler?

Pretty much. Bitcoin wasn't made for anonymity. The logical approach to handling this is that exchanges consider coins from those wallets as invalid, creating a secondary class of coins.

And assuming all tumbled coins were tainted? Perhaps you could, but then I can imagine tumblers paying "innocent" people (out-of-band) to tumble their coins, while charging money launderers to do the same. If you could get a big fraction of all the active coins/wallets to be "tainted" then people are much less likely to refuse to transact with them.

> can imagine tumblers paying "innocent" people (out-of-band) to tumble their coins, while charging money launderers to do the same

Perhaps. But the legal precedent is for laundered money to be tainted per se. The laundering itself taints the cash independent of any preceding criminality.

Yes, but then you have a problem of "tainted" bitcoins. So in theory you arrive in a situation where some bitcoins aren't equal others - they can't be spent in a normal way because at some point in the past they went through a tumbler, so payment providers won't touch them "just in case".

Yes, that's kind of the whole point - from the government or law enforcement perspective, having a class of "tainted" coins would not be a problem but the intended outcome, and if a side-effect of that is a serious disincentive to use tumbling/laundering services (since that would effectively taint/destroy your funds, no matter if they were originally clean), that would be considered as a bonus, not as a flaw.

The way it one of the ways it work is that Vlad the blackmailer buys a bunch of digital artwork from Irina the artist using bitcoin, who then convert the bitcoin to cash in order to purchase something for her husband Vlad the legitimate businessman.

And because none of the wallets aren't accurately linked to real persons all tree actors in the above transaction could be the same entity with 3 distinct fictional personas.

Add to that that the former soviet block is littered with regions where nobody really agrees on who the legitimate government is and where the entire economy happens using foreign currency, there is plenty of ways to deliberately block investigations from simply following the money trail.

Yes, then all three wallets get tagged.

There are blockchains like Zcash and Monero that are anonymous.