A botnet would be perfect for the bitcoin laundering process you describe above.

As for laundering money via Bitcoin and other forms of online currency (and, presumably, out into actual cash that you then transport via other means, and gold, and so on) - these are all part of the existing money laundering industry, though. I guess the point I'm trying to make isn't that you can't launder Bitcoin, but that for law enforcement, it's not really largely worse than the current situation. Whether the benefits of a global transaction stream they can pipe straight into their supercomputers versus the ease of micropaying between random identities via Tor to launder your own bitcoins play out as harder or easier than cash laundering remains to be seen, but either way, I think it's roughly the same order of magnitude as cash, and so not a horrible new threat that needs stamping on from above...

Yeah, "bad apples" will use it, but what I mean is more that they shouldn't flock to it as a lovely new panacea for transferring money without legal oversight. From the perspective of a criminal, I'd be very suspicious of the security of bitcoin compared to the traditional briefcases full of nonsequential bills and so on!

"So, I think bitcoin will be a boon for law enforcement, as it'll overally make it easier to trace down the financial activities of bad apples."

True but it's FAR from being a full proof way to track funds. It's very naive to think that your statement is at all accurate, a majority of funds bouncing around in the digital world will move between currency. (1)As an example, an agent will accept Bitcoin and pay out Liberty Reserve leaving no absolutely no way to trace. (2)Anyone out there swapping Second life currency, Facebook credits or some other online digital unit for Bitcoin? (3)Funds may be paid in a deposit of an online a game, a few hands of poker played and funds withdrawn. (4)Merchandise can be purchased and resold via eBay. There's an endless global supply of outlets and exchanges for digital currency. The few rare circumstances you mention for tracing transactions could soon become the exception not the norm. All of this has been done before over the past decade with other digital currency, it's really shocking how many people think Bitcoin is the first of it's kind.

"Therefore, the bad apples won't use it much..."

HA, we'll all have to stand in front of the mirror and repeat that phrase each morning. You got to be kidding me you believe that one.

"...which will help to give the network a good reputation and encourage legitimate take-up."

I really wish that were true. The only thing which will encourage legitimate business to accept it will be a government license and printed regulations, otherwise it's the wild west and anything goes and that won't last. Don't get me wrong, I love the wild west, I'm trying to give you some heads up, if you think this will all be rainbows and puppies, you're in for a fricken big surprise, get out of the US with this business, THEY DON'T WANT IT. The first to go is always be the agents exchanging the digital to national currency. The banks will close their accounts, they will be prosecuted or both. Don't do it through the US and I'd say it will all be fine.

[ed: fixed formatting]

Relaying transactions over a hijacked machine anywhere should be trivial as well. The methods of tracking proposed are not reliable.

I don't think that's so bad though. Cash is similar, it's always been there, but the world didn't crumble yet. Okay, it's faster and easier to transport BTC. But for large amounts that have enough of a criminal origin to require laundering in the first place, speed is not that much of an issue. I don't think the difference will be all too big.

The presence of botnets makes the claim that someone's BitCoin activity can be traced bogus. Also, as Jon pointed out, the BitCoin activity stream cannot be an effective way of determining the entire story.

Very few people need untraceable irrevocable transfers. And of those people, even fewer need them for legitimate purposes.

You point on transactional tracing definitely made me think about 'self-contained pools' and 'transaction timing'. However, I don't think you are considering a structure of unrelated, unconnected mutual offset accounts as are used today in correspondent banking. For example, a Pound Sterling transaction comes in and a Japanese Yen transaction goes out without the two ever connecting because the offset is conducted off the grid.

Also, as more 'mixer' services -- http://bitcoinlaundry.com/ and http://app.bitlaundry.com/ -- come on line, the greater the pool of dead-end transactions and the greater the opportunity for unrelated, off-the-grid offsets.