I'm no expert, but isn't a public blockchain only pseudonymous?
Bitcoin, for example, doesn't claim to be an anonymous payment system.
Bitcoin, for example, doesn't claim to be an anonymous payment system.
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.
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?
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.
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.
"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.
Wouldn’t the simple solution be tagging coins that exited such a tumbler?
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.
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.