Without that, your trading partner ends up holding a "dirty" wallet — just as if you gave them a suitcase full of marked bills.
That wallet still holds value — all dirty money does — but it's a lot less value than cleaned money.
Databases of stolen credit card numbers sell for not-much money. It's not just because you need stuff set up to drain the cards; it's because the money you drain from the cards is dirty. The dirty money is worth only about as much as the database itself. It's when you clean it that it attains "face value."
Anybody that claims they know is just trying to scam a government for a lucrative blockchain analysis contract. Just another crypto entrepreneur aiming to leak fiat out of the system, even while pretending to act like an adversary to crypto users.
The reality is that:
A) the UBO either isn't trying to hide because they can acquire the goods and services they want without laundering (other tokens, governance control of a crypto network, passive income, digital art, using the dirty funds to pump other tokens that they already own with clean money allowing them to derive entrepreneurial or trading genius benefits)
B) the UBO know they can launder whenever they feel like it or get around to it
C) the funds have already changed UBOs to people that were not involved and shouldn't be tracked, because A) and B) already happened onchain or offchain
What I was describing here wasn't that, I am referring to onchain transfers in trade for goods and services. (Part C could also be hand to hand trusted transfer of a wallet/private key)
Chain analysis still assumes that its the same owner or related guilty beneficiary all the way to a centralized exchange.
a) I give you my wallet, and you immediately send the coins to a new address to protect against my (potential) copy of the wallet, or
b) I just send the coins to your new address myself.
Either way, the blockchain records a transfer from my address to your new address.
So you're the blockchain analysis firm for the Department of Justice, and you're like "omg omg look the coins are moving! omg omg look its going to a centralized exchange account lets go subpoena the records and find out who has the KYC and identifying information behind that account."
DOJ busts down the door "aha! got you!"
If it was the person that actually hacked or did drug trafficking, then they found that person and charge them with that, wire fraud, money laundering etc.
If it was just the recipient then the investigation is still ongoing and much lesser charges are possible. The DOJ would at best case try to find out who the "kingpin" is by overcharging the second person, but the primary observation is that the DOJ has not stopped any particular activity. Either way, its still not quite what happens:
The reality is that it is many hops between unrelated people before it hits a centralized exchange that is subpoena-able at all. People.don't.need.or.want.fiat. Especially not a lot of it at any given time. Even hedge funds take in-kind investments of crypto to create a new limited partner. People don't need to cash out first and then invest that cash.
the reality offchain can be very different, I was trying to make clear just in case you or others that didn't catch that. but I think we're agreeing on everything.
I would say the lack of major prosecutions on this is because criminals still launder the money first and don't want to frame people (or have the exchange account frozen so soon), and DA/prosecutors use their discretion to tell when its unlikely the person in question was the actual person they are looking for, for now. Some people likely are getting framed, judging from televised arbitration shows like Judge Judy where the entertainer keeps cutting off the defendant who calmly says their bank account was compromised, and awards everything to the plaintiff.
This isn't crypto specific and is for bank and brokerage accounts too. Most darknet money-isolating tutorials talk about trading stocks in a brokerage account with stolen/recreated credentials as well.
Unless an account in your name wire transferred money directly for a shipping container full of cocaine, you would never find out that someone has opened a bank/brokerage/crypto account in your name and was operating it like a normal person accumulating money and occasionally trading.
Think of it like being a victim of identity fraud but the fraudster improves your credit score by acting normally and responsibly for you. That's literally whats happening pretty often.
Not everyone wants fiat. Not now, not eventually. They are able to obtain goods and services in crypto. They are able to pay developers, buy games, invest in other crypto/projects ensuring the success or perception of success of people they like, control crypto networks with voting power, create exchanges and other infrastructure. There is no "eventually buy a multimillion dollar house how do I do that inconspicuously or maybe I can buy it with crypto in the future". It's just recognizing that it is possible whenever you want, but also not a priority or a necessary addition to what people value in this world.
It's fungible enough for all the purposes that many individuals with dirty crypto or organizations with dirty crypto care about.