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The scenario I was thinking of was I have some bitcoin from doing Bad Things (TM) that I want to launder. I could register with kraken.com and trade only virtual currencies with the L1 verification ( un/pw, country of residence, phone ).
Process

  1. deposit dirty BTC
  2. buy LTC
  3. transfer to another LTC address
  4. transfer back to another kraken account.
  5. buy BTC
  6. transfer BTC to another exchange that I have linked to a bank account
  7. cash out BTC

What issues do you see with this? From what I understand kraken.com only has a un/pw ( easy to create a throwaway ) country of origin ( no verification, can lie ) and phone ( easy to buy a burner ). And even that isn't public knowledge. Once I transfer to LTC those litecoins are now clean. Does that make sense? There is no link between BTC sold and LTC bought except for at the exchange and that only has untraceable details ( un/pw/fake country of origin/burner phone)

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  • Why not just use a mixer service?
    – placeybordeaux
    Commented Dec 17, 2013 at 21:43
  • 2
    im not actually trying to launder bitcoins, its more of thought exercise. Also, not sure I would trust a mixing service and they have weaknesses too.
    – browep
    Commented Dec 17, 2013 at 22:02

4 Answers 4

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Because all transactions in both Litecoin and Bitcoin are stored in the block chain, you run into the same issue you do here if you were just to try and withdraw USD for bitcoins, i.e., does your intermediary store logs of the off chain transactions? When you buy LTC using BTC on Kraken, if Kraken decides to log this transaction then there is now a link between the BTC and the LTC. This link could be used by law enforcement if they are trying to trace some dirty BTC. From an LEO point of view, this is how they would follow the money:

  1. Use the BTC blockchain to trace the money to a Kraken account.
  2. Ask Kraken for information about where that money went. Kraken gives them an LTC address.
  3. Use the LTC blockchain to trace the money to another Kraken account.
  4. Ask Kraken for information on where the LTC went. Kraken gives them a new BTC address.
  5. Use the BTC blockchain to follow the "laundered" money.

The blockchain stores all transactions. The only way to clean money is to do some sort of transaction off of the block chain. To do that you need an intermediary who is willing to do that for you, and take the risk of LEO or some other regulatory firm calling them on it. Shady mixing pools might be willing to do this for you, but Kraken or other legitimate commercial exchanges will not.

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2

Yes I would say that this is quite possible but because litecoin is traceable like Bitcoin the entire laundering process you described reposes on the exchanges platform confidentiality.

There is actually a coin called Zerocoin that is in preparation and that is designed to be completely untraceable. I hadn't a deep look into their White paper so I can not tell you if it will work well but you can may be find it out by yourself.

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There is already one alternative crypto-currency that is trying to solve the problem of staying anonymous while performing transactions: http://stablecoin.net

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In strictly hypothetical terms, I think you're over thinking this. You're doing it all wrong. Stop it. With financial compliance laws in the US, you're going to set off some kind of red flag. Remember, exchanges are required to inform on you for anything that might look suspicious. Don't chance it.

Two thoughts:

Simply, use a service like Bitplastic.com, and swallow the 5%+1BTC fee. It's essentially a pre-paid MasterCard that works on the coinbase (I think) exchange rate. If you're in the US and doing bad things, this is appealing for a couple of reasons. The first being that it's an international card, so the FBI and local law enforcement has no jurisdiction over it. They would have to call Interpol on you, and they're not going to do that unless you're important. Stay unimportant, and you're made in the shade. The other thing that's nice is the simplicity of it. You don't have to involve an exchange (ie: a second or third potential point of failure) to use your ill gotten wealth.

The other thing I would do is start an LLC out of New Mexico. New Mexico LLC's are great, because they're almost totally anonymous. They're not totally online yet, so it might take a couple of months to file the paperwork. Trust me when I say this: It's totally worth having one of these. Anyway, from there, start a Delaware LLC that is registered to you, and not the New Mexico LLC. Still with me? Make sure both companies have bank accounts with different signers. Funnel the dirty bitcoins into the New Mexico LLC, and have it contract with the Delaware LLC to do some sort of legitimate work. Keep a record of this work. Call it "consulting." Just be careful, so that there are absolutely no ties between the companies on paper. When it's time, have the Delaware LLC pay taxes on all work. At that point, you're legal, only the anonymous LLC is tainted, and you're good to go. A third offshore LLC in a place like England might also be useful, but I don't want to get into that right now.

If you try something like this, and screw it up, you're probably going to prison. Just remember that I take no responsibility for anything you may or may not do with these ideas. On the other hand, this too may be over thinking it. It's been my experience that the simplest solutions are usually the best.

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