user58: 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

deposit dirty BTC
buy LTC
transfer to another LTC address
transfer back to another kraken account.
buy BTC
transfer BTC to another exchange that I have linked to a bank account
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)

user2506: There is already one alternative crypto-currency that is trying to solve the problem of staying anonymous while performing transactions:
http://stablecoin.net

user10621: 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.

user7583: 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:

Use the BTC blockchain to trace the money to a Kraken account.
Ask Kraken for information about where that money went. Kraken gives them an LTC address.
Use the LTC blockchain to trace the money to another Kraken account.
Ask Kraken for information on where the LTC went. Kraken gives them a new BTC address.
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.

58: <p>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 ).<br>
Process</p>

<ol>
<li>deposit dirty BTC</li>
<li>buy LTC</li>
<li>transfer to another LTC address</li>
<li>transfer back to another kraken account.</li>
<li>buy BTC</li>
<li>transfer BTC to another exchange that I have linked to a bank account</li>
<li>cash out BTC</li>
</ol>

<p>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)</p>
 2506: <p>There is already one alternative crypto-currency that is trying to solve the problem of staying anonymous while performing transactions:
<a href="http://stablecoin.net" rel="nofollow">http://stablecoin.net</a></p>
 10621: <p>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.</p>

<p>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 <a href="http://spar.isi.jhu.edu/~mgreen/ZerocoinOakland.pdf" rel="nofollow">White paper</a> so I can not tell you if it will work well but you can may be find it out by yourself.</p>
 7583: <p>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:</p>

<ol>
<li>Use the BTC blockchain to trace the money to a Kraken account.</li>
<li>Ask Kraken for information about where that money went. Kraken gives them an LTC address.</li>
<li>Use the LTC blockchain to trace the money to another Kraken account.</li>
<li>Ask Kraken for information on where the LTC went. Kraken gives them a new BTC address.</li>
<li>Use the BTC blockchain to follow the "laundered" money.</li>
</ol>

<p>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.</p>
