Making it illegal makes it vastly less useful for illegal purposes. Legitimate transactions provide cover, it’s like the difference between a sniper in a forest or an empty parking lot. If your factory selling a truck full of AK-47’s you want to actually be able to buy steel to make more AK-47’s. If bitcoin’s illegal you now need to find a buyer for the guns and another buyer for the bitcoins.
The steel mill was probably going to want dollars instead of Bitcoin regardless, so the only difference is that they do the trade for dollars on a black market exchange. This is likely to get folded into the money laundering process anyway -- the Bitcoin goes to unspecified offshore location to get turned into dollars that come back as a clean payment for "consulting services" or what have you.
There is no need for additional "cover" at that point because the illicit transaction is already illicit. If someone just took that Bitcoin and bought a house, the IRS would have questions. It would have to be laundered first. The output of the money laundering process is clean dollars regardless of whether the input is illegal because of the illegal source or illegal because of the illegal source and currency.
Do you expect the guy laundering money to accept bitcoins without charging extra? Because if the guy selling bitcoins takes ~10% from the AK-47 buyer and the guy laundering money also takes his ~10% cut for using bitcoins on top of his X% cut for laundering money, suddenly it’s starting to look really unappealing.
The real appeal of bitcoin for illegal purposes is it’s effectively a poor but really cheap way to launder money. Try and deposit even 1 million in cold hard cash and the banking system throws up red flags, liquidate 1 million in bitcoin and that looks significantly more legit at least on the surface. It doesn’t help if you’re under investigation, but then again it’s cheap.
> Do you expect the guy laundering money to accept bitcoins without charging extra?
That's the entire purpose of using them.
Someone who has a million dollars in physical cash either needs to get someone local to launder it, which might be hard to find or require paying them a thick margin, or they have to find a way to ship a huge amount of physical cash to the place it's being laundered and risk it being seized at border crossings etc.
Someone who has a million dollars in Bitcoin can buy money laundering as a service over the internet from the lowest bidder who has a good reputation. The Bitcoin gets transferred to some place with favorable banking rules, gets liquidated there where it's either not illegal or the local authorities are corrupt, and it comes back as dollars. Since it's possible to do it over the internet, you have competition from all over the world including some favorable jurisdictions, so the margins get smaller than they would be if you had to find someone locally.
Money laundering can’t just be done in an arbitrary location. You need to transfer money back into your country’s banking system while looking legitimate to safely spend it.
Put another way, banks are already operating on digital money that’s the problem.
