A new story up on Fusion — Former Mt. Gox CEO: Current Bitcoin exchanges are a ‘disaster waiting to happen’ — looks at a recent post from Mark Karpeles regarding the segregation of financial controls within the Bitcoin exchange framework. I provided a couple of quotes for some perspective.
In addition to the snippets in the article, it bears mentioning that I would disagree with his view that it is possible to make a fully decentralized exchange today due to the fact that cash is centrally created and thereupon controlled by a variety of agencies. He is right about the intersection of AML and how some companies are unable (or more likely, unwilling) to legally comply with it due to how they operate (such as LocalBitcoins and Purse.io).
As an aside, virtually most (if not all) VC-funded, US-based hosted wallet and exchange is likely in non-compliance of a variety of custodian/depository regulations though it is unclear if/when any jurisdiction will prosecute them:
One last comment about that story, there may be ways to create financial controls to reduce the ability for maleficence to occur but as Karpeles ironically pointed out (he did not acknowledge it but probably is aware of it), by converting bitcoins into an altcoin, you effectively are delinking provenance and creating a money laundering mechanism. Based on a number of conversations with altcoin traders I suspect that a non-negligible portion of the litecoin trading volume on a daily basis (on BTC-e and ShapeShift.io) are related to money laundering type of activities. Though this would be hard to verify and prove without building a good network heuristic and/or access to the server logs at these companies.
See also: CEWG BitLicense comment