BTC to XMR, sure. But XMR to BTC is the value proposition -- if you've made a fortune doing something illegal, you'll want to have access to the BTC market somehow.
Right now, you can probably do that without being sent to prison. It's a matter of using one of the many conversion websites to go from XMR to BTC, then depositing to your exchange and selling it. (I don't know how you'd explain it on a tax form, but maybe you can think of something clever.)
But if exchanges start actively cracking down on any account that deposits BTC in response to XMR transactions (i.e. the exchange maintains a known list of wallets used by those conversion websites), they can start putting accounts on hold if those accounts have received large quantities of BTC from any of those XMR-related BTC wallets.
Also with the lightning network you can mix and change different crypto currencies, and it can be really hard to trace the provenance of the coins. Not something an exchange can do automatically.
> the exchange maintains a known list of wallets used by those conversion websites
Remember that new wallet can be created for each transactions. So even if they'd try to do that, it wouldn't work.
You can certainly map clusters of BTC wallets. It doesn’t matter if you create a new wallet for that purpose, since those new wallets are contaminated by the transaction history. Basically, from the exchange’s view, they’d bucket the wallets into either “looks like mixing; hold the account” or “seems legit.”
Most wallets aren’t used for any high volume transactions; most account holders at Coinbase have no need for that. So it’s certainly possible to map out the network and partition it into known good / known bad categories, and handle the middle ground manually.
In other words, yes, XRP is very clever. That’s not the problem. The problem is, you’ll someday find it very hard to convert large quantities of XMR to USD without risking jail time.
> So it’s certainly possible to map out the network and partition it into known good / known bad categories
You can't do this sort of analysis on the XMR blockchain. Can't see who's actually sending or receiving money. Can't see the transaction amounts. Can't see how much money any given wallet contains. Can't taint coins by association with criminal activities. Without exchange metadata it's impossible to correlate transactions with any certainty.
There's essentially nothing that can be done about it. Will governments become oppressive enough to jail people for the crime of using a medium of exchange they can't control? I'm not even sure that'd be enough to stop it.
I sign up for the converter, and say "Here's some XMR. Give me BTC."
At that point, some BTC wallet gives me BTC. I now know which wallet is being used by the XMR converter. And I know all the other metadata as a result.
The ideal scenario is everyone using monero for everything. Why send money to an exchange at all when we can send monero to each other directly? There should be no need to swap monero for other forms of money.
This is the original cryptocurrency dream. Monero is the only coin that has a shot at actually achieving this.
Right now, you can probably do that without being sent to prison. It's a matter of using one of the many conversion websites to go from XMR to BTC, then depositing to your exchange and selling it. (I don't know how you'd explain it on a tax form, but maybe you can think of something clever.)
But if exchanges start actively cracking down on any account that deposits BTC in response to XMR transactions (i.e. the exchange maintains a known list of wallets used by those conversion websites), they can start putting accounts on hold if those accounts have received large quantities of BTC from any of those XMR-related BTC wallets.