[desdiv]

I'll number each individual step and you tell me which step isn't clear:

1. I wire 4000 CNY to the BTC exchange.

2. BTC exchange receives my CNY, and shows that I have 4000 CNY in my account.

3. I buy 1 BTC with my 4000 CNY; exchange shows that I have 1 BTC in my account.

4. Later on, I trade that 1 BTC for 600 USD; exchange shows that I have 600 USD in my account.

5. I transfer the 600 USD into my US bank account.

In step 3, since I never took possession of the BTC, it never leaves the exchange, and thus no blockchain transaction took place. If no blockchain transaction took place, then anyone observing the blockchain would be oblivious to my fiat to BTC trades.

[rando18423]

Thanks. Step 3 and 4. You wire them the CNY, and how do they get your new BTC? I guess you're saying that the way most exchanges work is with a central depository of BTC and they just internalize (book out) their orders? (Unless the exchanges are really pseudo-derivatives dealers selling CFDs?) Isn't this exactly why places like Coinbase require your identity? (Does BTCe?) And if they aren't internalizing orders, particularly for massive sums which will be hard to find another side of the trade to internalize against, wouldn't that require a blockchain transaction to get more BTC in their depository, unless the exchange starts also acting as market maker, a la EnronOnline?

If I go to BTCe with a $50mm USD deposit, but they only have $25mm BTC equivalent deposited there, and "buy" an equivalent amount of BTC, will they not be required to obtain $25mmUSD equivalent more BTC from the blockchain?

Furthermore, do the exchanges take a position either long or short? If I then liquidate my $50mm worth of BTC, how do they get the fiat to wire to me, if they don't transact with somebody else?

I just fail to see how the major shifts in supply/demand are totally absorbed by the exchanges and never show up on the blockchain. Do the exchanges have an inter exchange market off of the blockchain or something? I agree with you, technically, that for small sums, there's no need for this and so the blockchain volume may not represent total size of the market, but at the scales we are talking about (see how much HSBC laundered for a single drug gang alone), how does this not show up, or rather, how does it never hit the blockchain? Particularly when somebody eventually wants to liquidate back to fiat?

"HSBC was accused of failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of U.S. currency from HSBC Mexico, allowing for money laundering, prosecutors said."

That is one subset of the problem. BTC has what, $12mm/day volume? This one subset is over 2 years worth of all the BTC volume. Honest question, is off blockchain BTC trading really that big?