[illumin8]

This is very similar to the way the US Treasury handles physical currency updates. If I recall correctly, in the 1990s, Iraq still had a working money press that could print perfectly legitimate US dollars as fast as possible. PC printer technology had also advanced to the point where $20s and $100s were easily counterfeited.

The US Treasury had to go through a transition period where new money with new security features were printed and the old money was taken out of circulation. I assume BTC will have to go through a similar digital verification.

The way this would work in theory is that old BTC will be converted to new BTC on a 1 to 1 basis, but first each old BTC will need to be validated against the blockchain. You could just say that any BTC with over 1,000 confirmations is valid, since it is highly unlikely that so many confirmations could be falsified.

Another way to convert from old-BTC to new-BTC would be to use the miners to validate each conversion. For example, if a sufficient number of miners verifies that yes, indeed a certain BTC appears in the blockchain, then that one is considered valid and is inserted into the new blockchain, and removed from the old blockchain. This algorithm could actually pay a new-BTC reward for validating old-BTC to the miners that validate each transaction, thus ensuring a sufficient amount of CPU power is dedicated to this process.

[tptacek]

It is difficult to launder huge volumes of $20's and $100's.

It is trivial to launder huge volumes of forged Bitcoins; they are as liquid and convenient as real Bitcoins of any denomination.

Similarly, while you have to read interesting long-form journalism to learn about Iraq and North Korea counterfeiting operations, the whole world would know if either country could trivially forge Nasdaq transactions.