Look at 1000USD and 500 notes... they are even less traceable than bitcoins
Actually they are sort of traceable. First,
Snopes debunks that they are RFID-enabled. But every bill has a serial number, and for large amounts of currency it is quite rare to use cash. That means the bills have a very short trip from one bank to another, where they are always carefully inventoried. Put it all together and it means it's simple to figure out who got the bill out of a bank and who put it back.
Yes, every bill has a serial number. Do the ATM's actually record this ? What if you scratch the bill, so the serial number is difficult or impossible to read, have you twarted the tracking then ?
So, if I take a 100 USD bill out of a bank in NY, then this leaves my hand, and then finally 2 weeks later, a coffee shop owner deposits it in his bank account, how do we know where the bill was between the time it was withdrawn and the time it wa deposited ? Was there 1 intermediary, 10, 20 ? We can't and won't know at all. We do not know where this bill travelled.
You're talking about a 100 USD bill. I'm talking about a 1000 USD bill.
I agree that small amounts are impossible to fully track. That's why money laundering is only reasonable in small bills. 100 USD is the bill of choice right now I think.
And do the bank register the serial number when bills are deposited ? I'm not sure about that. Seems like loads of work, for little benefit. And as we know, the banks are all for profit making, and if a task doesn't contribute to that, they don't do it.
I think that serial numbers of bills are only used in certain cases, for instance when ransom money is paid, and law enforcement want to attempt to track it.
Banks must inventory their bills to be allowed to perform "magic" like fraction reserve lending, which means the bank can deposit your money and then lend out up to 8 times as much money based on your deposit. (You talk a little about this down below.) This is all regulated by the Federal Reserve, and the Federal Reserve mandates serial number tracking on all large denomination bills.
It's not done by hand! The same machine that counts the money records the serial number.
Now, how could you possibly create money out of thin air? If you're the govt. you could of course just print it, or go to a pc and select add 10 million usd to the economy. The processes are more complicated than that but you get the point.
Now if you and your friend wanted to risk becoming criminal to make a lot of money, what you could do is to somehow make the bank accept a loan application. They will create the money out of thin air, on the promise that you will later pay it back (ie. backed by depth). So if this money is transferred to another bank, and withdrawn there, the original bank loses nothing. Because they never had the money in the first place. It's quite the intriciate system. See money as debt documentary to learn more.
But yes, bitcoins are more traceable by default than cash. You can see every hop bitcoins do through the public ledger, the block chain. Once the USD bills leave a bank, there's no way of tracing them.
Only for small denominations. I think the important point here is to avoid 1000 USD bills.