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ThrustVectoring comments on Bitcoins are not digital greenbacks - Less Wrong
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Actually, I realized that my mental model of how bitcoins acquired value with respect to the US dollar is wrong. BTC being fungible with US dollars is still important, but it's use in transactions isn't. A drug dealer and drug buyer would both willingly trade $40 worth of drugs for $40 worth of bitcoins, but whether $40 of bitcoins is 1 BTC or 100 doesn't make a bit of difference to them. Drug dealer still immediately cashes out his bitcoins so that they can restock their inventory, and the drug buyer still immediately buys bitcoins so that they can buy drugs. What these transactions do is merely fund the BTC exchanges through transaction fees - there's no long-BTC position held for any appreciable length of time.
There's still a kernel of truth to the analysis, though. BTC speculators - those actually holding the long positions in BTC - aren't going to be willing to stick around for the legal risks of money laundering (at least, that's what it could be in the eyes of the US Government). I'm still retracting, though, since I realized that I did things wrong.
In short, the risk is more of money coming from the bitcoin ecosystem being automatically treated as dirty money. This discourages speculation, which tanks the price.
This assumes that the drug dealer has an easy and fast way to wash the bitcoins into clean money. If a drug dealer withdraws $100,000 from mtgox that will raise some flags. He has to explain to the IRS the source of the money.
Given his situation he has an incentive to buy the drugs from his supplier with bitcoins. Those Bitcoins might go to a warlord in Afghanistan who uses them to buy weapons.
Have you read the FINCEN Bitcoin guidance?
Yes. Also, governments won't tolerate further taxation and financial regulatory control being taken away from them (since that taking away is not paid for by lobbying) towards some kind of shadow economy. If it becomes large enough so that a random senator will know what it is, there'll be some guise ("drug currency") to control it, its viability for the US market will plummet, and once that's out of the picture ...
For what it's worth, two senators did mention Bitcoin in a letter to the Attorney General about the Silk Road two years ago. As far as I'm aware, nothing came of it.