That may be true online in recent years where underground black markets like Silk Road and Atlantis marketplace have cropped up. But it seems to ignore that there is another tried and true way to pay for illicit goods and services: Cold, hard cash.
The report identifies a virtual currency as being different from electronic money because the latter "uses a traditional unit of currency and is regulated" while the former is "unregulated and use an invented currency." But as a general rule, all currencies are "invented" to some degree, virtual or no. They function in society based on whether or not other individuals will accept them in exchange for goods and services. So a currency's value fluctuates based on how society perceives its worth. It's the reason exchange rates between different currencies are fluid. Yes, regulation helps bring an air of legitimacy to a currency -- especially when that regulation is backed by a government that is perceived as stable. But the same basic principles apply to currency in the digital and physical realm.
And while it's certainly true that we have seen virtual currencies be used for illicit purposes, their physical counterparts have served the same role for far longer. The anonymity offered by Bitcoins is not substantially different from the anonymity of circulating paper dollars. In fact, the McAfee paper itself recounts a conversation in an online forum that illustrates how paper can be used for illicit purposes. In that conversation, one member of an online forum asked for advice on the best way to anonymously transfer money to a friend. One response suggested mailing cash through the U.S. postal service.
There are some obvious benefits to virtual options -- among them speed and reliability. A virtual currency transfer can be near instantaneous as opposed to the few days it could take the cash to move through the postal system. And there's also always a chance that your package might get lost in the mail, whereas it's easier to get confirmation that payments have been received online.
McAfee acknowledges that Bitcoin has legitimate uses. But it also ends on a warning note, arguing that "ignoring this market opportunity is likely to cost potential legitimate investors significant revenue, but failure to address the potential risks may cost a lot more."
But I don't see anyone shying away from accepting paper dollar bills because someone, somewhere is using that same medium to buy cocaine.