> Yes but there is no existing way to poison illegitimately gained bitcoins as not eligible for use with legitimate purchases
I am curious about this. If Uncle Sam serves Coinbase notice that it considers the contents of XYZ wallet to be stolen goods, then haven't they created lower-value coloured coins, and won't other exchanges start creating lists of those pretty quickly?
No criminals involved in this kind of nefarious activities use Coinbase. The blockchain is all over the world and you can setup an exchange in your back yard if you wish, in middle of nowhere in Africa, for example. Good luck having Uncle Sam go there.
Sure, but they're still going to want to _spend_ those coins at some point, and coins that can't be redeemed in the US are worth less than ones that can.
Any USD retrieved from TotallyLegitExchangeLLC up in Belarus could still be marked as tainted if most of its blockchain transfers volume originate from illegal activity, so I feel in practice you would be limited to a narrow band of exchanges popular enough to have legitimate traffic and yet still unknown enough that they're still under the radar of their parents countries and/or the US' financial institutions.
Yes, but it's not happening yet. It takes a while for things to progress from protocol-as-designed to protocol-as-exploitable. But the lack of fungibility is a serious design flaw in Bitcoin, and eventually it's going to have to change to a completely different protocol, or there will be no such thing as a Bitcoin.
This points to the heart of the issue. A single BTC key is not fungible in the proper sense as it can be tracked.
There are ways around this on BTC that do not require protocol changes. For example, you can use a coin mixing service like whirlpool to essentially `wash` your BTC. However, this solution is incomplete unless everyone agrees to use it and in doing so `taint` their own BTC supply.
> "If we are all using stolen BTC then none of us are."
The proper way to fix this is with a protocol change as mindslight said. This already exists in a half-way form called ZChash. This is a fork of the BTC blockchain that updates to protocol to allow for `shielded` transactions. These protect anonymity and, I believe, transaction amount as well.
However, ZChash only gives the option to perform a `shielded` transaction. Most transactions on the ZCash blockchain do not utilize this function since it is slower than a standard BTC transaction.
The actual proper implementation of `shielded` transactions that I know of is called PirateChain.
I am curious about this. If Uncle Sam serves Coinbase notice that it considers the contents of XYZ wallet to be stolen goods, then haven't they created lower-value coloured coins, and won't other exchanges start creating lists of those pretty quickly?