For example, even with non-reused addresses, compliant participants may report their addresses to a risk-scoring service. If you go outside that "system", boom your coins risk score goes way up.
This is not sustainable in the long term.
All that's required is that users put one non-reporting entity between every transaction between reporting entities. A non-reporting entity could be anyone or any business.
How are you going to get people to do that? Joe Sixpack either buys coins from Coinbase or gets paid in those coins by his employer using a compliant payroll service, those coins go into his coinbase or circle or other compliant wallet. He spends those coins at Overstock or some other retailer using a compliant payment processors.
There is zero incentive for any of these parties to put a non-reporting entity in the middle of their transactions. At best it adds inconvenience and extra cost for no gain. At worst it impairs the acceptability and therefore the value of their coins, which is actually an incentive to not do it.
Coinbase et al. may attempt to keep their users inside a walled garden that is only allowed to transact with other people in the same walled garden, but they won't get away with it in the long term.
I'm not so sure. That's certainly now how things are going now.
Here's how to do tainting. I won't even charge a consulting fee. Start with a statement like this:
"We (govt), in our long tradition of honoring innovation and freedom, are excited about the possibilities of the revolutionary development of 'smart money'. In order to overcome some of the deficiencies which hold the solution back, our programs are designed to produce a margin of safety necessary for every citizen to enjoy the benefits Bitcoin with confidence."
UTXO's are considered either tainted or not ('addresses' are meaningless.) The formula is very simple: If all inputs were untainted, so will be the output. The definition of 'taint' is simply that whether a transaction was performed by someone who has properly registered the outputs they control (which can be accomplished automatically by using the services of certain proven entities(e.g., Coinbase.))
We (govt) issue charters to entities who have demonstrated the technical prowess to maintain the information needed. An entity such as Coinbase already maintains the high precision and legally enforceable identity information and would have a big leg-up. They also may simply supply this information to a partner entity who maintains a government charter.
A tainting authority has the legal authority to 'untaint' outputs. They can do so, under procedures subject to the pleasure of the state, as a service to their customers. Individuals who have a legacy stash can easily untaint it by simply documenting the origin with a reasonable degree of precision. This service will probably be completely outsourced to chartered entities.
Individuals who wish to deploy Bitcoin autonomously ('dinosaurs') are perfectly free to do so provided that they appropriately account for any outputs they produce. If they fail to do so their outputs will be considered tainted. Even by this time a majority of users have evolved from the dinosaur phase into a mammalian form (fluffy, bleating) who run 'lightweight' clients on their smartphones. Such wallets can be easily adapted to cross-check a proposed 'spend' (collection of inputs) and decide whether the output will be accepted (based on whether the inputs are acceptable) prior to payment. Since networks are fast this validation only adds a second or two to a transaction. Most people who would object to such a common sense solution are probably criminals and/or dangerous in other ways.
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Although a mere mortal like me (tvbcof) shouldn't be challenging the immense wisdom of an economic guru of Justus's caliber, I would submit that an untainted BTC with the flexibility to be used, un-discounted, at a not unheard of site like Coinbase would command a larger value than it's less flexible cousin. But what do I know?
edit: spelling
