In order for money to be useful, each piece of it has to be interchangeable with any other piece. This is what the court held in Crawfurd v The Royal Bank. If all Bitcoin is not equal, then Bitcoin’s fungibility is damaged. Obviously it makes no sense for a Bitcoin company to damage the fungibility of the thing it is trading in; this hurts the price (and perception) of Bitcoin and makes it less useful. This causes the rational actor to ask, “Who is really behind such an insane policy, that any Bitcoin company surely must know will damage their business?” This quote may provide the answer…

From a Coindesk Magazine report on Bitfury’s Survillance tool

If there were such a thing as a “Conspiracy Theorist”, the fact that a former White House deputy press secretary is working at BitFury, where fungibility damaging software has been developed and released, would be a red flag. What better way to destroy Bitcoin than to infiltrate Bitcoin companies and convince them to build tools that insert a layer of mistrust on top of all transactions, burdening business and spreading the contagion of suspicion throughout the network and community? Merchants would be reluctant to take Bitcoin, lest they find themselves burdened with “Dirty Coins” that they can’t convert back to fiat or use in onward transactions. This would effectively put brakes and dampeners on Bitcoin’s spread through society, and the Bitcoiners themselves would be the ones doing it, at no cost to the conspirators!

From this speculative, Conspiracy Theoretic perspective, several Bitcoin companies have been infiltrated in exactly this manner, probably completely innocently; the business owners being duped into believing that if they hire an ex-government insider, that they will get some form of immunity and be left alone to innovate. But that is another Conspiracy Theory, obviously.

Even without Conspiracy Theories, it is a fact that people from the ex USSR “Satellite States” are still suffering from the brainwashing and momentum of that evil system, that tortured and corrupted them for over seventy years. Eastern Europeans are far more likely to be reflexively accepting of Bitcoin Surveillance, and Statist nonsense, and there are other companies from ex USSR states that are making surveillance their business model.

It’s important to bear in mind that what is illegal in an ex USSR satellite state may not be illegal in the USA. Someone in the Czech Republic may mark a Bitcoin with a red flag because it was used for a purchase of a book (for example) that is entirely legal in the USA with its guaranteed rights. The only way around this would be to insert meta data on each transaction so that red flagged Bitcoin was tagged, “ILLEGAL BOOK PURCHASE IN CZECH REPUBLIC: RED FLAG” and US users being able to ignore all “criminal” activity marked in ex USSR countries as “NOT OUR PROBLEM IVAN”. It would mean that Bitcoin could have many flags on it, from different jurisdictions, accumulated over time.

An Infinite Well of Taint

Remember that the supply of Bitcoin is strictly limited, and it is never destroyed, unlike fiat, which is recycled as it is worn out, decommissioning the unique serial numbers that are never re-used.

Bitcoin never wears out, ever. That means that by the time the last block is mined, each Bitcoin in circulation could have literally billions of flags attached to it, and Bitcoin consolidated with coin management tools to optimize wallets would accumulate all the flags of all transactions made with its parts, further compounding the number of flags on every Bitcoin in any wallet.

And the opposite of Bitcoin consolidation exacerbates the problem exponentially. Consider this Bitcoin transaction graph…