user253: Already it's possible for MtGox etc. to detect spends of coins that have certain well-known thefts in their history. If regulators forced audits on exchanges and key popular merchants, as well as keeping track of coins they deemed to have been involved in illegal activities, they could make these exchanges and merchants pay a small tax on these 'tainted' transactions and pass this cost on to the consumer.  As the regulators 'tainted' coin list would be public, it would become in more and more peoples interest to use wallet software which subscribes to the 'taint' list in order to reject coins they know will incur a penalty upon spending. The more the regulator raises the tax at the exchanges and audited merchants, the more people must join.
Audited exchanges and merchants would have to submit batches of all bitcoin addresses involved in their transactions to the regulator. Agents could perform random transactions with exchanges and merchants to make sure 100% of transaction IDs are reported.
Is this scenario realistic, and wouldn't this make Bitcoin ultimately a very controlled environment indeed?
('tainted' coins would still have value on black markets, creating a split system where bitcoins are no longer completely fungible)

user684: I don't think your scenario is realistic. In particular, the idea of paying a penalty fee to "clean" tainted coins would indicate tacit acceptance of these illegal transactions. It seems more likely that they would forbid the acceptance of tainted coins altogether. 
You may have considered this eventuality and rejected it as the taint would spread as mentioned in https://bitcoin.stackexchange.com/a/2128/684. You might imagine that the system would grind to a halt as nearly all coins become tainted.
However, there is a mechanism to untaint coins which were tainted accidentally or in retrospect found to be tainted when some of the coins long in the past are suddenly declared tainted. All that is required is for the same value as the tainted coins be sent back to the tainted "address". Slightly more technically, a new transaction with the tainted coins value is written with a scriptPubKey indentical to to scriptPubKey of the originally declared tainted transaction. "Taintexplorer" software, similar to Blockexplorer would be able to see the taint entering the transaction chain at a certain place and exiting later on. The remaining coins would be deemed to be untainted.
In this fashion, a clear distinction can be maintained between tainted and untainted coins. The most important feature of this is that the total value of coins declared tainted need only be as large as the aggregate value of the transactions declared tainted.
I believe that if the Bitcoin system gains widespread acceptance then policing of businesses and transactions in the fashion described is inevitable.

user883: I would say something simple. If there are a tainted list, it is really very easy to avoid it. Anyone here know what was 1mdc (1mdc.com)? It was a service that "bailed in/out" e-golds. A similar service/coin will make possible bitcoin transactions "outside" of the Bitcoin blockchain. So, you see... Once you bail-in your bitcoins there will be no way to track it back as it will be spend using another system - no public transactions then. Let's say you have 100 bitcoins. You use the 1mdc alike system to bail-in your bitcoins. Once it happened no more transactions with this 100 coins will be made in the bitcoin blockchain until you bail-out it. But you do not need to bail-out the coins... Use the 1mdc alike coins where it is accepted. Voilà! tainted list is useless.

user884: Could you make a custom client that doesnt process tainted coins? That would stop the spender if no one added his transaction to the block chain.

user7: In a scenario where bitcoin becomes widely adopted and an important part of the economy, governments instituting such black lists is plausible.
There are no technical means of resisting this. The only defense would be a social one, where people agree to only use exchanges, merchants, e-wallets and clients that don't discriminate against black-listed coins.

user575: Note that tracking coins isn't trivial. If I make a transaction with a tainted 10 BTC input, a clean 10 BTC input, and a 20 BTC output, is the output tainted? Half-tainted? Whatever the answer, the system will be complex and unintuitive and people won't be eager to go along with it.

user1126: The problem with tainted lists is that it requires a trusted body to declare which coins are tainted.

user323: As all transactions are transparent and can be seen by anyone, there is no way of resisting it other than by the unwillingness of the community. Only problem I can see with the discrimination against certain coins, are transactions that have multiple inputs and outputs, which would either "wash" the dirty coins, thus making the point moot, or "taint" new coins, thus being able to "infect" many more addresses.
Say I had 100 infected coins and sent each known address a Satoshi. At the moment the main client would accept that transaction and add the infected coin to your wallet. If you went with the tainting scenario, this would effectively taint the whole system. Of course, by then the clients would become more discriminatory about the coins they accept.

user85: I don't think the scenario is realistic because it would only punish innocent people. By the time coins could be marked as tainted, they would already be in the hands of innocent people. Governments don't do similar things with other currencies. For example, if you deposit dollar bills in a bank that turn out to have been stolen, the government could charge the bank a "fee" to clean the bills which the bank could pass on to you. But governments don't do that because they recognize that by the time the bills could get on a "hot list", they're already in the hands of innocent people.
There are also specific features of Bitcoin that make this difficult. Transactions put all the input Bitcoins into a big pile which they dole out as outputs. There's no concept of particular output Bitcoins corresponding to particular inputs. Bitcoins don't have a serial number that can be traced through the block chain. So any such tracking rules would be basically arbitrary.
It's just not something realistic. It's more realistic with physical currencies which have serial numbers and are widely used to facilitate crimes and buy contraband. And governments don't do it with physical currencies -- largely because they know it would only punish the innocent.

253: <p>Already it's possible for MtGox etc. to detect spends of coins that have certain well-known thefts in their history. If regulators forced audits on exchanges and key popular merchants, as well as keeping track of coins they deemed to have been involved in illegal activities, they could make these exchanges and merchants pay a small tax on these 'tainted' transactions and pass this cost on to the consumer.  As the regulators 'tainted' coin list would be public, it would become in more and more peoples interest to use wallet software which subscribes to the 'taint' list in order to reject coins they know will incur a penalty upon spending. The more the regulator raises the tax at the exchanges and audited merchants, the more people must join.</p>

<p>Audited exchanges and merchants would have to submit batches of all bitcoin addresses involved in their transactions to the regulator. Agents could perform random transactions with exchanges and merchants to make sure 100% of transaction IDs are reported.</p>

<p>Is this scenario realistic, and wouldn't this make Bitcoin ultimately a very controlled environment indeed?</p>

<p>('tainted' coins would still have value on black markets, creating a split system where bitcoins are no longer completely fungible)</p>
 684: <p>I don't think your scenario is realistic. In particular, the idea of paying a penalty fee to "clean" tainted coins would indicate tacit acceptance of these illegal transactions. It seems more likely that they would forbid the acceptance of tainted coins altogether. </p>

<p>You may have considered this eventuality and rejected it as the taint would spread as mentioned in <a href="https://bitcoin.stackexchange.com/a/2128/684">https://bitcoin.stackexchange.com/a/2128/684</a>. You might imagine that the system would grind to a halt as nearly all coins become tainted.</p>

<p>However, there is a mechanism to untaint coins which were tainted accidentally or in retrospect found to be tainted when some of the coins long in the past are suddenly declared tainted. All that is required is for the same value as the tainted coins be sent back to the tainted "address". Slightly more technically, a new transaction with the tainted coins value is written with a scriptPubKey indentical to to scriptPubKey of the originally declared tainted transaction. "Taintexplorer" software, similar to Blockexplorer would be able to see the taint entering the transaction chain at a certain place and exiting later on. The remaining coins would be deemed to be untainted.</p>

<p>In this fashion, a clear distinction can be maintained between tainted and untainted coins. The most important feature of this is that the total value of coins declared tainted need only be as large as the aggregate value of the transactions declared tainted.</p>

<p>I believe that if the Bitcoin system gains widespread acceptance then policing of businesses and transactions in the fashion described is inevitable.</p>
 883: <p>I would say something simple. If there are a tainted list, it is really very easy to avoid it. Anyone here know what was 1mdc (1mdc.com)? It was a service that "bailed in/out" e-golds. A similar service/coin will make possible bitcoin transactions "outside" of the Bitcoin blockchain. So, you see... Once you bail-in your bitcoins there will be no way to track it back as it will be spend using another system - no public transactions then. Let's say you have 100 bitcoins. You use the 1mdc alike system to bail-in your bitcoins. Once it happened no more transactions with this 100 coins will be made in the bitcoin blockchain until you bail-out it. But you do not need to bail-out the coins... Use the 1mdc alike coins where it is accepted. Voilà! tainted list is useless.</p>
 884: <p>Could you make a custom client that doesnt process tainted coins? That would stop the spender if no one added his transaction to the block chain.</p>
 7: <p>In a scenario where bitcoin becomes widely adopted and an important part of the economy, governments instituting such black lists is plausible.</p>

<p>There are no technical means of resisting this. The only defense would be a social one, where people agree to only use exchanges, merchants, e-wallets and clients that don't discriminate against black-listed coins.</p>
 575: <p>Note that tracking coins isn't trivial. If I make a transaction with a tainted 10 BTC input, a clean 10 BTC input, and a 20 BTC output, is the output tainted? Half-tainted? Whatever the answer, the system will be complex and unintuitive and people won't be eager to go along with it.</p>
 1126: <p>The problem with tainted lists is that it requires a trusted body to declare which coins are tainted.</p>
 323: <p>As all transactions are transparent and can be seen by anyone, there is no way of resisting it other than by the unwillingness of the community. Only problem I can see with the discrimination against certain coins, are transactions that have multiple inputs and outputs, which would either "wash" the dirty coins, thus making the point moot, or "taint" new coins, thus being able to "infect" many more addresses.</p>

<p>Say I had 100 infected coins and sent each known address a Satoshi. At the moment the main client would accept that transaction and add the infected coin to your wallet. If you went with the tainting scenario, this would effectively taint the whole system. Of course, by then the clients would become more discriminatory about the coins they accept.</p>
 85: <p>I don't think the scenario is realistic because it would only punish innocent people. By the time coins could be marked as tainted, they would already be in the hands of innocent people. Governments don't do similar things with other currencies. For example, if you deposit dollar bills in a bank that turn out to have been stolen, the government could charge the bank a "fee" to clean the bills which the bank could pass on to you. But governments don't do that because they recognize that by the time the bills could get on a "hot list", they're already in the hands of innocent people.</p>

<p>There are also specific features of Bitcoin that make this difficult. Transactions put all the input Bitcoins into a big pile which they dole out as outputs. There's no concept of particular output Bitcoins corresponding to particular inputs. Bitcoins don't have a serial number that can be traced through the block chain. So any such tracking rules would be basically arbitrary.</p>

<p>It's just not something realistic. It's more realistic with physical currencies which have serial numbers and are widely used to facilitate crimes and buy contraband. And governments don't do it with physical currencies -- largely because they know it would only punish the innocent.</p>
