> Payments which you can't make today inside a legal system are two types. And if you enable system you automatically enable both types. For libertarians that is a clear 100% positive. For regular centrist citizens, not so much.

The problem with this argument is that cryptocurrency now exists whether it's legal or not and using it for illegal things is already illegal. Drug dealers are committing a felony by selling drugs and if that hasn't deterred them then neither will making something else they're doing a crime too.

So all of the negative uses are going to happen regardless of whether you also ban the positive uses. At which point, what are you gaining by making it illegal or inconvenient for innocent people to use it for something that isn't otherwise illegal?

> Since blockchain is public, you can always trace "bad" or real bad payment to the source wallet. That i one issue, and another is that since BTCs are non-fungible, the tokens used in such payments are forever tainted.

People keep making this claim and it keeps not making sense.

You don't need someone's permission to send them Bitcoin. Meanwhile large exchanges keep billions of dollars in a single wallet and have single wallets that do billions of dollars in transactions over a short period of time.

So let's consider the two possible ways this can work: First, if you get coins directly from a tainted wallet then you get in trouble, but if it was several steps back then it doesn't matter. This is, of course, useless, because then people would just transfer the coins through a couple of other wallets first.

Second, any wallets that receive any tainted coins become tainted forever. Then immediately the vast majority of the chain is tainted because the coins have made the rounds through a large exchange at some point. Worse, it's pointless to try to defend against it by refusing tainted funds, because you can't actually refuse funds. Your billion dollar wallet or freshly mined Bitcoin can be tainted by any troll who sends you a dollar from a tainted wallet without your permission, and trying to treat coins as non-fungible is probably a good way to get someone to troll you like that.

Which gives you two alternatives again. The first is that all coins can be tainted by trolls, which will in practice cause exactly that to happen and thereby make the premise meaningless. The second is that you can try to say that it doesn't count if someone sent them without your permission, but now you can't tell if something is tainted by looking at the chain because it can't tell you which transactions were unauthorized by the recipient, and moreover you would then have a mechanism for getting dirty coins into a clean wallet.

In other words, when anyone can send you money without your permission, your options are "everything is dirty" or "everything is clean".

> At which point, what are you gaining by making it illegal or inconvenient for innocent people to use it for something that isn't otherwise illegal?

The problem is scale. The more widespread is such system, the lower is the barrier to entry and the higher is cost to actually prosecute users to their amount and rate of usage (which we already see today).

Also this whole legal/illegal divide is often presented as if there was approximately same order of magnitude of both users. While I guess that actually the illegal use is way way larger than the legal use, simply because it is so crude and slow and buggy and unsafe by design. (excluding gambling, since that use is kinda derivative, depending on the all other uses making up a base on which to gamble)

And this is why token systems by rights should be heavily restricted, since they are so disproportionate in impact. We can all legally buy a knife in any shop, despite the fact that if used for attack a knife almost inevitably produces at least one body. Small arms are also available almost anywhere but with a lot of restrictions. Big arms are almost never available for purchase, just like explosives. And then the stuff like a canister of zarin is totally out of the question. That's because of the disproportionate effect. Same with financial instruments. Tokens are an Abrams of the finance world, and currently we let anyone have one, which is mindboggling to me.

> In other words, when anyone can send you money without your permission, your options are "everything is dirty" or "everything is clean".

You are correct. Afaik all tries to ban Tornado laundered tokens were eventually dropped. But the mechanism and potential still remains.

Also, please correct me if I'm wrong, in the case of BTC specifically we can track tokens from the "dust" attack and separate them from the legal and nice tokens, since they will stay in the different UTXO in the same wallet. Though I'm not very familiar with that, if it possible to pick which UTXO to transfer selectively.