> 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.