to me, Bitcoin is fungible when you think in terms of UTXO's.
which half of 1BTC is tainted from joining 0.5BTC taint with 0.5BTC pure from 2 UTXO's? when you then split that 1BTC into two 0.5BTC payments, are they both uniformly tainted or is there a discrete 0.5BTC that is tainted? how do you distinguish?
yes, an address can be tainted if identified with a drug dealer. but that's not the same as UTXO's, which is where the real action is.
I think the mixing of UTXOs that occur during each transaction makes white- or black-listing unworkable in practice. Each transaction, the taint from the input coins mixes and spreads evenly across the outputs. Taint slowly diffuses across the UTXO set such that nearly every coin--even a freshly minted coin--becomes a certain shade of gray.
But then what are the rules for accepting "gray" coins? I don't think it's possible to implement a 100% "white coin only" policy without simultaneously killing the currency. The reason is that coins are always blacklisted in
retrospect. By the time the coins are blacklisted, taint will have already diffused across previously-white coins. If these coins are suddenly un-spendable, then the currency system is pretty useless.
So that means that there will be some threshold for how gray your coins can be before they are unacceptable for certain purposes. And if that happens, this just creates a market for "coin whitening." Say, some of my coins are whiter than the minimum
well my wallet can add in a bit of black coins for a slight profit! Or someone wants to pay for something and only has dark gray coins? Well, they could use a service like xmr.to except instead of converting moneroj to bitcoins, it converts dark gray coins to light gray coins for a small fee.
I think it would be so easy to work around any tainting initiative that tainting would be ignored, abandoned, or never attempted in the first place.