(1) people who send BTC in the "ring signature sidechain" (RSSC), taint their BTC who are not entering the RSSC. If their identity is matched with the same identity as who put BTC in the RSSC, this person can become "flagged".
No, it's possible to trustlessly
coinswap in and out of such a system, with no detectable connectivity. And there are many reasons to use such a sidechain, such as improved smart contracting. I consider improved fungiblity to be an essential basic feature.
Unfortunately, it's appears that it isn't possible to trustlessly swap in and out of monero because the developers of bytecoin didn't carry across smart contract functionality which they didn't understand. Perhaps the capability could be added later.
In a cash system, why would I want to go through an extra smart contract feature to send or receive payment?
I would assume the liquidity of Bitcoin, but the liquidity of Monero could change very rapidly.
All things being equal, I would want the simpler system, yes?