The beauty of the Shadow market will be the decentralizaion. There will be no "Dread Pirate Roberts" to catch.
My issue is not so much with "identifying illegal activity on blockchains", at the end of the day you live in a country governed by law and should abide by it or move elsewhere.
My issue is with the motion that this will be used as an excuse to "tracking everything you do" (like we need more mass data collection) and whilst Satoshis vision was great the opaque blockchain technology is actually a step backwards when it comes to our privacy.
Right now I have a choice, I use my "credit card" for a transaction where I do not care about my privacy and use "cash" where I do...
Hang tight as things could get very interesting very soon.
I'm not for illegal activity either, but it's more important that those who do it do it at their own risk alone, and people who don't do it don't get dragged into it. As it stands now anyone who carries a lot of cash or uses Bitcoin runs the risk of being caught up in the "war on drugs" even if they don't buy, sell or use any. We all have BTC wallets and probably most of us own coins that can be traced back to an illegal transaction. This will eventually become a problem.
Even worse is that crypto is global, and what is illegal use is governed in some places by laws that are not humane or understandable by free people. A "terrorist" in one country might be someone we call a "freedom fighter" in the US, and our blockchain activity could lead to someone having their assets seized or even arrested/extradited in some other country without them even realizing they are connected to something illegal in a country they don't live in. The privacy of Shadow doesn't just hide us from our own governments, it hides us from governments we should consider enemies too.