I saw a post saying that for 50BTC you could encode something like 300K into the chain (encoded in the to address, the coin would be lost since those addresses don't actually exist).
I mentioned that a while ago but I realize now that there are more effective ways of storing data in the block chain without incurring any costs. I think you can assume that at the moment an interested party can store something approaching 50k of arbitrary data per block for free. If you generate the block hash yourself, I think it's possible you could store 500k.
The kiddie porn problem is real. I had phrased it in terms of Lady Gaga videos previously.
As far as I can see, nothing effective can be done about it. It's a byproduct of the design.
ByteCoin