I stand by the statement that it is possible, in general, to walk the blockchain to break through the veil of anonymity.
is that really true?
lets say you send 1 BTC to my sig address and i go and spend 0.5 BTC on candy with the other 0.5 BTC going to change. then, the candy dealer goes and buys drugs on the next SR's web account. does that mean i was involved in the drug deal?
I think it could be useful to make a distinction between what is true legally and what is *achievable* by motivated law-enforcement agencies.
In your scenario, it's clearly the case that I am not implicated in or responsible for the illegal activity that takes place several transactions downstream of my transaction. But that's not to say that the visible linkage is not helpful to law-enforcement.
For example, imagine the police believe the downstream address is owned by a drug dealer but don't know for sure and certainly don't know who it is. It seems entirely feasible to me that a motivated investigator could walk the chain backwards until they find an address they *do* know (perhaps the exchange where I bought my Bitcoins). Now they can walk forwards: serve a subpoena on the exchange to find out who I am. Turn up at my front door with a scary-looking dog and a menacing manner. It may not be legitimate to ask, but I suspect I'd probably reveal the name of the candy vendor if I felt sufficiently threatened. The cops can then move one step further and visit the candy retailer.
Again, there may be no legal justification for demanding the information they want but that doesn't mean it won't be done.
So my argument nets down to: Bitcoin may not be as easy to trace as other electronic transactions but it's MUCH more helpful to law-enforcement agencies than physical cash.