All previous addresses that received the coin are listed on the public blockchain ledger.  From what was said I believe Coin Validation plans to look at the history of the addresses associated with coins.  If your coin was used 10 transactions ago by a silk road user, (eg seen entering the silk road address) then likely implications are you will not be able to spend your coin on any site using their system.

They hope it will be viral, ie because you dont want to hold coins you cant spend, you may also refuse to accept coins they do not white list.  Having them validate your coins will not be free and the uncertainty arising from not knowing if your coins will suddenly become less spendable will create fungibility problems.

we're not planning on tracking coins... so go ahead and send coins to those coins

As mentioned above, if there were "clean coins" and "unclean coins" - we would quickly run out of clean coins. That is a ridiculous model that we have worried about for some time, and its advent is likely impossible.

It is very easy to taint "clean coins" with the current protocol - so that would be a fruitless endeavor to pursue.

Please stop confusing "clean coins" with KYC'd Bitcoin addresses.

I agree, KYC Bitcoin addresses != blacklist.

I think the quote you are referring to, and the one that has people upset is somewhat out of context. We are not looking to create a distinction for clean / unclean coins or even clean / unclean addresses for that matter. It is simple as you stated, creating a list of known addresses. This is something that has been thought about and worked on for years.

BIP 15 https://en.bitcoin.it/wiki/BIP_0015 is an example of how much this has been thought about. In fact, Satoshi himself originally thought about using IP addresses as an alternative to Bitcoin addresses, and it existed in the client for some time.

There was even some work done by some prominent core devs to explore using DNS or email addresses in conjunction with or as an alternative. Ultimately the new payment protocol was developed: https://bitcointalk.org/index.php?topic=300809.msg3225143#msg3225143

"Is this just about creating known addresses?" Yes

"Let's say I buy some coins on an exchange, and a couple hops ago they passed through some illicit site's wallet. Does your system track that?" No

"Am I going to be able to spend my coins with a company using your system?" Yes, I hope so

"Do I just have to send them to my personal known registered address first?" Probably, depending on how strict the company receiving them is about receiving coins from KYC'd addresses.