If a quarter of the total merchants accept Bitcoin using BitPay or Coinbase etc., you're unable to use many services.
There are usually alternatives. And if not, then contact the merchant in question and let them know they've lost business by using BitPay. Goes back to my point above that these services only keep getting away with insane levels of privacy invasion because people keep using them. If everyone refused to use BitPay, then the alternatives would grow significantly.
He gave me a "plausible" response, essentially saying that the banned UTXOs would be those directly linked to wrongdoing (my wording), like for big BTC thefts, etc.
Of course he did. This is always how authoritarian entities start their assault on your rights. "You're not a criminal, are you?" "Why won't you think of the children?" "Don't you want to stop terrorists?" And then it spreads to censoring you because you are supporting a cause the government doesn't like (Canadian truckers) or you happen to live in the wrong country (Russian citizens).
If they can censor someone else, then they can censor you. And to censor anyone, they must first spy on everyone. Wasabi will obviously try to spin up plausible sounding excuses here, but the fact remains that they are now an enemy of censorship resistance and therefore an enemy of privacy.
But from a practical standpoint for the newbies/ordinary users, would you recommend services that would taint their wallets that might make it hard for them to sell their coins in exchanges?
I would never recommend a newbie to use any services which enforces taint in any way. And again, if we are going to make newbies scared of tainted coins from day 1, then we are playing in to the hands of the authorities and doing exactly what they want - making sure newbies abandon their privacy immediately upon entering the space.