An excellent question.  Dr. Back alluded to identity management in the above-quoted post, where he essentially referred to Zerocoin as how things would work in an “ideal world”.  I suggest reading that old 2013 discussion at length, to avoid retreading talk about problems that remain unsolved after nine years.  People just keep rediscovering the same old problems, while forgetting what has already been long known about potential solutions.

Looking far beyond that old discussion:  It terrifies me that as an ultimate form of whitelisting, it is entirely possible to design an all-KYC, fully permissioned blockchain system that uses zero-knowledge proofs to avoid ever publicly revealing any transactional information whatsoever.  Worse:  Such a system could use zero-knowledge proofs to enforce identity-based permissions in transactions that are fully anonymous between counterparties.  That sounds like a contradiction only to those who don’t understand what zero-knowledge proofs can achieve.  Worst:  There are projects already working on building such systems.

From the perspective of blockchain analytics, such a system would have privacy superior to any Bitcoin mixer system, superior to Monero, and infinitely superior to Wasabi:  The blockchain is totally opaque, with theoretically optimal privacy.  But it would obviously be terrible for privacy in a meaningful sense—and it would be terrible for freedom.  Thinking aloud here, I know that it is possible with today’s technology to construct such a system so that among other interesting features, governments (or banks) could switch off a dissident’s ability to use money.  Now, try obtaining food and shelter when you cannot use money!  The way that he has embraced taint tracing and coin blacklisting, I presume that nopara73 would find this acceptable.

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I am pessimistic about the future.  Such things cannot be fought by “educating the public”:  The majority of people in any society are always stupid, apathetic, and myopic.  And please make no mistake about what I said:  People problems cannot be solved solely by technological solutions.  “Cypherpunks write code” is, in my own opinion, a call to create accomplished facts:  Fait accompli is the most persuasive political argument in the world.

Once upon a time, the sudden existence of PGP derailed then-Senator Joe Biden’s anti-encryption bill.  By the same token (so to speak), Satoshi Nakamoto created something that no modern government would have allowed to exist:  A totally permissionless, uncontrollable, unfreezable, irrevocable, unstoppable new form of money.  “Cypherpunks write code.”  Out of nowhere, this new thing just suddenly existed.  Thirteen years later, those who wish for a cashless dystopia are struggling to put the genie back in the bottle.  Such is the power of accomplished facts!

Alas, Bitcoin also created a transparent global ledger as an accomplished fact.  In the essential sense of permissionlessness, Bitcoin gave us new freedom—but ever since then, anyone who wants privacy has been struggling against accomplished facts.  And I must emphasize this:  Bitcoin has a transparent global ledger, only because Satoshi did not know any other way to create a decentralized system.  He was caught on the horns of a dilemma between DigiCash, a centralized system with theoretically optimal privacy (statistical hiding), and the decentralized, un-private system that he actually made.  He tried to find another way.

OP of a thread in 2010:
Satoshi’s reply:

The existence of Bitcoin thereafter motivated a new flurry of cryptographic research.  The initial breakthroughs came in 2013–2014, and generated a brief flurry of interest in the Bitcoin community.  Thereafter, the state of the art has rapidly advanced.  Most Bitcoiners today are unfamiliar with this field; but I have followed it closely since 2013.  Only now, as of 2022, I am ready to declare the technology mature for general usage.  Among other criteria:  We now have zero-knowledge privacy systems with no trusted setup—the big breakthrough for that came in 2019, and needed another few years of research and development to reach production quality.

Upon the foregoing, tadamichi, I may properly answer your question:  In Bitcoin, we currently have a system where, as a practical matter, exchanges and other services cannot use whitelists to enforce the purpose of taint tracing.  It would hurt their businesses too much.  That is an accomplished fact.  We have the advantage, but we must defend it.

If Bitcoin were overthrown in the market by a system that is designed from scratch with built-in KYC whitelisting, and which advertises better “privacy” due to an opaque blockchain, then all coins would be under such controls, and a service would suffer no disadvantages by simply going along with the system.  To fight such a possibility, Bitcoin needs to get ahead of events and become permissioness, decentralized money with strong privacy and perfect fungibility.

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Bitcoin is freedom.  There is an old proverb that free speech belongs to those who own a printing press.  How much worse is a system in which the financial system can be used to starve anyone deemed undesirable, simply by denying the use of money?  That’s the system that we have today with banks, payment cards, Paypal, and other entities that are notorious for enforcing financial censorship even to prohibit legal expressions—anything from expressions deemed too sexy, to expressions deemed politically incorrect.  Now, I shudder when I learn about how China already has a totally cashless financial system—and some European countries are moving fast in the same direction.  It is a part of a design for the most inescapable tyranny that has ever been conceived to the human mind.

In this aspect, Bitcoin partially, imperfectly restores the default status of the majority of financial transactions throughout all history, until very recently:  Permissionless.  Old-fashioned cash transactions were permissionless—and they were also untraceable.  A Bitcoin upgrade with theoretically optimal zero-knowledge privacy and fungibility, i.e. a new Zerocoin, would restore what we had for millennia until, starting less than a half-century ago, new technologies began to allow for the permissioning and tracing of financial transactions en masse.