ISPs are not storing and distributing illegal material, though, right? Such as copyrighted movies or much, much worse..?
They're not 100% the same as Bitcoin. But they do distribute illegal content as a "side effect" of their normal operation.
Let's say we have server A with classified military information (to not always use the same example). In some darknet forum B, user C (customer of ISP D) reads the onion address to download the material, and proceeds to do so. While the "intent" comes from C, D is the one facilitating the file transfer from server A to user C. Normally they even store the packages composing the content for a short time. ISP D is obviously (normally) not "willing" to do that with illegal material, but due to the structure of Internet as such it's the entity who "delivers" the cuestionable object. (The only way ISP D can prevent this is some kind of content filter but that can be easily circunvented.) But normally, those which can be sued are not D but A, B and C.
In the case of Bitcoin it's not 100% the same, as the data is stored permanently, but similar. If a node operator distributes illegal material, it's a side effect of his normal operation. If the node isn't the originator, then he should also not be legally responsible. And my interpretation is that this is what this Princeton guy meant in the 2018 article.
Should we not aim to make it as hard as e.g. Grin is making it (or maybe even doing better than that) to abuse the system and put Bitcoin nodes at risk of legal trouble, just because it is still possible there, at a much lesser extent?
I personally would have no problem with attempting to improve the "financial transaction data to arbitrary data" equation. However, there is some functionality which while it's financial in nature, can also be used for other purposes, and I wouldn't like to be crippled. An example is Lightning Network, which depends on scripting. Scripting will always have the side effect of permitting to store some arbitrary data.
My fear is that if Bitcoin advances in the direction of Grin due to fears of legal trouble for node operators, a discussion could arise which aims to make such extreme anti-arbitrary-data-measures mandatory for "legal" blockchains. IMO this would cripple the whole blockchain/crypto space too much. I don't care about NFTs (at least not for the "data stored on chain" model) but I like some smart contracting abilities, like decentralized options, LN, atomic swaps, discreet log contracts, etc. and if they become impossible then the openness of the crypto ecosystem is seriously harmed, I think.
So the fight should go into another direction: highlighting the similarities of Bitcoin, ISPs, Freenet, IXP operators and other entities/protocols which can sometimes distribute illegal data as a side effect of their normal operation.
This can be accompanied by technical measures to lower the data possible to be stored per transaction/output, but imo this is another discussion, aimed more at improving blockchain efficiency for financial txes.
And again, the "destructive attack" of someone wanting to cause harm inserting illegal data is even possible with Grin-like "spam resistance". The more market cap Bitcoin gets, more likely (due to immense profit possibilities) is someone wanting to short the BTC price down almost to 0, and such an entity could thus afford lots of fees.