So bitcoin can be fungible if the merchant doesn't care where your coins coming from.
That's the point!! But I think that's not just gonna workout immediately..YeS! All we ever wanted was having Bitcoin as a full-fledge decentralized coin Thus, the lightening network was made for offchain transactions [without having to be recorded on the block chain already]. Mixers are also on the same spot, all to fully achieving bitcoiner's anonymity..The governs are fully aware of the loopholes in transacting "tainted" coins, which is why they're issuing out censorships.
If you can track its history, how can it be fungible?
Being able to track the history is a privacy problem, not a fungibility problem.
I think you're both confusing privacy with anonymity. Bitcoin was never anonymous and it cannot stop the government from snooping on you through centralized, third parties.