Except crypto is decentralized, and you can use mixers, which are not owned by anyone, to anonymously move coins from a blacklisted wallet. There is no mechanism in decentralized crypto to freeze an address, and I don't think the crypto community would adopt such a blockchain.
Blacklisting doesn't have to be a feature of a blockchain. It's enough if most countries decide to make it illegal for anyone to spend coins received from a blacklisted address. It's not easy to enforce of course, but people would be afraid they get in trouble if they're ever deanonimized, and businesses could be required to report their trades, just like taxes.
This will force creation and use of wallet reputation checkers for most users of cryptocurrencies. Mixers will not want to be left holding all the blacklisted coins, since that causes them financial loss. Therefore mixers will launder coins at a very high premium (lemon market) and compete on developing their own systems for reputation checks and escrows to reduce their risk of being left with coins nobody wants.
Everyone already knows mixers are holding illicit coins. It doesn't matter because mixers don't actually "want" anything. They're just code in the ether. You send your coins to an address along with a receiver address and the smart contract sends coins to the other address. How do courts stop that without shutting down exactly what makes blockchains valuable?
If a bank robber wanted to swap blacklisted $100 bills with you, would you? Would you just swap them at their face value, or at a discount knowing that it gives you a non-zero risk of having negative legal consequences?
Mixers will have to change their policies in order to avoid becoming a market for lemons in which everyone loses.
I do not expect governments to worry a tiniest bit about destroying value of an anti-government technology.
mixers are currently a market for lemons. No one uses a mixer on clean crypto. Hasn't been a problem, but I guess the government could start banning exchanges from accepting crypto that has ever been used at a mixer, although eventually won't it all pass through one?
> Just blacklist any coin downstream of a blacklisted coin.
What does this mean? If a single blacklisted coin is put in a mixer then every other coin mixed together is blacklisted? You've just banned mixers. Eventually every single coin will be able to be traced back to a blacklisted wallet, so you've also just effectively banned crypto in the long run.
> No legal entity would be able to hold or trade blacklisted coins.
Mixers don't have to be entities though. No one owns them, no one is responsible for them. They're just code someone uploaded one day and promptly forgot about.
