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One word: Fungibility.
90 percent of U.S. bills carry traces of cocaine. But you will not get arrested just because you used a $50 dollar bill that was previously in the hands of a drug dealer.
Taken from ChipMixer's FAQ on "Fungibility? Why would I care?":
Let's hear the expert:
First of all I was going to explain what we mean by fungibility before bitcoin and ecash. It's an old legal concept in fact, about paper currency. It's the idea that a one ten dollar note is the same as any other ten dollar note. If you receive a note that was involved in a theft, 10 transactions ago, and the police investigate the theft, they have no right to remove the ten dollar note from your pocket. It's not your fault that it was involved in a previous crime. And so bank notes actually have serial numbers, so it would be possible for a stolen note to be traced back to you.
This first arose, there was a 17th century court case where a wealthy merchant sent a couple of high-value bank notes to a colleague in the post and they never arrived. Before he sent them, he was quite paranoid that they would get stolen. He wrote down the serial numbers and made a mark on them. Sure enough they didn't arrive, so he put in a complaint with the bank, and evenutally the notes turned up at the bank. He tried to get the bank to return the notes to his ownership. The courts sided with the bank. Their reason was that if notes could be returned to their original owner after a theft, it would damage confidence in currency and it would be bad for business, the currency would become unusable because every time you received the paper note you would have to look in the newspaper whether it was reported stolen, or you would have the risk of it being taken, or you would have to rush to the bank to deposit it so that it was the bank's problem.(...)
Then we arrive at this problem of taint tracing. Because it's not very private, some people took an interest in tracing coins and I think the motivation was that there's a number of high-profile thefts of coins from exchanges and other businesses, and that's a problem for those businesses and they went out of businss because of it. Some people would like to put distance between themselves and coins that were used in illicit use. There is a law that says that currency is fungible, but because you can somewhat tell where a coin was used before, people started to care. Coin validation proposed to offer as a service to trace coins and try to give you a rating about how the history of the coin from your point of view and to offer that as a service to businesses. I think this could be quite dangerous because it goes back to that 17th century court case where now you could receive a coin that is perfectly valid at the time that you receive it, but a few weeks later a crime is uncovered and now your coin is tainted. So if this coin validation service is advicing many of the merchants where you would want to spend your coin at, it's tainted and now the merchant would refuse to accept your coin. That's a strange experience for you; you're holding a coin that you might have to sell at a discount to get rid of it. The aggregate effect of this might create a run on the bitcoin price. So it reopens this long-set legal principle that currency or currency units are all equal.
http://diyhpl.us/wiki/transcripts/bitcoin-adam3us-fungibility-privacy/