I'm not sure I understand this, why exactly would it matter that a specific Bitcoin was at one point used in an illegal transaction? Surely people cannot be that hypocritical. I'm fairly certain most of us have at one point handled laundered money without knowing but nobody seem to care about that.
Because there is a giant database in the sky that records, forever, exactly where those Bitcoin came from and where they go. There is no such database for money you physically handle.
If satoshi could have figured out how to make Bitcoin work without everything having a public and traceable permanent record, he would have, but he couldn't. He even posted about that a few times.
@jonald_fyookball even in your original case, Bob is not going to want to touch those coins because he doesn't want the DEA coming to his door (shooting his dog, etc.) whether he is selling drugs or not. In fact, especially if he isn't. So at that point when he has to be careful where his Bitcoins come from and what they have been associated with, fungibility is already lost. Coinbase/Bitpay users are already in this situation, whether they know it or not.
You have people on this thread saying the exact same thing. They pay to mix their coins (and hope they aren't getting dirty coins back) just because they are worried about where they came from. Now you have mixed coins, or coins that come from a known-legal source, worth more than unmixed unknown-source coins. That's also not fungible.
