Suppose I multisig 3 users together and then it takes say 2 of the 3 of us to withdraw the funds...then one day someone like Elon Musk drops $1,000,000 bitcoin.
Nobody said that you should create multisig setup like that.
Something like 2 of 2 (or even 3 of 3) would work very good and you would need all parties to sign transaction in this case.
Now off course there is a risk in case other party (or parties) refuse to do that or if they lose access to their wallet and backup, than coins are lost forever.
But you are right, some mutual trust is needed for this to work... it's still better than in fiat system that you need to trust 100%
Technically once someone tries to convert the coin to fiat, that last transaction will have a real person associated to it, and the company, coinbase or whatever will know who that was, but it could have passed through hundreds of transactions before that.
That would be very easy to avoid with simple usage of p2p trading, mixers, decentralized exchanges, centralized exchanges without strict kyc.
It seems that while bitcoin provides transparency, and while I can 'prove' that I own a particular address, there is no way to 'prove' who made the withdrawal.
You could prove that you made withdrawal if you add some personal information or id number known only to you in bitcoin transaction, that you can prove later.
It would be a terrible idea for privacy to know ID's of everyone addresses and who exactly made withdrawals.
This does not always have to be the case. You can look into the
Two-Factor Key Generation (2FKG) process used by Ballet company to create their physical Ballet Crypto cards. A private key is generated in two physically separate locations without either having access to the complete key before it is permanently written on the physical card and protected from tampering. I don't know if something similar can be applied online.
But you would need to trust Ballet claims to do what they say, you would also have to trust all manufacturing process, and they are third party in this case.
There are similar paper note wallets that work in similar way, but I don't have control over anything in both examples.
In case of multisig at least I have partial control.