This is the wet dream of every government being able to mark the money in a persons pocket useless. Claiming that the dollar note he has was used 10 trades before by a drug dealer. So you have a dollar note but its worth nothing.
In fact its even worse. Its the hostile take-over of bitcoin. Bitcoin wont be free anymore. It would be ruled by the ones that decide what coins are worth something and what coins arent. And this authority of course let themself pay for the allowance to use your money. And you identity on top.
I knew it was a stupid move to start a centralized bitcoin organisation that have the power to change bitcoin at the same time because of the power they have about the official wallet. They didnt implement the possibility to fork bitcoin yet. Which should be doable in case bitcoin foundation draws a stupid move. Only with the ability to fork the wallet the real bitcoin network could move on. Though it wouldnt help much with tainting in this case.
Of course anyone can create such a server but it only matters if someone believes in it and think coins are less worth then. The bitcoin foundation and the official wallet development should be divided. It shouldnt be possible to implement a change that is automatically auto-updated for a big part of the bitcoin network. Thats simply way too dangerous. When i read how many members of the foundation seems to like the idea i wonder if its best to close bitcoin foundation. Its an attack point against bitcoin and with the might about the official wallet its an effective attack point.
The following is a good explaination of the problem in another thread:
But isn't the purpose of CoinValidation to label adresses and not coins?
I don't get why the fungibility of coins is destroyed if only adresses are impacted?
All previous addresses that received the coin are listed on the public blockchain ledger. From what was said I believe Coin Validation plans to look at the history of the addresses associated with coins. If your coin was used 10 transactions ago by a silk road user, (eg seen entering the silk road address) then likely implications are you will not be able to spend your coin on any site using their system.
They hope it will be viral, ie because you dont want to hold coins you cant spend, you may also refuse to accept coins they do not white list. Having them validate your coins will not be free and the uncertainty arising from not knowing if your coins will suddenly become less spendable will create fungibility problems.
There are costs associated with the fraud tracing validation, blacklisting and payment revocation. eg its bad for merchants too, they cant rely on receiving money they can spend themselves. This is why credit cards are expensive for merchants (3-5% + 30c). This is one thing that makes bitcoin attractive for merchants and users - the fees are close to zero in comparison. Coin blacklist/whitelistng (just different names for the same trend) damage the underlying irrevocability which enables low cost transactions, and pulls bitcoins transaction cost up towards credit cards and paypal.
The problem is when fungibility degrades because everyone is mutually scared of accepting blacklisted coins the utility of the coin goes down, the cost of using the currency goes up and so its price falls. It might literally collapse if the feedback loop picks up momentum as people sell non-white listed coins at steeper discounts in a race to the door.
This makes as much sense as a $100 note in your pocket disabling itself because 10 previous holders ago, someone stole it from a convenience store.
Someone posted on reddit about a 17th centur scottish court case (cant find the link now), where a bank was able to prevent legislation that would've had that implication - if you're left holding a stolen note, you lose it. The court rejected the case based on the argument that doing so would be unfair and also destroy the fungibility and value of the currency. Coin Validation want to reopen that 17th century mistaken (but defeated) court case.
Adam