Many members of the community have reacted quite loudly and negatively to the suggestion that a central authority should be able to declare certain bitcoins tainted. This effectively introduces an external-to-the-blockchain way to essentially remove their bitcoins from their control, which they (currently) believe is impossible in bitcoin, and which they believe would devalue their bitcoins if it were known to be possible.

I gather that it would be straightforward for individual bitcoin users to refuse to handle known-stolen bitcoins.

Perhaps this is illegal already - under local handling of stolen goods laws. People would likely be inclined to take up this policy were there a single case of legal enforcement.

I believe this would lead to a stable situation where those known-stolen bitcoins were worth far less than regular bitcoins.

The present loud reaction would become irrelevant. What's more, I believe it would benefit bitcoin to remove some of the danger of (irreversible) theft.

I wonder if this is a problem that could be solved with an evolution of the technology. Meaning bitcoin (or a future crypto-currency) policing itself in a distributed manner, without requiring a central authority. Perhaps some way to hold referendums as to whether specific coins should be considered stolen. And if passed, some predetermined resolution mechanism would come into play, whereby the stolen coins would no longer be valid anywhere, and new coins would become available - either returned to the theft victim, or added to the mining pool, or something.

Well, one attack that I can come up with immediately is to just create a new wallet, transfer the bitcoins from the flagged wallet, then cash out from the new wallet. Your obvious retort would then be "Aha! But how about we just track any transactions from the flagged wallet and flag those wallets too!", sure, but then you open up for an alternative attack where you could get your wallet flagged and then send a minimal amount of bitcoins to some prominent wallet to have it automatically flagged (say the hot wallet of a major exchange), extortion anyone? To solve this we would need whitelists and the arms race goes on and on...

You can track the individual transactions. So if I have some tainted coins and I really do not like you. I know your main wallet and transfer 1$ worth of tainted coins to you. You can just transfer the tainted coins out of the wallet and that is it - the rest of the coins in your wallet are perfectly fine.

That said, tainting is not a path we want to go down. The potential for abuse is enormous, and rendering more and more coins useless.

Except bitcoins are completely fungible. Once the bitcoin is transferred in the wallet, you can no longer make any difference with the other bitcoins in the wallet ; it has no distinct identity anymore.

Think transaction into a bank account : you cannot separate the money that was transfered in from what was already there.

We can taint accounts, but not individual coins.

You know exactly what input transactions contains tainted coins, so you know the amount, and thus how many untainted coins there are.

But when you transfer BTC out, even if it's in the exact amount of the tainted coins transferred in, how do you decide whether the outgoing coins represent the tainted ones or the untainted ones?

Say there's a 50 BTC untainted wallet, and tainted 1 BTC is transferred in, then 1 BTC is transferred out. How do you decide whether that outgoing 1 BTC was drawn on the tainted portion or the untainted portion of the account?

Always regards the last bitcoins as the tainted ones. Local wallets could simply treat tainted bitcoins as not existing, thus removing that annoyance too.

The FBI would probably come knocking with a warrant demanding that all Bitcoins that has passed thru Silk Road should be added to the list, because thus founds comes from illegal activities.

But they can always just run them through mixing services.

I have better question:

If all transactions are public, in theory you could trace user, who has your bitcoin now. Than you could sue him to get your stolen stuff back.

Is it clear that you have any kind of legal property when you "own" a bitcoin? I mean, it's just some numbers in a distributed database (and not one with legal backing the way the banking system has).