Privacy features are only going to provoke regulators even more. Right now things are transparent and they can work towards a way of controlling bitcoin without severely inhibiting its growth. If true privacy is added then they'll lose that element of control and the only real option will be to outlaw it.
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So we are ok with letting governments control bitcoin?  What you are describing is basically allowing governments to get rid of bitcoin's censorship resistance.

https://www.bloomberg.com/news/articles/2018-11-28/u-s-exposes-bitcoin-users-addresses-in-iran-cyber-sanctions

I agree it doesn't make any sense but when has that stopped governments in the past?  I am worried by how quickly everyone is dismissing this issue given the broad power US financial regulators have.  I personally think it is very important that Bitcoin adds privacy features ASAP.

I agree this isn't going to work in the long run.  For one, bitcoin can always add additional security measures.  What I'm worried about is the US government perceiving bitcoin as a threat and then using anti-money laws to prevent adoption in the US before these security measures are adopted.  I am not aware of a de minimis provision in current law that prevents prosecution as long as transacted amounts are below $X so I think what you described about Iranians turning every wallet into a dirty wallet is in fact possible.

Well the point is that the US government is publishing names and the related addresses that the government has determined to be owned by the sanctioned persons.  So the government could argue that anyone transacting with these addresses could have known who they were transacting with.  I agree that it would be preposterous for the government's position to be that in an A->B->C->D scenario where A is on the OFAC list that C and D should trace the funds back to A and therefore not engage in the transaction.  However, if the government wanted to pass regulations that would threaten bitcoin this is one way to do it short of more overt measures like banning bitcoin.  In fact the government might be forced into such regulations if it wants the original OFAC list to have any teeth.  Otherwise, the sanctioned person can simply created new addresses, transfer funds to those addresses and then engage in transactions.

According to recent news the US treasury department has publicized bitcoin addresses related to sanctioned Iranians.  These Iranians are on the OFAC list which means that all US citizens and permanent residents are prohibited from transacting with people on the list.  I am worried about the implications for bitcoin.  If bitcoin is moved from these addresses to an address owned by a US person, the Feds could conceivably prosecute if that US person spends from that address.  Ultimately this could lead to a cascading effect where blacklisted wallets spend bitcoin and end up tainting other wallets that then spend bitcoin and taint yet further wallets.  If the US government ever feels threatened by Bitcoin I suspect this is the avenue they will pursue.