So why does anyone else need to participate, when the exchanges can just watch for such annotations?
You are right. Exchanges can watch for such annotations, and I hope they will do it.
However, it is currently complicated to track stolen coins, and exchanges might have other priorities.
If a website makes that information publicly available for everyone, then I guess exchanges will have an incentive to use it, because they do not want to return stolen coins to their clients.
What happens if Bitcoin does reach the point where it has utility outside of converting to fiat after being stolen?
This is a bit far fetched... anyway, if Bitcoin ever reaches that point, it will be much less vulnerable than today.
Currently, the Bitcoin economy is not safe at all; it is threatened by the fact that exchanges might be shut down and their bank accounts frozen. This is my main concern, and what I propose is a solution for today's problems.
How do you verify that the coins were actually stolen or scammed?
This is the job of the police. When someone goes to the police and files a complaint, there is always the possibility that he made it up. The website would require a police report in order to flag coins as stolen.
IMHO, this whole idea just makes Bitcoin far less attractive than the possibilities for irrecoverable theft ever did.
Seriously ? for thieves and scammers, maybe. But some people here would like to expand the Bitcoin economy to other circles of society.
In any case, what I propose is not to change Bitcoin, but only to make some information available. Bitcoin is not really anonymous, and the idea that you can use Bitcoin anonymously is a misconception. This misconception has led some US senators to call for a shutdown of exchanges. Let us try to avoid that.