If MtGox can ident the Bitcoins, why not fix it?

[CoinCube]

But why not stop those bitcoins from being traded ASAP.

You keep (intentionally) ignoring this question.  Who would do this?  On what authority?  How would they do it?

In related news the top 500 bitcoin addresses are mine and were just stolen please freeze them.

Sadly the court system will.

Failure to understand Bitcoin will indeed cost investors billions. 744,408 BTC stolen (nearly 7% of total mined coins to date) and some people seem to be cheering like this is a good thing because they don’t like (long despised) MtGox. This is far far from over.  Where did those stolen coins go? Well check your wallet because they were likely fed back to the markets. If you have been buying bitcoins on any exchange chances are you have some of the stolen loot yourself. These stolen coins can be traced back to their true owner in a direct chain of title thanks to the block chain. If you don’t think this matters you don’t understand the legal system and the principle of Nemo dat quod non habet

Under both American and English law the original owner of stolen property can demand ownership be returned to him if he can prove a chain of title (something the blockchain conveniently provides). The only recourse for an innocent buyer of stolen goods (and only in some jurisdictions) is to argue the exchange it was bought from had an implied warranty and he can try to sue the exchange after returning the coins to the true owner. MtGox is insolvent good luck there. BTC-e is run by anonymous folks think they will stick around in the face of massive lawsuits?
...
Regardless expect all future exchanges to require both rigorous identity checks prior to buying and selling as well as fine print stating that anyone who supplies coins to a market is ultimately responsible in the event those coins are determined to be “black” or stolen goods in the future.

Still think there is no need for truly anonymous cryptocurrency?

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[DeathAndTaxes]

There is no chain of title from the depositor to the current owner of a coin.  MtGox being off blockchain and pooled funds makes sure of that. You can trace a particular "coin" back to MtGox, but the trace stops there.  You can't trace back further than that.

The depositors didn't have any "coins" directly and thus have no claim with the actual thief (if one exists).  MtGox had its coins stolen (or embezzled).  The depositors traded Bitcoins for IOUs payable by MtGox.  Much like a bank there is no individual depositor's money.   The bank has a liability to the depositor.  If a bank is robbed it is the bank's money that is being stolen.  Now in the US we have deposit insurance but even if we didn't the bank couldn't just say "sorry that was your particular $100 bill stolen is last weeks robbery).  The banks funds were stolen and the liability the bank owes the depositor still exists.  Now in this case when MtGox lost their coins, they lost the ability to repay those IOUs.  In the size of the theft was smaller MtGox couldn't just say "sorry that was your coins stolen" the liability (IOU) would remain and depositors could seek damages against MtGox.  I know we went a long way round but while MtGox may have a claim against any coins that can be traced back to MtGox, no depositor would.

Still the application of demo dat rule is not a forgone conclusion when it comes to bitcoins.  It doesn't apply to legal tender and it also doesn't apply to bearer instruments (i.e. casino chip), or negotiable instruments (i.e. a check).  It is at least plausible a judge would rule that bitcoins are more like those exceptions than real property.  Until we see a court case we won't know for sure.  I am not a judge so what I think matters little but a bitcoin has more in common with a casino chip (a bearer instrument) then it does with a car (which is a unique specific piece of real property).

Note: to be clear I am not saying I have the answer just pointing out the law is pretty slow to react to technological changes.  This and countless other questions will eventually be decided but the timescale is measured in decades.

[justusranvier]

But why not stop those bitcoins from being traded ASAP.

You keep (intentionally) ignoring this question.  Who would do this?  On what authority?  How would they do it?

In related news the top 500 bitcoin addresses are mine and were just stolen please freeze them.

Sadly the court system will.

[CoinCube]

There is no chain of title from the depositor to the current owner of a coin.  MtGox being off blockchain and pooled funds makes sure of that. You can trace a particular "coin" back to MtGox, but the trace stops there.  You can't trace back further than that.
....
application of demo dat rule is not a forgone conclusion when it comes to bitcoins.  It doesn't apply to legal tender and it also doesn't apply to bearer instruments (i.e. casino chip), or negotiable instruments (i.e. a check).  It is at least plausible a judge would rule that bitcoins are more like those exceptions than real property.  Until we see a court case we won't know for sure.  I am not a judge so what I think matters little but a bitcoin has more in common with a casino chip (a bearer instrument) then it does with a car (which is a unique specific piece of real property).

You have chain if title from the victim to MtGox. With records from MtGox you will also be able to identify the stolen coins that left MtGox. That is a sufficiently strong chain of title for a lawsuit.

Your assumption that the courts will rule that bitcoin should be treated like cash rather then a commodity is in my opinion foolishly optimistic. I have no horse in this race (not a MtGox customer). But at the very least this creates huge legal uncertainties for bitcoin.

[nanonano]

Still the application of demo dat rule is not a forgone conclusion when it comes to bitcoins.  It doesn't apply to legal tender and it also doesn't apply to bearer instruments (i.e. casino chip), or negotiable instruments (i.e. a check).  It is at least plausible a judge would rule that bitcoins are more like those exceptions than real property.  Until we see a court case we won't know for sure.  I am not a judge so what I think matters little but a bitcoin has more in common with a casino chip (a bearer instrument) then it does with a car (which is a unique specific piece of real property).

Note: to be clear I am not saying I have the answer just pointing out the law is pretty slow to react to technological changes.  This and countless other questions will eventually be decided but the timescale is measured in decades.

+1

That whole post was what I wanted to express but wasn't able to, thank you. It will be interesting to see the actual legal decisions when they start coming up -- I bet we'll get both interpretations initially but my guess is the same: bitcoins may not be formal currency but handling them as unique pieces of property makes little sense.

[nanonano]

Your assumption that the courts will rule that bitcoin should be treated like cash rather then a commodity is in my opinion foolishly optimistic. I have no horse in this race (not a MtGox customer). But at the very least this creates huge legal uncertainties for bitcoin.

You make it sound like bitcoin needs to be considered something like  legal tender by only mentioning cash. In reality there are quite a few exceptions to this rule (depending on country of course), D&T mentioned a few.

I'm not that interested in how the law is currently interpreted in some specific jurisdiction right now (no horse in the race either), but I would like to see someone actually argue why bitcoin should not have the same exception as these existing exceptions "to facilitate trade and commerce by favouring security of transactions over the protection of property rights in certain common, but risky, trading situations". Personally I have problems making a good case against that.

[BitOnyx]

Such idea would damage opinion of bitcoin as currency you can trust, that is easy to exchange and transfer. I doubt it is possible and i hope it isn't. People who lose money at gox took they risk and must pay for it. They still have possibility to get it back by lawsuit so I wouldn't push any one to drastic method like this one.

[CoinCube]

I'm not that interested in how the law is currently interpreted in some specific jurisdiction right now (no horse in the race either), but I would like to see someone actually argue why bitcoin should not have the same exception as these existing exceptions "to facilitate trade and commerce by favouring security of transactions over the protection of property rights in certain common, but risky, trading situations". Personally I have problems making a good case against that.

There is no case law here. Thus the only certainty is lots and lots of lawsuits. For Bitcoin the best outcome is if MtGox's records are so bad that they can't identify which bitcoins were stolen but this seems unlikely.

Some courts may go with your argument above. Others may rule bitcoin a digital commodity and order coins be returned to victims. It will likely vary by jurisdiction. As clarity in law is probably not coming anytime soon all we can be sure of is uncertainty in regards to this issue.

Recommended Reading:
How Bitcoin could become its antithesis
Failure to Understand Bitcoin Could Cost Investors Billions
Economic Devastation  

[soy]

There is no chain of title from the depositor to the current owner of a coin.  MtGox being off blockchain and pooled funds makes sure of that. You can trace a particular "coin" back to MtGox, but the trace stops there.  You can't trace back further than that.

Let's explore that for a second.  MtGox knows which accounts got double paid and knows the specific Bitcoins it paid with.  Perhaps MtGox doesn't  track internally which specific Bitcoins or fractions come from where, but would be able to look the double paid entries and identify which Bitcoins or fractions were sent.  There should be a case for MtGox claiming exactly which Bitcoins and or fractions were stolen.

Someone might quibble if it was theft if MtGox paid it out - that making it MtGox at fault not the receipent.  I know my withdrawals never saw a double payout.

Some say redlisting is bad for Bitcoin.  Others, in this case myself, say no it isn't.  Bad: religious can tag someone as say PAID FOR AN ABORTION and he and his Bitcoins be damned.  Good: redlisting government seized Bitcoins, redlisting stolen Bitcoins.

Lets look how much was stolen, something like 6.2% of all Bitcoins in circulation which at the moment are worth roughly $458 million dollars.  It's tough to spend that much money.  So they are going to sell cheap. 

Who can buy in January and February?  Most Americans are climbing out of holiday credit card debt and if anything will be selling.  Speculators will buy most.  Who lost in MtGox?  Those who see the banks and wealthy in their own country devaluing their currency.  What happened with the April crash of 2013.  A massive transfer of wealth to speculators and a general devaluation of Bitcoin.  It did come back.  I know it taught me a lesson.  Speculators cause currency to be devalued.  Currency speculating is legal.  Currency speculators just aren't my favorite people.

So, who is going to shout loudest that redlisting is a bad thing.  Those who paid for an abortion?  No.  Speculators? Yes.

I say redlist those coins and devise a way to return the stolen property in Bitcoins to MtGox.

[AnonyMint]

There is no chain of title from the depositor to the current owner of a coin.  MtGox being off blockchain and pooled funds makes sure of that. You can trace a particular "coin" back to MtGox, but the trace stops there.  You can't trace back further than that.

Coins get spent into Mt. Gox's pool, so there is clear chain of collective ownership of the pool.

The depositors didn't have any "coins" directly and thus have no claim with the actual thief (if one exists).

This depends on the contract with Mt.Gox. Most banks have a clause which says that deposits are unsecured creditors and not allocated nor unallocated storage. Whereas most other vaults/accounts in the world are allocated or unallocated storage.

http://dollarvigilante.com/blog/2013/11/04/plans-in-place-for-a-us-bank-bail-in.html

Jim Sinclair pointed out that banks legally own depositors' funds as soon as the depositors hand those funds over to the banks. The money becomes the banks and the "depositors" actually become unsecured creditors holding promises to pay. Previously the banks were obligated to pay back this loan on demand with cash. Under the new Federal Deposit Insurance Company - Bank of England (FDIC-BOE) plan revealed this year, however, these promises to pay become equity in the bank, which won't be able to be used as payments for bills, which is why most people have money in the bank in the first place.

The point is that your money is not yours while it is "deposited" with a bank.

However I assume Mt.Gox would not have many customers if there had such a fine print in their Terms of Service. The presumption is these deposits into Mt.Gox were balances for an account with an exchange.

MtGox had its coins stolen (or embezzled).  The depositors traded Bitcoins for IOUs payable by MtGox.  Much like a bank there is no individual depositor's money.   The bank has a liability to the depositor.  If a bank is robbed it is the bank's money that is being stolen.

Mt.Gox was not a bank. Did they have a banking license to take deposits? I don't think so.

Now in the US we have deposit insurance but even if we didn't the bank couldn't just say "sorry that was your particular $100 bill stolen is last weeks robbery).  The banks funds were stolen and the liability the bank owes the depositor still exists.

Not any more! Read what I quoted above. Now the banks can give you worthless equity in the bank instead.

Now in this case when MtGox lost their coins, they lost the ability to repay those IOUs.  In the size of the theft was smaller MtGox couldn't just say "sorry that was your coins stolen" the liability (IOU) would remain and depositors could seek damages against MtGox.  I know we went a long way round but while MtGox may have a claim against any coins that can be traced back to MtGox, no depositor would.

That depends on the contract Mt.Gox had with its account holders. In any case, the court can apply the demo dat rule on behalf of Mt.Gox.

A copy of the Terms of Service is available on way back archive. Looks like you made the wrong assumption:

it will hold all monetary sums and all Bitcoins deposited by each Member in its Account, in that Member's name as registered in their Account details, and on such Member's behalf.

Members agree that, whenever a Transaction is made, the Platform sends and receives the monetary sums and/or Bitcoins from the Buyer and the Seller’s Accounts in their name and on their behalf, through the IT system in place on the Platform at the time of the Transaction.

LIABILITY

Members represent and warrant that they are the legitimate owners and are allowed to use all monetary sums and Bitcoins deposited on their Account and that the Transactions being carried out do not infringe the rights of any third party or applicable laws. Members who are not consumers ("Business Members") will indemnify Mt. Gox for any and all damages suffered and all liability actions brought against Mt. Gox for infringement of third party rights or violation of applicable laws.

To the extent permitted by law, Mt. Gox will not be held liable for any damages, loss of profit, loss of revenue, loss of business, loss of opportunity, loss of data, indirect or consequential loss unless the loss suffered is caused by a breach of these Terms by Mt. Gox.

Mt Gox cannot be held liable for any malfunction, breakdown, delay or interruption to the internet connection, or if for any reason our site is unavailable at any time or for any period. Where our site contains links to other sites and resources provided by third parties, these links are provided for your information only. We have no control over the contents of those sites or resources, and accept no responsibility for them or for any loss or damage that may arise from your use of them.

In the case of fraud, Mt. Gox will report all necessary information, including names, addresses and all other requested information, to the relevant authorities dealing with fraud and breaches of the law. Members recognize that their account may be frozen at any time at the request of any competent authority investigating a fraud or any other illegal activity.

To the extent that a Member operates and uses the Site and the Platform other than in the course of its business ("Consumer"), nothing in these Terms shall affect the statutory rights of such Members.

Nothing in these terms excludes or limits the liability of either party for fraud, death or personal injury caused by its negligence, breach of terms implied by operation of law, or any other liability which may not by law be limited or excluded.

Subject to the foregoing, Mt. Gox's aggregate liability in respect of claims based on events arising out of or in connection with a Member's use of the Site and/or Platform, whether in contract or tort (including negligence) or otherwise, shall in no circumstances exceed the greater of either (a) the total amount held on Account for the Member making a claim less any amount of Commission that may be due and payable in respect of such Account; or (b) 125% of the amount of the Transaction(s) that are the subject of the claim less any amount of Commission that may be due and payable in respect of such Transaction(s).

Still the application of demo dat rule is not a forgone conclusion when it comes to bitcoins.  It doesn't apply to legal tender and it also doesn't apply to bearer instruments (i.e. casino chip), or negotiable instruments (i.e. a check).

Because the government needs for legal tender and checks to be fungible, as it is the government's (i.e. banksters') money and banking system. And very rich (banks) need the casinos to launder their drug money (did you forget about HSBC recently).

Breuer told a press conference in New York that Mexican drug traffickers deposited hundreds of thousands of dollars each day in HSBC accounts. At least $881m in drug trafficking money was laundered throughout the bank's accounts.

It is at least plausible a judge would rule that bitcoins are more like those exceptions than real property.  Until we see a court case we won't know for sure.  I am not a judge so what I think matters little but a bitcoin has more in common with a casino chip (a bearer instrument) then it does with a car (which is a unique specific piece of real property).

Note: to be clear I am not saying I have the answer just pointing out the law is pretty slow to react to technological changes.  This and countless other questions will eventually be decided but the timescale is measured in decades.

Bullshit. It is quite clear a judge will rule that Bitcoins are property and not creditors to Mt.Gox.

At least do some research before you spout off your often wrong mouth.

[soy]

Still the application of demo dat rule is not a forgone conclusion when it comes to bitcoins.  It doesn't apply to legal tender and it also doesn't apply to bearer instruments (i.e. casino chip),

Note: to be clear I am not saying I have the answer just pointing out the law is pretty slow to react to technological changes.  This and countless other questions will eventually be decided but the timescale is measured in decades.

Not sure what the demo dat rule is.  Perhaps that there is a uniqueness to the stolen property?  I see that dollars have serial numbers and now so do casino chips.  So if the demo dat rule doesn't apply to seralized numbered dollars it doesn't apply to casino chips even tho now they have rfid tags internally (saw it on CSI used as evidence) so maybe the demo dat rule does apply to serialized numbered dollars.  It likely applies to serialized numbered dollars having been marked with an explosive dye pack from a bank robbery.

[soy]

There is no chain of title from the depositor to the current owner of a coin.  MtGox being off blockchain and pooled funds makes sure of that. You can trace a particular "coin" back to MtGox, but the trace stops there.  You can't trace back further than that.

Coins get spent into Mt. Gox's pool, so there is clear chain of collective ownership of the pool.

The depositors didn't have any "coins" directly and thus have no claim with the actual thief (if one exists).

This depends on the contact with Mt.Gox. Most banks have a clause which says that deposits are unsecured creditors and not allocated nor unallocated storage. Whereas most other vaults/accounts in the world are allocated or unallocated storage.

http://dollarvigilante.com/blog/2013/11/04/plans-in-place-for-a-us-bank-bail-in.html

Jim Sinclair pointed out that banks legally own depositors' funds as soon as the depositors hand those funds over to the banks. The money becomes the banks and the "depositors" actually become unsecured creditors holding promises to pay. Previously the banks were obligated to pay back this loan on demand with cash. Under the new Federal Deposit Insurance Company - Bank of England (FDIC-BOE) plan revealed this year, however, these promises to pay become equity in the bank, which won't be able to be used as payments for bills, which is why most people have money in the bank in the first place.

The point is that your money is not yours while it is "deposited" with a bank.

However I assume Mt.Gox would not have many customers if there had such a fine print in their Terms of Service. The presumption is these deposits into Mt.Gox were balances for an account with an exchange.

MtGox had its coins stolen (or embezzled).  The depositors traded Bitcoins for IOUs payable by MtGox.  Much like a bank there is no individual depositor's money.   The bank has a liability to the depositor.  If a bank is robbed it is the bank's money that is being stolen.

Mt.Gox was not a bank. Did they have a banking license to take deposits? I don't think so.

Now in the US we have deposit insurance but even if we didn't the bank couldn't just say "sorry that was your particular $100 bill stolen is last weeks robbery).  The banks funds were stolen and the liability the bank owes the depositor still exists.

Not any more! Read what I quoted above. Now the banks can give you worthless equity in the bank instead.

Now in this case when MtGox lost their coins, they lost the ability to repay those IOUs.  In the size of the theft was smaller MtGox couldn't just say "sorry that was your coins stolen" the liability (IOU) would remain and depositors could seek damages against MtGox.  I know we went a long way round but while MtGox may have a claim against any coins that can be traced back to MtGox, no depositor would.

That depends on the contract Mt.Gox had with its account holders. In any case, the court can apply the demo dat rule on behalf of Mt.Gox.

A copy of the Terms of Service is available on way back archive. Looks like you made the wrong assumption:

it will hold all monetary sums and all Bitcoins deposited by each Member in its Account, in that Member's name as registered in their Account details, and on such Member's behalf.

Members agree that, whenever a Transaction is made, the Platform sends and receives the monetary sums and/or Bitcoins from the Buyer and the Seller’s Accounts in their name and on their behalf, through the IT system in place on the Platform at the time of the Transaction.

LIABILITY

Members represent and warrant that they are the legitimate owners and are allowed to use all monetary sums and Bitcoins deposited on their Account and that the Transactions being carried out do not infringe the rights of any third party or applicable laws. Members who are not consumers ("Business Members") will indemnify Mt. Gox for any and all damages suffered and all liability actions brought against Mt. Gox for infringement of third party rights or violation of applicable laws.

To the extent permitted by law, Mt. Gox will not be held liable for any damages, loss of profit, loss of revenue, loss of business, loss of opportunity, loss of data, indirect or consequential loss unless the loss suffered is caused by a breach of these Terms by Mt. Gox.

Mt Gox cannot be held liable for any malfunction, breakdown, delay or interruption to the internet connection, or if for any reason our site is unavailable at any time or for any period. Where our site contains links to other sites and resources provided by third parties, these links are provided for your information only. We have no control over the contents of those sites or resources, and accept no responsibility for them or for any loss or damage that may arise from your use of them.

In the case of fraud, Mt. Gox will report all necessary information, including names, addresses and all other requested information, to the relevant authorities dealing with fraud and breaches of the law. Members recognize that their account may be frozen at any time at the request of any competent authority investigating a fraud or any other illegal activity.

To the extent that a Member operates and uses the Site and the Platform other than in the course of its business ("Consumer"), nothing in these Terms shall affect the statutory rights of such Members.

Nothing in these terms excludes or limits the liability of either party for fraud, death or personal injury caused by its negligence, breach of terms implied by operation of law, or any other liability which may not by law be limited or excluded.

Subject to the foregoing, Mt. Gox's aggregate liability in respect of claims based on events arising out of or in connection with a Member's use of the Site and/or Platform, whether in contract or tort (including negligence) or otherwise, shall in no circumstances exceed the greater of either (a) the total amount held on Account for the Member making a claim less any amount of Commission that may be due and payable in respect of such Account; or (b) 125% of the amount of the Transaction(s) that are the subject of the claim less any amount of Commission that may be due and payable in respect of such Transaction(s).

Still the application of demo dat rule is not a forgone conclusion when it comes to bitcoins.  It doesn't apply to legal tender and it also doesn't apply to bearer instruments (i.e. casino chip), or negotiable instruments (i.e. a check).

Because the government needs for legal tender and checks to be fungible, as it is the government's (i.e. banksters') money and banking system. And very rich (banks) need the casinos to launder their drug money (did you forget about HSBC recently).

Breuer told a press conference in New York that Mexican drug traffickers deposited hundreds of thousands of dollars each day in HSBC accounts. At least $881m in drug trafficking money was laundered throughout the bank's accounts.

It is at least plausible a judge would rule that bitcoins are more like those exceptions than real property.  Until we see a court case we won't know for sure.  I am not a judge so what I think matters little but a bitcoin has more in common with a casino chip (a bearer instrument) then it does with a car (which is a unique specific piece of real property).

Note: to be clear I am not saying I have the answer just pointing out the law is pretty slow to react to technological changes.  This and countless other questions will eventually be decided but the timescale is measured in decades.

Bullshit. It is quite clear a judge will rule that Bitcoins are property and not creditors to Mt.Gox.

At least do some research before you spout off your often wrong mouth.

We really need a Like button.

[Amitabh S]

Cant believe this stupid thread is still alive !

MtGox has an internal record? really?? and how am I to believe such a record has not been tampered with or generated two days back? ?

[AnonyMint]

I hope readers can start to comprehend why coin taint is the most serious Achilles heel of Bitcoin.

On Friday, 2 BTC were stolen from me. I am considering reporting this to law enforcement. This means that anyone who receives BTC which derives from my stolen 2 BTC will be liable to return them back to me.

Perhaps the thief pushed them through a mixer such as Bigcoinfog.com

Thus that mixer will be liable to provide records. If it can't, then it will be liable for the 2 BTC.

So you can't you see you are playing with fire by mixing your coins through a centralized mixer.

And can't you see that without widespread anonymity (and decentralized mixers!), then crypto-currency is absolutely useless except to a government which wants a ledger from hell to track everything.

[MrTeal]

I'll post this again here, as the general discussion on this goes against my understanding of how Bitcoin works.
"If you send 1.5BTC to 1AAAAA... and I later send 2BTC there, when the owner of that key later sends 3BTC to 1BBBBB... and 0.5BTC is change to 1CCCCC, which Bitcoins are yours and which are mine?"

AFAIK, there is no chain of possession of any individual Bitcoins, there are only transactions for amounts from inputs to outputs. If you deposited at Gox and those Bitcoin went into a cold wallet (without a separate key for every transaction), even if you contend that the Bitcoin is still yours and you don't just have a promissory note I don't believe establishing a chain of custody is possible in the physical way that some here are suggesting.
Please correct me if I'm wrong on this.

[Vigil]

I don't see why it is an issue. You can't trace cash either - you couldn't trace any money prior to electronic payments.

[MrTeal]

I don't see why it is an issue. You can't trace cash either - you couldn't trace any money prior to electronic payments.

Cash you can, since each bill has a serial number.

My understanding is that it's more like water. In my example, when the first guy sends 1.5L(BTC) to 1AAAAA, that address now has a bucket of water with 1.5L in it and you can trace the history of that bucket. When I send 2L there, 1AAAAA now has two buckets of water, each with individual histories. When 1AAAAA spends that water to someone else, he's pouring 3L into a new bucket for 1BBBBB and 0.5L into a new bucket for 1CCCCCC. You can tell that those two new buckets were made from the output of the two input buckets, but you have no way to say what water in 1BBBBB or 1CCCCC's buckets came from which input from 1AAAAA.

With more complicated with more inputs and outputs. If Gox did a transaction with 20 inputs (one of which are your coins), and 100 outputs, which of those 100 outputs are yours? Who can you go before the judge and say "that guy got my money"?

[Vigil]

I don't see why it is an issue. You can't trace cash either - you couldn't trace any money prior to electronic payments.

Cash you can, since each bill has a serial number.

My understanding is that it's more like water. In my example, when the first guy sends 1.5L(BTC) to 1AAAAA, that address now has a bucket of water with 1.5L in it and you can trace the history of that bucket. When I send 2L there, 1AAAAA now has two buckets of water, each with individual histories. When 1AAAAA spends that water to someone else, he's pouring 3L into a new bucket for 1BBBBB and 0.5L into a new bucket for 1CCCCCC. You can tell that those two new buckets were made from the output of the two input buckets, but you have no way to say what water in 1BBBBB or 1CCCCC's buckets came from which input from 1AAAAA.

With more complicated with more inputs and outputs. If Gox did a transaction with 20 inputs (one of which are your coins), and 100 outputs, which of those 100 outputs are yours? Who can you go before the judge and say "that guy got my money"?

You can to some extent, its still nearly impossible in most cases. If someone robs a bank you can trace where it was spent.

My other point was: "So what that it can't be traced?" Why should the government have to be able to trace money? Why should they even have the power to do so? At one time, there were many different currencies floating around, including gold and silver coinage which could not be traced. Just because something can be done doesn't mean that it should be done or that doing so is legit. Government requiring money to be traceable isn't legit.

We need to change the system back to the way it was prior to the government trying to track everything. Its not a fault of bitcoin, it is a feature that it can be difficult to trace.

[soy]

duties of the US government:  establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity

Making money 'trackable' is good business and makes sense and would probably come under the first three of the above.  If it didn't make sense Las Vegas would have left their casino chips untraceable but no, they realize the RFID identification and tracking of casino chips makes good sense for them and offers a level of protection they need.

[soy]

I don't see why it is an issue. You can't trace cash either - you couldn't trace any money prior to electronic payments.

Cash you can, since each bill has a serial number.

My understanding is that it's more like water. In my example, when the first guy sends 1.5L(BTC) to 1AAAAA, that address now has a bucket of water with 1.5L in it and you can trace the history of that bucket. When I send 2L there, 1AAAAA now has two buckets of water, each with individual histories. When 1AAAAA spends that water to someone else, he's pouring 3L into a new bucket for 1BBBBB and 0.5L into a new bucket for 1CCCCCC. You can tell that those two new buckets were made from the output of the two input buckets, but you have no way to say what water in 1BBBBB or 1CCCCC's buckets came from which input from 1AAAAA.

With more complicated with more inputs and outputs. If Gox did a transaction with 20 inputs (one of which are your coins), and 100 outputs, which of those 100 outputs are yours? Who can you go before the judge and say "that guy got my money"?

Years ago I took a course on computers part of which included doing the math that an 8088 processor did in its process.  Then they explained how those processes changed with larger processors.  One could get a sense of the incredible depth of the machine process.  On a similar vein I looked into network management protocol.  It's empirical and the tree starts with the DOD, which makes sense as the internet started as a US department of defense information sharing network.  Every motherboard ID, every video card ID, every ethernet MAC address is part of that tree.  It was apparent that identifying information of all kinds was being crunched within the CPUs and as a result is part of any contact with the internet.  Can I do the math of a quad core Intel processor?  No.  Can every satoshi of those missing Bitcoins be traced?  I'd bet that would be a yes.