That won't handle the case where some coins are stolen and used before they are marked as "bad". Some merchant will be out of luck once the transaction is reversed. Really that is no better than what we already have from credit card payment networks.

Also interesting: since the total number of Bitcoins is fixed, as more and more coins are used for crime and get blacklisted, the value of remaining coins will become inflated. Given a long enough timeline, there will be too few coins for the currency to remain useful.

(Though to be fair, people simply losing the private keys to their wallet also has the same effect. Not sure which phenomenon would, over time, result in more coin losses.)

Bitcoin is already not such a useful currency (although it’s currently a very useful speculative asset) due to the fact that it has been maxed out at a real world daily average of ~3.5tx/s for years AFAICT (half the often quote 7tps) as its blocksize is hard-capped (and if history has shown, will never be able to be increased). There are also minimums for value that are effectively spendable based on BTC/byte transaction fees, UTXOs (the set continues to grow dramatically) and price where a larger and larger percentage of the coinbase becomes un-economic to spend as price goes up.

Just as a point of reference, the current median tx price in USD is ~$12, next block confirmations currently cost in excess of 100+ satoshis/byte and the median tx size is ~250 bytes.

Not if the person behind the crime was caught - then their coins could be un-flagged.