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If we could improve fungibility without losing verifiability, Ordinals and Stamps would be done for. What enables them is the ability to track sats, all they need to do is to pretend the system uses a FIFO accounting system and that's it. Improving fungibility (we can copy the Monero guys) would solve most of this, a mempool war of trying to limit people to what they can or can't do with their money and the tools they have at their disposal is not the way, IMO.
Monero-style privacy on L1 would trigger a big Operation Chokepoint. The reason governments are not targeting Monero is it's not nearly as big as Bitcoin.
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We don't need Monero style privacy per se, but we can copy some things.
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