The problem with ignoring privacy on the base layer is that it will eventually affect fungibility. As adoption increases, the spread of "tainted" coins will begin to destroy the SOV "digital gold" property of bitcoin and any other transparent coin as regulation latches on to chain analytics and marks coins with varying degrees of "dirtyness". We already have a premium price on fresh bitcoin just recently mined from the blockchain with no history. Other coins sell for less because of the added history.

The FATF has a list of sanctioned addresses which have been sprinkled with dust amounts to spread the taint by users protesting these regulations. If the state feels threatened by some currency replacing national fiat, they could amplify the spread of taint artificially and if fungibility is sufficiently disrupted, then the currency begins to lose it's overall attractiveness and can't achieve mass adoption. If I was a state actor this is how I would sabotage the bitcoin network. Privacy on the base layer will become more urgent in the future.

If bitcoin can't implement this due to the ossification of the protocol, it may end up as the Yahoo! of the search engine wars and later on the Google will take over. If this "google" of crypto is a centralized state run currency then we end up closer to book of Revelations territory with a tyranny so oppressive that none before it even compares.