Already it's possible for MtGox etc. to detect spends of coins that have certain well-known thefts in their history. If regulators forced audits on exchanges and key popular merchants, as well as keeping track of coins they deemed to have been involved in illegal activities, they could make these exchanges and merchants pay a small tax on these 'tainted' transactions and pass this cost on to the consumer. As the regulators 'tainted' coin list would be public, it would become in more and more peoples interest to use wallet software which subscribes to the 'taint' list in order to reject coins they know will incur a penalty upon spending. The more the regulator raises the tax at the exchanges and audited merchants, the more people must join.
Audited exchanges and merchants would have to submit batches of all bitcoin addresses involved in their transactions to the regulator. Agents could perform random transactions with exchanges and merchants to make sure 100% of transaction IDs are reported.
Is this scenario realistic, and wouldn't this make Bitcoin ultimately a very controlled environment indeed?
('tainted' coins would still have value on black markets, creating a split system where bitcoins are no longer completely fungible)