If I understand you correctly, you are saying that exchanges and potentially ETF providers can increase the supply of paper bitcoin and sell such printed tokens to customers. 

I see a couple of problems with this. First, this would become apparent when the company is audited. If they don't own as much bitcoin in reserve as they claim then they would be engaging in fraud. For this to go unnoticed we would need governments collaborating deeply with exchanges.

Secondly, fake paper bitcoin would only be a problem for those that use government-aligned custodians. It seems like it would be self-defeating for governments to undermine the government-aligned custodians where they can easily tax the paper bitcoin. 

Since sovereign owners can verify their bitcoin they are not impacted by frauds. You could argue that the exchange rate could be impacted temporarily. This is possible, yet would allow bitcoiners to stack more bitcoin at a cheaper price for a longer period.


2. Yes, bitcoin on exchanges will be impacted by all kinds of taxes. Yet, if governments overplay the taxes then nobody will want to use government custodians, so there's that consideration as well.

Bitcoin in self custody is hard to tax, in spite of KYC regulations. Bitcoin is global and not jurisdictional. If a government seek to tax your bitcoin in a manner you disagree with, you can cross the border and spend your capital (bitcoin) in a better jurisdiction.

This is how game theory plays out: jurisdictions have to compete for capital and skill by offering good conditions of living, low taxes, et cetera. 

I wrote a longer piece on game theory and why tainted coins will not work over time: 

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