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To riff a bit on your example of wanting your money to be useful:
Typically if you wind up on a sanctions list, the people you do business with most often already are engaging with you economically in spite of this status. The mere fact that Bitcoin can circumvent certain sanctions imposed by these entities already makes it more fungible than anything we traditionally think of as "money".
I am always surprised at how often people advocate that Bitcoin should be used more privately or permissionlessly or sovereignly by "your average person" when this hypothetical person doesn't have any motive, incentive or desire to act in these ways (which by the way, all take extra effort as a matter of course). Meanwhile those who are motivated to act sovereignly, privately or permissionlessly already do so.
Coinjoins and other methods exist to further obfuscate UTXO history, and chainalysis has been shown to be unreliable, to put it charitably.
Nonetheless, a motivated enough government has demonstrated they will prosecute whomever they wish for whatever they wish. If that is the standard, then nothing is fungible.
Comparing fungibility to ordinals (an externally imposed system) is interesting. I certainly hadn't thought about it that way.
What is your response to this:
Bitcoin is useful in that it allows anyone to send sats to anyone else even if a government or set of governments doesn't want them to.
If OFAC has some list of addresses that they don't like, it doesn't really stop me from sending to one of those addresses or whoever owns one of them from sending out. What it does do though is increase the likelihood that a person won't accept their payment.
At the end of the day, I want my money to be useful. I want to buy stuff with it or use it as collateral. If most of the people I interact with don't want my sats because of the address they come from, it might be enough of a problem that the utility of those sats specifically is decreased (ie I have to spend more time/effort/resources to use them to buy something than if they were not coming from an address on an OFAC list).
While I agree that this is an external layering on the system, it possible because of how bitcoin works (transaction graphs are visible, fairly easy to track). It's one thing to say, bitcoin is perfectly fungible because the protocol doesn't have a mechanism for preventing any particular transaction from being included in a block, but what many people in the world might mean when they say "Bitcoin isn't fungible" is that technical aspects of how it works make it very easy for governments to target specific coins.