Blockchain Tracking Software

We've all heard about the blockchain software being developed to track individuals from what I assume is their KYC fiat entry point.

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With that being said, I don't see how this is possible/provable. For example, if I send some ETH from an exchange to an address, how would they even know that it's my account, and not someone with whom I'm transacting? Especially, say, if I send a small amount to a wallet somewhere and send that to a smart contract. Unless every single address requires KYC, I don't understand how this makes any difference.

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Am I missing something here?