I think it's mostly to do with encouraging players to play certain content themselves and for making it harder to buy power. In a game where items are bound to the character when they drop, then you know that if you see someone wearing that item, they're at least competent enough to have run the dungeon where that item drops. Higher level dungeons tend to be more complicated as well as requiring better armor/weapons, so you really want players to learn from the lower level ones before they attempt the harder ones. It's not fun for anyone when a noob buys top tier equipment and joins an advanced group without understanding how to play the character.
Personally, I think a mix of bind on pickup and tradeable drops makes the most sense. Bind on pickup drops are important for encouraging players to progress through content in the right order, but if everything is bind on pickup then well geared players lose their incentive to run lower tier content. Whatever stage of the game you're in, there's typically only a few instances that are worth running at any given time because the others are either too difficult or the drops are worse than what you already have. (It's boring if you're stuck repeating only the same dungeon for a long time with no variety, and it's a waste of content if you advance past dungeons without playing them much if at all.)
The principle I'd suggest is that at any stage of gear progression, the player should be able to spend game money to improve their power level, (such as using valuable tradeable consumables or adding tradeable gems to BoP armor) however without getting bind on pickup gear a player should still be less powerful than an equivalent player that does run those instances. One could also argue for limiting tradeable drops to cosmetic items and other items that aren't combat related, but without items that are useful in relation to the game's primary mechanic (which is usually combat, although in some MMOs it could apply to some sort of crafting skill as well) a lot of players won't care - tradeable items need to be useful for players to actually want to buy or farm for them.