Essentially, you want to guarantee a way for governments to be able to track every transaction, this would be the way to do it.
That being said, I am not anti bitcoin, I just don't see it as a privacy thing.
Of course it is 20x less efficient than tracking Bitcoins, and requires input sources from several places, but it’s fun to know that even banknotes are quite easily traceable.
The value only exists because someone else is willing to exchange it for goods or services.
That brings me to why your point is wrong: sovereign currencies are backed by governments and that means that there is some intrinsic demand because that currency is used to pay taxes and is paid to civil servants, contractors, etc. In all but the worst run countries that has a substantial anchoring effect. Bitcoin has nothing like that, which is one reason why it’s so volatile – which is great for a speculator but not anyone writing contracts with values set in BTC.
It's hard for me to just accept the fact that hype drives demand, and demand sets the price. The hype can be a meme or be seemingly ignorant of better alternatives, but it doesn't matter the speculative feedback loop can apparently irrationally sustain itself for a long time.
I really wonder what the next major recession is going to look like.
Most of the traded gold sits in a vault and is never touched as then it would need to be retested for purity or something. Sure, if the economy would crash to the point that gold-as-an-investment-instrument is worthless, you could take it out of the vault and sell it for industrial use, so it has at least some intrinsic value, but I doubt it would retain a lot of its value if everyone tried doing that.
In contrast, Bitcoin’s hashes have no industrial or aesthetic value and they’re not even linked to the concept. If Ethereum becomes more popular, cryptocurrencies could be successful as a concept even if Bitcoin speculators have millions of dollars worth of inputs nobody wants to buy. Since there are almost no situations where someone has no other options for a transaction, it’s really for the network to collapse if the price drops below the mining threshold - the number of people who are going to pay a premium to avoid PayPal/Square, wire transfers, etc. is unlikely to be enough to support an intentionally inefficient architecture.
You could however make "accepting" coinjoined UTXO's illegal, but the lightning network fixes this (you can use coinjoined coins to open channels, lightning payments do not know the payer).
If a government decides you need to do full kyc to buy a coffee, then it might be time to emigrate :D
And it's not like the government couldn't fine the businesses equal to say, 1.5x the amount transferred from the blacklisted address.
The more likely scenario would be that it's treated like cash. You're not going to be questioned for using it to buy coffee, but if you decide to buy a house with a sack of cash they'll start asking questions.