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They may indeed go underground. That means that legitimate businesses will have a hard time dealing with them if they deal with them at all.

Make no mistake, even if governments can't stop people trading bitcoin, they can stop it becoming mainstream in the way many BTC enthusiasts seem to want.

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I'm not sure it is in their long term strategic interest to push bitcoin underground since that will make bitcoin far harder to tax (declining tax revenues -> increasing taxes and decreasing State power -> more people hiding income = the Greek Syndrome).

It doesn't necessarily matter if it's harder to tax. If the only way to exchange Bitcoins for currency is via face-to-face transactions, 90% of what usefulness it has is eliminated. The remaining use, exchange of a virtual currency for virtual goods and services, is only useful with an easy way to get ahold of a sum of said virtual currency to begin with.

Which is to say, with a sufficiently low volume of BTC being passed around, taxing it becomes as important as making sure you tax cash transactions by roadside fruit vendors or lemonade stands.

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