They definitely won't make it illegal, I'm sorry if that's how what i said came across
Of course you can still use bitcoin, this is the land of the free. However, to stop money laundering and save us from terrorists, drug dealers and sex traffickers everyone has to use this government issued wallet software to transfer bitcoins, which enables tracking of all whitelist coins.
Yes bitcoin will still confirm any transaction, but if you ever transfer one of your whitelist coins from coinbase or your employer to a non-whitelist coin by using your own wallet software, you go to jail. If you own a blacklist coin and try to pay any business, they flag the transfer and you go to jail. Technically bitcoin still works and is still legal, but it has been co-opted. The above scenario also isn't that hard to implement, we already have it with banks and cash.
Yesterday it was the same with gold, they didn't outlaw gold per se, instead they said you had to transfer gold to the gov who gave you an equivalent amount of dollars that were the same as gold, that they could now track within the banks.
Today it is the same with cash, they are not outlawing cash, but any amount or transaction above a nominal amount has to be kept in electronic form in bank accounts, enabling full tracking and ownership by the government, this is today. They could easily legislate this for bitcoin.
The only thing that stops that from happening is a large enough percentage of the population saying no. It sounds that many here think there will be enough who say no, my fear is there isn't.
Also, if this is how it plays out, we'll all be rich as sin. Provided of course that we whitelist our coins and pay our due (taxes). If not, you go to jail. Given this choice I'm sure many here will choose to whitelist their coins and retire.
The point I've been trying to make for a long time now is that 'quality' is vastly more important here than 'quantity'.
If native Bitcoin were used almost exclusively by entities who had some immunity to the problems than can vex an individual of the masses then the system might have a chance. Of course the system would also need to be defensible, and being a tiny system like our current 7 TPS implementation goes a long way. Operators who are highly proficient and motivated could probably maintain a functional system without use of the global internet at all, or at least uses it in such a way as to be undetected and thus more difficult to attack.
This has nothing to do with being 'elite' or whatever. The beauty of sidechains with it's two-way-peg would be that it would spread the brute strength of native Bitcoin around to a multitude of sidechains users of all varieties. I'd anticipate many sidechains 'playing ball' with the authorities and being as invasive as the govt demands. Fine. I don't give two shits if Uncle Sam knows that I bought a burger at Mon Mar 23 22:40:30 PDT 2015 with McDonaldscoin which I acquired from Bob on Tue Apr 29 12:15:56 PDT 2014. When I want privacy I'll use a sidechain which is more focused on that problem or native Bitcoin itself.
A very valid argument is that if the government could mandate whitelisting for one-size-for-all Bitcoin they could do so for native Bitcoin used primarily as a balancing and backing currency as well? My theory is that with 'power users' forming the mainstay of the userbase in this case they would be less susceptible to coercion and better prepared to defend against it. And again, the smaller the system core can be, the more options it has to hide. 'Small' in this case is, if anything, inversely proportional to value since the real value would be the ability to remain autonomous of coercive regimes. The value would be effectively the summation of the value of all presently active sidechains.
I would point out also that currency systems are quite empowering in a number of ways. That's why governments try to monopolize them and why other entities regularly try to create their own. The interest in coupons and gift cards and such exemplify this to some degree. A ready-made sidechain solution which an entity could adopt which rides on a proven and valuable backing store (hopefully Bitcoin) would be a juicy morsel for all manner of entities and some of them quite large and powerful. If these types could be enlisted in support of native Bitcoin (knowing that govt subversion of it would ruin their sidechain value) then they make potentially powerful allies. Much more so than some number of individual plebs even if that number was fairly large and it is highly questionable that it ever really would be.