I think regulation will be limited to the more easily definable targets such as merchants and exchanges. However, the current (and proposed) regulation is itself a stifling blow as it creates another barrier to entry for new businesses, and makes obtaining cryptocurrency more difficult.

The fundamental flaw at this point is people lack the incentive to buy crypto so they can then go out and buy something they could have already bought with the debit card in their pocket. What is the point in taking that extra step?

Regulation just means businesses are less likely to accept cryptocurrencies, and consumers have one more reason not to take that extra and "unnecessary" step of exchanging their fiat.