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If the Japanese government decided that MtGox was doing something it didn't like, like enabling money laundering, it could force MtGox to cease trading
Mt Gox complies with AML which makes them greatly valuable to the Japanese government and other governments with whom they cooperate. Of course Mt. Gox is used for money laundering to some extent which is part of what gives it value because, being something of a choke-point in the Bitcoin ecosystem, Mt. Gox vastly more useful alive than dead. The minute Mt. Gox stops playing ball they will be shut down. Of this I have little doubt.
and seize all of the fiat and servers.
Anyone with an account there would potentially lose everything in their account, pending investigation.
I don't think that people would shrug it off and move to another exchange - they'd seriously consider quitting Bitcoin altogether if they lose significant money or have to fight accusations of money laundering.
I never kept anything on any exchange that I could not afford to lose. Doing otherwise would be utterly stupid in my opinion. It was quite easy to move the bulk of my BTC assets into deep storage, and I don't see that changing even at a low processing rate and irrespective of what happens with fees.
If simple and lazy people abandon Bitcoin because they get ripped off (as a result of said deficiencies) I say goodbye and good riddance. In a lot of ways such people are useless baggage which limits the potential of the solution. I may feel that way in part because I personally have no plans to try to exploit them though.
Edit: word fix.