I think government need to study more about bitcoin and how it works. Because bitcoin its not easy to use an entire city that that they not study about it. And maybe they not adop bitcoin because some people are not use technology and they don't know how to use modern technology.
Yeah, governments needs to integrate Bitcoin and Fiat in such a way to use it together. It should be in a way that both fiat and digital currency work side by side with no loss in government revenue.
It can work if the governments agree that bitcoin would be an alternative to the fiat and that they will be the ones to dictate how many bitcoin would be in circulation and what policies it must follow. But with bitcoin still in its infancy stage, this might not happen in the near future as most countries still depend heavily on fiat.