We can work with regulators to make sure Bitcoin is acceptable to them. For instance we can ensure that it remains possible to track the flow of money through Bitcoin. We can also ensure that there are options if certain funds need to be frozen and blacklisted, due to fraud, theft, or because they encode illegal data. We can work with them to find ways to apply AML rules to Bitcoin transactions and to the exchanges. There are ways to put taxation into Bitcoin itself, so that taxes are automatically applied when a transaction is made. Maybe even one day we'll be required to prevent dangerous levels of deflation. A lot of these changes are technical, such as improving scalability so transactions can remain on the blockchain, developing P2P blacklist technologies, and preventing deflation.
If Bitcoin heads in this direction, surely there will be a hard fork. The whole point of Bitcoin for a lot of users is to have a currency that functions independently of the world's most heinous criminals--the bankers and politicians--and makes their destructive, self-serving policies/regulations/legislation irrelevant. Each of us should be free to transact in whatever currency has the features and characteristics that we want and individually choose. Similar to religion (in the USA at least), a currency should not be imposed on us. It's obvious there isn't going to be a one-size-fits-all cryptocurrency as we move forward.
We can also go the other route, and give Bitcoin users even more tools to remain anonymous and transact on their own terms. Technologies like mixing and off-chain transactions to let you make transactions without revealing where the coins came from, technologies like P2Pool to ensure mining stays decentralized, and colored coins to let us trade our assets without involving third party exchanges.
We can go both routes. It's as simple as a hard fork.
Didnt read this whole thread so not sure if this has been said already. But the idea of taking both routes could be vary beneficial depending how regulated the gov't wants it. There is no reason why the foundation cant make a "regulated" bitcoin client and secretly in the back room on a Tor server work on a 2nd shadow client, one which ignores those rules. End result would be, The foundation does what the gov't wants but at the same time we do what we want. if at any point the clients become incompatible, they only need to say "well, we did our best gov't, everyone is ignoring our official client now". they can all publicly quit but keep working on the shadow client (the real client) same as always. Legally they wouldnt be responsible, though we would have legal battles for bitcoins future at that point.
I guess the question becomes, can you legally ban a technology that isnt illegal, simply because its users choose to use it for that? Think Torrents, they are perfectly legal, but some people upload illegal/copyrighted content.