If in the future Bitcoin will become a widespread currency, someone will notice that being digital can be a downside, because it makes Bitcoin 100% tied to the Internet, electricity and electronic devices, unlike fiat money that can exist in many forms. Physical Bitcoin already exists, but mostly for collectible purposes. If someone will decide a physical Bitcoin for payments, they will probably get a lot of Bitcoins (lets's say 10 000), lock them in and release paper currency that will be backed by those Bitcoins. It will work just like current cash, but backed by Bitcoin instead of gold, and it won't have any problems with private key ownership that you have described in your post.
It is a great concept and smart way to convert Bitcoin into paper currencies for necessary people in essential scenarios and of course today Bitcoin is entirely depending on the Internet and electricity and still many areas and regions in the world doesn't have those facilities properly and even have most retail and other payment options desire paper currencies over digital currencies so in such situations converting Bitcoing paper currency might be very valuable