This is pretty typical for all innovations, give it some time and the regulatory function will emerge from the ecosystem itself, at this stage what the government really needs to do, is to abandon the idea of any sort of regulation, just sit back and see the system evolve on its own, the KYC suspicions exist because of the level of access your government-issued documents provide to potential frauds
If the issuing of documents would start to rely on blockchain in some way - we would have our secure ID, safe to be used in all that stuff