It really does. Public/open blockchains are much more transparent than legacy banks. There is all sorts of legal red tape for government agencies to surveil citizens (at least in western countries). If governments could get people to use KYC-linked blockchains, people would be offering them all their financial activities on a silver platter. No need for court orders or grand juries or subpoenas.
Public KYC-linked blockchains would be a huge mess for everyone involved, it would mean that not only government can view all transactions of every citizen, but also everyone else - the citizens, foreign governments, criminals, terrorists and so on. Any such blockchain would be quickly banned because of how much danger it creates, it's essentially an open database for robbery targets, or a perfect dataset for creating targeted ads.