I think fiat and cryptos are two absolutely different things. Even if regulators decide to legalize it and bring regulation on it they would definitely not make it a currency for day to day use and replacement of fiat they would only use it as an asset or security in which people can invest and earn returns or hold them for a period of time and such a thing would not have that much effect on fiat. They will still exist and no economy around the world would be hampered with this. Countries too would work normally I think there won't be any change in world economy at all with mere regulation of such kind Only that people would start considering Bitcoin as an investment option.
In some countries, bitcoin can already be used as payment instrument. But not to replace the whole, because in everyday life bitcoin and fiat can be used but the role of fiat is higher when compared to bitcoin. besides being used as a means of payment, bitcoin is also used as a valuable investment asset and also as a place to store value.
Bitcoin and fiat are both payment instruments, but regulations prohibit them from being used in various countries. For example Indonesia, they still prohibit bitcoin as a legal payment tool.