If a merchant wants to use a centralized exchange for reasons that make sense to him, it's his right to do so.
Absolutely. And if that merchant is happy to complete KYC at that exchange to turn his bitcoin to fiat, then it is also his right to do so. However, I am under no obligation to complete KYC at that exchange. And sure, I can always refuse to use the merchant who wants my personal details and find another merchant, or refuse to trade with the use who wants my personal details and find another, which is a viable solution at the moment. But as time goes on, and governments push for more and more restrictions and more and more KYC, then the pool of people conducting business without KYC details shrinks. Some countries are starting to force users to complete KYC for their own addresses before letting them withdraw from an exchange, for crying out loud. Mining pools are starting to censor transactions which don't come from "approved" sources. The government will not stop until every address and every bitcoin is linked to someone's personal details, and if you don't compromise your privacy in this way, then your bitcoin will not be accepted at any exchange and your transaction may not even be mined.
If I use the services of such a merchant who then sends those coins to a centralized exchange where they get confiscated for being associated with mixers/underground markets/gambling/whatever, I can't tell the merchant that I am a privacy-oriented individual and he needs to be one as well by not using such exchanges. He'll want his money because the coins I sent him, aren't worth anything to him.
No merchant will accept coins if they are worried about them being seized. Instead, centralized payment processors like BitPay (which are already pretty far along with the whole spying on their users thing) will start to employ the same chain analysis firms that exchanges employ. If the exchange would seize your coins, then BitPay will too, and the merchant will not be out of pocket.
It's an extreme scenario, yes, but I don't think it's sufficient to say either "Well, let's convince governments or exchanges to stop their regulations" (which will never happen), or just to cross our fingers and hope it doesn't come to this. If it becomes near impossible to spend your bitcoin without some chain analysis company giving the approval or some centralized third party collecting your KYC data, then bitcoin is no longer bitcoin as far as I am concerned.