What does this mean for the long term prospects for cryptocurrencies? Will blockchain survive losing it's original purpose?
Yes Blockchain will survive its original purpose, irrespective of the fact that the governments are planning on introducing their own centralized Blockchain but the true qualities of Bitcoin Blockchain will still survive. Bitcoin can survive with or without mixers, Bitcoin was active before the mixer so it is not that Bitcoin need them but they're the ones that needs Bitcoin to have a service to render. Using Bitcoin as it was intended brings anonymity with it but it's just the privacy that is missing although there will be other ways which we can use Bitcoin and increase our privacy without making use of mixers. We have the option of using a different address for each transaction we want to carry out either spending or receiving Bitcoin and our privacy isn't exposed.
As for the longer term, this brings up an important question: why use blockchain at all?
Blockchain is transparent, it's decentralized and trustworthy. It might be slow and costly for now but it won't stay this way forever. There are strong believers of the Bitcoin Blockchain and they're developer too that'll bring out a more acceptable solution in the future and all this will be a thing of the past, we just have to exercise patience and give Bitcoin time. We're still new so the challenges are what we should be expecting because after we have a triumph over this setbacks, only God knows how explosive Bitcoin adoption will get.