That is exactly why they are not making it illegal, don't you think a nation who has their own currency, would make their currency weaker by allowing another currency to be legal there to be used? Of course they would, but they realized long time ago that if they put time and effort into making people stop using it, they could just tax it and make an income. This is as simple as that, they just realized that taxing and getting money from people is just a much better option.
This is why my nation not only allows you to invest into it and hold it, but allows you to accept it as payment too, not in some crypto way, not a special thing, you can accept dollar, euro, yuan, whatever foreign currency if you want to sell for that, and same goes for crypto in a manner.
You are right that government officials tend to be slick when it comes to matters like these. They know what they need to do so that they can benefit from something if they aren't able to get rid of it. Now, suppose they can see that they aren't able to completely eradicate the use of cryptocurrencies among their people. In that case, they will think of regulating them and taxing people who use them instead of trying to keep them away from them.
In our country, so far, they are hesitant to do it, there is no clear ruling about cryptocurrencies or their usage but the State Bank have ordered banks and other financial institutions to not allow transactions related to cryptocurrencies, so whenever a transaction such as that is found or suspected, the account is blocked and the funds are confiscated.
I'm sure this will change, but it is going to take some time though.