There might always be VAT and government interference, but legislation can only delay or mask beneficial ideas and practices. No gathering of politicos can wave their collective magic fountain pen wands and make Bitcoin disappear any more than they've been successful at making Bittorrent vanish, because time is not on their side.
Agreed, Bitcoin would not go away. But the use of exchanges would be difficult, maybe impossible. If all money is electronic and all transactions are known by the government through something like the RTPay gateway, then you can't do an illegal transaction without getting caught immediately.
This setup would make Bitcoin the choice of payment for any illegal transaction, but also any transaction which might be legal, but people prefer not to leave a paper trail. On second thoughts, this may even help Bitcoin grow, but it would push it into a niche where we don't want it.