I'd hate to see a system like that where I live, because the government will abuse it. We've already seen Canada freeze bank accounts of protestors, and US officials put protestors on the no fly list.
Preventing convenient payment technology only hurts the rest of us. If you want redundancy buy gold coins.
There is no way to “get rid of cryptocurrencies” at this point save for shutting off the internet. It is not within the power of the state to prohibit, any more than prostitution or cocaine.
There’s plenty of legal ways of exchanging cryptocurrencies for real currencies, shutting those down would be a good start.
Customers and merchants generate a keypair and CSR. The CSR by design contains no personal information. You submit the public key/CSR and seperate identifying information to a KYC authority.
The government generates a signed certificate the bank can use to open an account, and the customer or merchant signs their transaction requests using their private key to associate them with the account.
The bank has a paper trail showing KYC was performed, but does not have any personal information about the participants, almost akin to the old "numbered Swiss account" cliche.
Ideally, the KYC authority deletes the personal data after issuing certificates, but I'd expect it would be more "information can be released under court order" or "revocation policy blah blah blah".
That's the level of tradeoff I'd expect is politically viable. Bank of America doesn't know you're buying hentai, but if it turns out the 1000-year-old character is actually 12, a court can lift the veil.
Oh no, my government might be run by nazis -> Let's make the government services crap
The nazis don't need to use your crap government services, so you're just pointlessly making things worse, this is the same delusion as "But it's illegal". Why on Earth would crooks care whether what they're doing is legal?
I suggest:
Oh no, my government might be run by nazis -> Ensure this does not happen OR leave
I really want a system where I can transfer money effortlessly but I also want a guarantee that I won’t be restricted access to my banking.