1. At initial rollout, I don't imagine end users would be in charge of their own keys. State-managed keys un-does some of the benefit of being on the blockchain at all, however it sets up a modularity for the future where people could choose to take their own keys.
2. The blockchain can still have similar checks for fraud. IE I'd still imagine the DMV-approved key needs to sign-off on whatever transactions normally pass through the dmv, and perhaps with in-person paperwork. Some crypto maximalists imagine a world where cars and houses are on the blockchain and there are smart-keys or something that prove ownership. That doesn't seem realistic or desirable, however smartcontracts that mimic our current checks could be a big improvement over our current state administration.