The government can mandate that all entities that wish to legally transact in Bitcoin, must do so with a publicly-registered wallet (e.g. held on an exchange).

The government can mandate that all entities that wish to legally transact in Bitcoin, must do so with a publicly-registered wallet (e.g. held on an exchange). They can also ban transacting with any wallet that is not publicly registered. Any private wallet becomes, by fiat, illegal for the citizens of that country to transact with. Thus, any such "blacklisted" wallet is as good as confiscated, since no one can (or will) trade with your tainted coins. Your wallet's coins are, effectively, permanently banned. (It's as if they confiscated your gold and locked it in a vault, never to be used again.) Perhaps some other blockchain protocol has solved this issue, but Bitcoin hasn't, since Bitcoin wasn't designed with privacy in mind.