Ideally yes they could do that, totally agree with you. But the countries that use force in history has that worked well? Usually what happens then is another nation can come in and out compete the other by offering more freedom.

What happens if they use too much force is that it will be bad business and PR for the nation as a whole. Best they can do is to offer a low tax incentive or they may cause a brain drain effect where the smart and wealthy leave the country for another place.

The only thing you can't buy with fiat for the moment is food but that will probably be possible very soon in the future. So you will not even have to trade crypto into fiat.

I suspect we will see massive drops in value of crypto because of fear but that it will after some time start to rise again. There is just too many people involved right now to stop it. People are invested and think something has value then it has value because people think so.