I'm not sure the traditional financial system would ever out-compete the cryptocurrency ecosystem even if you removed the KYC etc as crypto is permissionless which is a breeding ground for innovation and efficiency. It would be impossible for the banks to keep up.
>they can copy the innovations that work, bolt them on top of their product, and offer something that is both innovative and is secured by men with guns
I don't think this has ever worked. By the time they have cut all of the red tape and finished bolting this feature onto their enormous enterprisey stack the world will have already moved on and the Ethereum ecosystem will be on The Feature 2.0. Also, if your security is provided by men with guns then those same men with guns can change the rules on you or the bank which makes your money much less secure. I'd take "mathematically impossible to cheat" over "men with guns might be angry if someone cheats" any day.
This may be the point we disagree on fundamentally :). To me, "mathematically impossible to cheat" usually comes with "mathematically unforgiving of mistakes". I estimate chances that the government will cheat me out of my money to be much lower than me getting crushed under a smart contract that, in the fiat land, a human judge would invalidate based on circumstances.
Writing this, I realized I'm thinking from the POV of someone living in a democratic and relatively sane country. I guess the risk calculus is different when you truly, deeply mistrust your nation's government.
> 3) The main users of cryptocurrencies are (AFAIK) criminals and amateur financial speculators.
The problem is that to fix this, we need governments to wrap their heads around this.
Cryptocurrencies exist as a thing that allows people to engage in pseudonymous financial transactions over the internet. It's going to be really hard to put the genie back in the bottle. Particularly for black market transactions, because then you can't even ban the currency since they'll just ignore the ban on the currency at the same time as they're ignoring the ban on the product the currency is being used to pay for.
Which means that the best thing we could do is out-compete it using a more traditional financial system. When the existing KYC laws have already been voided by the use of cryptocurrency, just admit the loss, stop yielding a competitive advantage to the system which is destroying the environment, and let people have pseudonymous bank accounts and smart contracts and so on, in ordinary banks and based on the trust in ordinary banks and governments rather than the trust in proof of work.
That would destroy the utility of cryptocurrency, and it could be the only way to really do that.