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.

So the solution is "I don't know yet, so we'll have the state be in control of the keys"

I'm sure you don't need me to say why this is an unacceptable solution. Yet again, blockchain is found to be a solution in search of a problem.