This is a logic fallacy. Let us remove DIDs, lets remove Smart contracts lets remove L2. They can all be used for KYC. There is nothing inheritly wrong with CS in itself and its ill suited for regulation. Goverment could ask you to implement a smart contract for KYC or to enforce a DID to follow transaciton or else block them etc.

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Con: There is a tremendous difference between can be done with 'Ease & Efficiency' VS 'Can Do It in with Much Difficulty'...... Eg. Some gun laws require the gun be keep in the trunk of a car so it can't be easily accessed, this makes using it less likely. In the same way.... CS makes regulation easy and therefore more likely..... like an easy to access gun.

Cardano Contingent Staking

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Selected claim, opposing its parent

Con claim 1, children below