Someone would still have to store it. It's not like some part of the blockchain could be omitted by everybody.
Sure. And that someone could be China, Iran, North Korea, Iraq, Equador, Chile, Russia, India, Seycheles, or if none of those are willing to, pretty much anyone, anywhere, on a Tor node. Or an I2P node. Or any other anonymizing node.
They could argue it's not the accounting ledger that's illegal but the excess information that is already. And because there are no methods available to prevent somebody to store more illegal information in it it can be declared illegal to posses the block chain.
You have to keep in mind to follow how a bureaucrat would think in case he is supposed to "do something about that".
And that's why drugs are not available anywhere, and CP is no longer on the internet. Sure, it would be a problem for the business that's in a country that bans bitcoin, but it won't be a problem for any businesses outside of that. USA banned online gambling. Doesn't mean that business is dead.
Government doesn't need to decrypt/steal your bitcoins in order to stop you from using them. They just take your computers and little slips of paper, now your bitcoins are "gone".
Well, they can take away my pieces of paper and my computers, but I have a bunch of other copies of those papers stashed around, and they're all pretty much useless without whatever keycodes I have in my head. Hell, even if it gets to the point where they can read my brain for passwords, my password could simply be "The 5th item from the bottom at such and such location, plus the number on this page on that book at that library, + large string of characters hidden there, which I can never remember because it's too big." I could even memorize a ton of such places, and know that only a few of them are legit, or which order they must be put together in to make a password.