I understand this has already started in other countries. For example this news story from a few days ago: https://www.nobsbitcoin.com/gemini-uk-to-prohibit-regular-bitcoin-transactions/
The question is: How will the government be able to enforce KYC in decentralized protocols/services and non-custodial wallets? For what I know, it's impossible to do such a thing. There's nothing stopping a person from acquiring BTC (or any other crypto) without KYC and storing it in a non-custodial wallet. Even if it's "illegal". People from China have already been doing this, even when the country outright rejected crypto/Blockchain tech. In fact, crypto has become more popular in the region.
Tighter crypto regulations will only make decentralization stronger in the long run. It's already too late to put a stop to the revolution. If you thought censoring mixers was enough, then you haven't seen nothing yet. I believe governments (particularly the US government) will target privacy coins like Monero and Zcash next. They will make an excuse that such coins are being used massively for money laundering and tax evasion. This will be a never-ending war between crypto and mainstream governments. As long ss people stand up and fight, don't expect the revolution to go anywhere soon.