Two possibilities have already been discussed:
- If the bitcoins are in a wallet on your computer, the government must acquire your private key, e.g. by
- physically seizing your laptop and forcing you to disclose the password
- physically or remotely installing spyware on your laptop to get your wallet and password
- forcing Microsoft to install such a spyware through Windows Update
- If a third party is managing the bitcoins for you (e.g. a trading platform), the government can seize the bitcoins from there without needing to interact with you
But there is a third, much more general possibility: The government controls the interface points where bitcoins are traded for goods or other currencies, and can simply forbid them from accepting your bitcoins.
The government can publish a list of seized addresses and declare that any address that receives seized funds will be automatically added to the list, and anybody who accepts seized bitcoins in exchange for goods, currency or crypto will be charged with money laundering.
The blockchain is by its very design a public ledger - this means that every single transaction that has ever been recorded is visible online. This is a dream come true for the government. They can completely monitor the flow of funds and automatically tell whether a transaction includes seized funds. They can publish free tools that tell anybody who receives a bitcoin transaction whether those funds were legitimate, and if not, to transfer those funds to the government.
Currently, the amount of money that is being laundered through bitcoin is relatively minuscule, so no government has implemented such a system yet, but I'm convinced that they will once this becomes a significant problem.
The government is serious about money laundering, and cryptocurrency just provides the ideal technical basis.
Once a government system like this is online, I predict that seized bitcoins will still circulate and be traded among users. They will be exchanged and traded on a "black market" that ignores the government rules (probably because they're in some tax haven jurisdiction outside of EU/US influence), but these seized bitcoins will be traded at a much lower value.
The government can also discourage miners from processing transactions that involve seized addresses by automatically seizing the mining reward of blocks that include such. It will be economical for miners to occasionally process seized transactions, but the confirmation times will be much higher.
The legal frameworks of various jurisdictions may or may not allow this form of seizure, but they will be adjusted according to the technological development.