I heard some people were talking about using crypto to build a full State on it, this is doomed to fail.

Let's say you loose your wallet. What do you do next? You call your bank to block your credit card and to take an appointment with the administration to make a new ID, driving license etc. The cash in your wallet is gone but everything else isn't. The process is annoying but at the end of the day you'll be fine.

Now if all this is based on a private key and you loose it, you're completely done, you're just not part of society anymore.

No one will ever embrace this because humans are messy and make mistakes all the time. Crypto and blockchain are so resistant to mistakes that for this specific case it's just not good at all.