I agree with the idea that license plates are the biggest part of the problem and that they've had a huge kind of scope creep in terms of what they're used for.

Whenever I've thought about this problem, the challenge with a more high-tech and privacy-friendly alternative is the intuition that it's good if witnesses to a crime or accident can memorize or write down the plate of an involved vehicle in order to make that specific vehicle identifiable. If the vehicles were providing only a cryptographic identity that wasn't memorable or that required special equipment to query, we would lose the "the robbers got away in a car with this plate" or "the pedestrian was run over by a car with this plate" scenario, which feels like a surprising cost somehow.

If it weren't for that, it might be feasible to use some more modern cryptographic approach to ensure that cars are licensed or insured without also making it easy in general to track them or people's activities or whereabouts. But allowing the public to quickly see any car's identity with their eyes and memorize it with their minds is quite a harsh constraint.