I think you're letting the perfect be the enemy of the good. It seems like an obvious advantage to have systems that decide the outcome automatically and correctly 99% of the time, despite requiring occasional corrections from outside. That's not the same as a regular contract, so it doesn't follow people would always either choose smart contracts or traditional ones.

What you're hoping for is, taken literally, impossible. Smart contracts can't protect people from fraud, or coercion. Since the law does protect them from these things, smart contracts cannot be totally isolated from the legal system (even if everyone wanted this, which they don't).

> Using existing governmental power structures to punish people who adhere to smart contracts in ways some system members don't like

Fine, but what about in ways that the rest of society don't like?