Could government use this to fight Bitcoin? Keep all the seized bitcoins, precommit to never sell any, and destroy the whole network when they have over 50%. The users would not know when the moment comes, because they wouldn't know exactly how many bitcoins the government has currently, only that the number is always increasing...
The attack that people are worrying about involves control of a majority of mining power, not control of a majority of mining output. So the seized bitcoins are irrelevant. The way the attack works is that the attacker would generate a forged chain of bitcoin blocks showing nonsense transactions or randomly dropping transactions that already happened. Because they control a majority of mining power, this forged chain would be the longest chain, and therefor a correct bitcoin implementation would try to follow it, with bad effects. This in turn would break the existing bitcoin network.
The government almost certainly has enough compute power to mount this attack if they want.
And apparently the sky is falling. From Ittay Eyal and Emin Gün Sirer at Hacking, Distributed:
But the fact is, this is a monumental event. The Bitcoin narrative, based on decentralization and distributed trust, is no more. True, the Bitcoin economy is about as healthy as it was yesterday, and the Bitcoin price will likely remain afloat for quite a while. But the Bitcoin economy and price are trailing indicators. The core pillar of the Bitcoin value equation has collapsed.
They note previous bad behaviour from GHash (which GHash attributed to a rogue employee).
Their proposal is a hard fork, with different parameters (to make huge mining pools no longer an economically rational choice), but respecting the blockchain to date so they can reasonably keep calling it "Bitcoin".