While you can't prevent transactions in bitcoins, you absolutely can cut off conversions between bitcoins and USD. Just cut them off at the payment provider the same way. Right now, bitcoin exchanges can operate entirely above-board; driving them underground and equating them with money launderers would make it extremely difficult for bitcoin to solve any of the problems that people want it to solve.

While many people (myself included) would love to see a cryptographic currency replace all existing currencies, it needs a transition period to have a good chance of succeeding, and making it illegal would eliminate that transition period.