It's the government trying to enforce their opinion of who should own those Bitcoins, thereby taking power away from the owner that the network has decided on, which would be "whoever has the cryptographic keys".
A person can believe whatever they want, but when push comes to shove, it's a country's court of law that ultimately determines who legally owns what.
I think you've answered your own question - a true crypto believer does not agree with that. If the smart contract says the Ethereum is mine because you wrote it poorly and I called the transfer money function in the right way ("exploited it"), a true believer would say "yep, it's yours."
Only because human language leaves a lot of room for interpretation. Computer output doesn't, or at the very least not nearly to the same extent. If your smart contract is itself legal (you are legally allowed to formalize those terms), and produced an output as a function of it's actual internal operation (and not a random, accidental bit flip) then it should stand even in front of a judge.
Technically no. Many things have intrinsic physical value that cannot be tracked via digital contracts. If I go to amazon and buy a book, but they ship the wrong book due to clerical error, then there's a clear cut violation of expectations with no room for conflicting interpretations.
In the crypto world, NFTs are frequently criticized for this very issue, and it doesn't even leave the digital boundaries: you can prove to have ownership of a token through the blockchain, but whether that token is actually tied to legal ownership of an asset is anyone's guess (case in point, there are various cases of people selling fraudulent NFTs for art they do not own).