Basically the answer is trust. Trust in a system backed by large institutions who also trust the system. Relevant: http://www.youtube.com/watch?v=9LaSrxtWfgc
Mybitcoin.com stole my bitcoins (I admit, it was stupid of me to keep them there). Then, when they promised to return 40%, I accidentally entered my old address, not a new one, and poof! all those bitcoins were sent into the ether. Gone for everyone. The infrastructure has to get much better. Otherwise I wouldn't feel comfortable holding large amounts of cash in BTC. Yet, what would suffice as 'better infrastructure' may be antithetical to the goals of bitcoin. Would any company be willing to hold BTC and insure it with cash? Unless that happens, I think it will remain on the periphery.
I can see it working as a trading system for paypal or transactions, but I wouldn't be comfortable leaving money in such a grey area. The only reason that we use banks is because of government guarantees surely? With a system that's neither tangible or backed by governments I don't see where the trust can come from.
Yes. The dude that supposedly ran the site, "Tom Williams" remained anonymous. I only had 10 BTC there, and didn't really bother to move my wallet for that reason. I did just open a Dwolla account last night, which might be a bigger threat to Western Union. But, if I was doing illegal stuff, I guess I would seriously look into bitcoin. With a system that's neither tangible or backed by governments I don't see where the trust can come from. I think the trust might be based in the average desire for people to hoard it. That might improve as exchanges between BTC and other currencies increase, but as long as it remains loosely tied to other currencies, I think it will remain very volatile. That said, it could be a good tool for speculating alone. In fact, the reason I opened a Dwolla account was in part to buy my 10 BTC back. Why not? I don't see why hype can't drive it back up again. This time I'll hold onto my wallet though. :)