I think it's the decision to treat it as property (and not its scalability) that killed the use of crypto in the US as payment mechanism, and limited its use only to store of value, speculation, and illicit payments.
Note that treating cryptocurrency as a "foreign" currency would not be magic; you still have to pay capital gains on any transaction over $200 AFAIK. But the IRS decided it's property so you still have to calculate capital gains on pizza and alpaca socks.
But that would put bitcoin above every other currency. As far as the United States is concerned, one dollar is one dollar and dollar is the unit of currency. Whether you own bitcoin, Mexican Pesos, Canadian dollars, etc, holding another currency as an American citizen means you are subject to appreciation of that currency when compared against the dollar, which is the unit of currency in which the IRS collects tax.
You are right you are not taxed (in nominal terms) if your dollar appreciates. That is because payment to the IRS is rendered in dollars, and dollars only. If your dollar increases, well so does the amount you lose when you give that dollar to the IRS.
Not above any foreign currency. Transactions below $200 would be exempt from capital gains. When they made that decision, the implication was that it cannot be used for liquid payments, i.e. be a "currency".