Seems like such a covenant simply makes a KYC’d coins more efficient for such a government institution, but this evil construct is already possible anyway with standard enterprise Bitcoin software, hardware and best practices.
On the other hand, can the terms of this covenant be publicly verifiable by the public? If so, such a covenant would be restrained by it’s own structure and rules. In other words, changes to it’s terms would be public when implemented, where as the terms and rules of a multisig KYC’d coin pool are entirely arbitrary to the key holders.
If those assumptions are correct, I think I prefer covenant KYC pools than multisig ones.