I would guess that one reasons that retailers are converting BTC to local currency immediately is that it is insanely volatile right now, so holding BTC comes with risk. If the value becomes more quiescent (say, on a par with the USD), and if the retailers can purchase their supplies from other retailers who also accept BTC, then direct re-spending of BTC would rise without the vendor going through an exchange first. Which would be ideal, since any exchange is going to skim a little off the top.
See, I also think cryptocurrencies in their present form have a good chance of failing, but for very different reasons:
1. The blockchain doesn't appear to scale well. It takes a long time to verify transactions, and we're hardly stressing BTC to reasonable levels. 1.2 million users is paltry compared to the population of the world. One would ideally need something like a BTC credit card, where actual transactions are mediated by insured banks that act as buffers, providing the illusion of "instantaneous" and "reversible" transactions for a fee that might be paid for by either card holders or merchants. The bank would then take on the risk of a transaction subsequently failing to verify, using typical means to go after the offending party to get the funds back.
2. It all goes south when the power's out. If there's a widespread blackout or communications outage, I can't use my BTC. I can use the bills in my wallet, or even trade the physical goods/services I have for the ones I need. Of course, you might say that credit/debit cards have the same problem, and increasingly that's what we use for daily purchases. If the computing infrastructure of the world were to collapse, I'd say we'd have bigger problems to deal with -- but I still like the idea of coins and paper money as a backup for temporary outages.
3. Properly securing a wallet is hard, and using a compromised wallet is easy. Have you seen what people do to print a secure paper wallet? Disconnecting the printer from the internet, etc.? Average Joes and Janes won't do it. And then access to that single number gives a thief access to however much money you've got in the wallet. Since some folks are storing tens of thousands of USD in wallets, thieves are highly motivated. Money has to be simple to use.
But all this is tangential to the original discussion: do we need special regulation of cryptocurrencies? To which I say, no. Like it or not, they're being widely used as currencies, moreso than the native currencies of certain island nations, so we might as well treat them as such. Now, they may be a bad implementation of a currency, but that's another topic entirely.