It's definitely just a way to kill competition. The taxi companies are mad that Uber isn't buying million-dollar medallions for each taxi - which would make their business model completely un-viable.
You want to know how to handle it properly and prevent crime? Look at what Portsmouth, NH did in response - not surprising since they're the home to the Free State Project. They disbanded the entire Taxi Comission and removed any extra restrictions on the normal cab companies that would prevent them from competing on a level playing field with Uber.
This doesn't mean there are no regulations - it means that Uber drivers are required to pay for the cost of a background check by the police department, and provide proof of insurance. This cost is tiny in comparison to buying a medallion, and provides the same level of safety as the background checks the taxi companies were running.
It's sad that a logical response by government is a surprise - adapting to changes while protecting citizens should be the basic mandate of government, not an exceptional feat.