Somewhere between those two extreme options. This development was probably inevitable. Existing NAS regulation was completely inadequate to deal with the explosion of recreational drones with batteries and control links that permit flight miles beyond VLOS at altitudes conflicting with manned aviation, or with the future commercial use of drones, especially for BVLOS operations. Reasonable regulations were implemented (Part 107 and the recreational exemption), but were largely ignored, especially by recreational users, who post freely about flying illegally. Meanwhile the technology keeps getting better, the number of users continues to increase, and the indidence of illegal flights also increases. Many of us on these forums have been pointing out that since the regulations continue to be ignored by pilots either ignorant of them or who believe that they know better and are justified in breaking them, then the outcome will be engineered controls such as those now proposed.
But at least this proposal provides a pathway to continue recreational flying, albeit with a little additional burden - other than being constrained to fly legally. Much of the complaining on this thread is just thinly veiled objection to the prospect of no longer being able to break the law with impunity. I have no sympathy for that position. And this will be a losing battle. The frequent comparisons to other issues like gun rights are flawed. There is no constitutional protection and public opinion outside the bubble of the hobby is not at all sympathetic - drones are widely regarded as a nuisance, a threat to privacy, and a hazard to aviation.
The proposed system doesn't require an internet connection. It's perfectly clear on that point if only you and so many others could be bothered to read it.
Maybe it's just human nature, but I simply don't understand this mindset. This kind of hand-wringing, sky-is-falling frenzy has followed nearly every development in this area over the last few years - altitude limits, 14 CFR Part 107, NPS restrictions, DJI GEO, etc. Every time the threads are the same - the hobby is dead, DJI is finished, poor me, I'm so oppressed. And then it's rapidly forgotten as the next crisis approaches.
Anyone who follows the history of technology realizes that sUAS are going to be ubiquitous. They have so many potential uses. There is no incentive to shut it down - the challenge is just integrating the various players with each other and with existing manned aviation. That's only going to happen via automated systems, not by the forlorn hope that individual users will choose to follow the rules.