What happened exactly?

There's a government gazette for proposed legislation limiting pretty much everything. The tldr here does a good job of describing it

BitcoinZAR Advocacy Group

Wow that's the closest to a blanket ban I've seen anywhere I think. "Written permission" "Freeze on suspicion" sounds appalling but unfortunately not uncommon, itself. The brainwallet is the most interesting, I've never seen that referred to in regulation before. But I guess there is precedence of LE demanding passwords that they "know you know".

Lots of people there use it to escape inflation?

I don't think many use it, but the barrier to do so is as low as it can get at the moment.

If not many people are using it who/what is driving the merchant adoption?

Ah OK. I read that as so easy because so many people have adopted it. But there seems to be ample fiat on/offramps as is