This has occurred for well over twenty years and continues today. Many people wouldn't even recognize the original "Stars and Bars", while the Naval Jack is ubiquitous. Even the blood-stained banner flag isn't flown, just the Naval Jack. How did this happen?
More than 20 years. It was first something for Confederate veterans groups: they wanted something for parades, conventions. Though there would be a number of different battle flags for different states, and there are photos of Confederate veterans with their state flag, there was a gradual settling on the version seen now, which looks like the battle flag of the Army of Tennessee, very close to the battle flag of the Army of Virginia. In 1904 the United Confederate Veterans tried to have the square Army of Virginia flag be standard, but the rectangular Army of Tennessee was more a standard dimension.
It was a part of the Lost Cause myth that the Confederate soldiers fought for honor, for a good cause: ergo, there had to be a flag to honor them. On the other hand, when the United Confederate Veterans started in 1889, at the outset it stated plainly that its members were patriotic American citizens. To parade with the "Stars and Bars" of the Confederate government would have raised difficult questions about their actual loyalty. Of course, those questions were also raised by the Battle Flag - a good post on that by u/Georgy_K_Zhukov, here - , but it was easier to ignore them.