The establishment of Hizb Al Wasat as a legal political party could provide a less menacing (from the regime's perspective that is) alternative to the Muslim Brotherhood, and a political outlet for the Islamic current in Egypt. It would establish a dual track for Islamists, akin to that found in Morocco, where the Justice and Development Party is allowed to participate legally, while the more popular Justice and Charity Organization remains banned.
Legalizing Al Wasat, it seems, would also lessen the increasing sentiment, both within Egypt and abroad, that the regime's ongoing repression of the Brotherhood is without justification. See, the recently announced alliance between the Muslim Brotherhood and long reticent secular elements of the Egyptian opposition. Also See this pointed question posed to Condi Rice at a press conference in Saudi Arabia on June 20:
When you were asked today at the Cairo address about the Muslim Brotherhood, your response was also that the United States will not engage with this group. Yet, the Muslim Brotherhood has, for a generation now, renounced terrorism and, in fact, last year issued an 11-page statement of principles in which it embraced parliamentary democracy, free elections and even universal suffrage. So how can you reconcile the refusal to engage at all with this group with the reasoning that you give for not engaging with, say, Hamas -- Hamas and Hezbollah?
Or this comment by Bush when asked about Hezbollah: "I like the idea of people running for office. It's a positive effect when you run for office."
Or this comment by Condi Rice: "I don't mean to underestimate the impact of radical Islamists having a say in the political process, but remember that the political process also has an effect on those who run in it."