Stealth Fighter bike internal gearbox question PICS

Hello all , I've noticed a dust cover for internal gears is wide open...
I already ordered a new cover but as you can see from the pictures, the swing arm nut which is welded on is touching the rotating gearbox's outer rim. Its like the nut is shaving the gearbox every rotation or at least it is very close. I couldn't put a piece of paper in between.. I may have to grind off the bottom part of the nut to have some clearance for gearbox before installing a new cover. So anyways the question is:

Question #1)The dust cover suppose to spin with the crank? The dust cover doesn't move at all on my bike. so I was wondering if its stuck or wedged like the whole gearbox shifted inwards towards the nut. it seems like it needs at least 5mm space shifted outwards between the nut and the gearbox for the clearance..

Question #2) Has anyone got rid of your 2 speed gearbox and swapped to normal 1 speed setup?
If yes which set fits perfectly? I know ill be losing the top speed pedaling but it would be much simpler with one less problem. it would be best if I can use the same outer stealth logo guard also..
Please help!
Thank you!

Detail shot of gearbox housing being too close like 0.01mm to the swingarm nut you cant fit a paper in between. Everything works perfectly including changing gears except for this mess. Thank you.