Once you use the KYC process, it is never called decentralized, and we don't need to come up with any solution in this case. Why are people always afraid about bitcoin being used by criminals will make bitcoin bad or not good? Don't forget that before bitcoin was born, criminals used fiat money, gold... all other assets for their crimes. Why don't we find a solution to those things but blame bitcoin? If you want that to stop, you don't need to find a solution for bitcoin, instead, tell the government to find a way to kill the criminals because it's their responsibility.
Because the government wants to control everything, and the appeal to fight crime is just a convenient rationale for a campaign to increase control over anything. Demonize bitcoin by saying that it can be used by criminals and keep quiet about how a small percentage of criminal money chooses to use bitcoin over fiat currencies. And that's it, you can ban and restrict bitcoin, increasing control over everything.