Regulations are to control money flow but in Bitcoin's case it's very different. Regulations let exchanges to ask their users so submit KYC every time they deposit money but there have been many cases when exchanges asked users to submit KYC for no legit reason and they didn't even release user's funds when they submitted every document that exchange demanded. If there was more care for users and exchanges didn't have all the rights and the ability to run business from offshores, then that would be good.
however regulations actually allow services to police the customers to then allow the service to evade themselves being liable for the illicit acts of their customers
You described it well!