It seems to me that fully decentralised exchanges, could have a tough time regulatory wise,
I don't see how. If an exchange were truly decentralized, there would be no handle which the state could grab in order to inject its desired regulation.
Sure, they could pass laws. But that would be tantamount to prohibiting person to person sales of anything and everything (i.e., used cars, beanie babies, garage sales, ...). Something that today exists -- at least in the USA -- only for very limited classes of goods such as firearms.
Well, I have a few thoughts, if you are talking about an exchange that is going to cater for a few small fry retail traders here and there, a few honest folk with legitimate privacy concerns, and then the other main fringe groups i.e a few drug dealers and black sites, the odd tax evader, money launderer, or any other anonymous trader whose sole purpose of using a DEX is to evade KYC, AML, and proceeds of crime and terrorism laws, then yeah sure fully decentralised exchanges can operate and function perfectly well and I fully anticipate there to be these exchanges continuing to pop up and provide exactly that service into that market and that's all good and well ..... or not.
However, I mentioned in my OP that I was talking about an exchange that could do HUGE numbers AND integrate with the existing financial system AND the new one, I didn't say to bypass the larger financial system (DEX) I said to FULLY INTEGRATE and do HUGE numbers... for a DEX to do so then it would need to implement KYC and AML and all the rest of it from a compliance point of view... otherwise it is destined to become a cryptocurrency to cryptocurrency only exchange, without ever any hope of gaining access to a fiat on and off ramp, therefore making it outside of the system, and a blockbox with limited potential for growth ... (not saying thats a bad thing, and not saying there wont be pretty big dexs in the future)
Ultimately, a DEX can still be shut down or the creators or devs be held accountable, so until a true open source distributed autonomous set up is made, and put out into the wild, with the ability to update its code and replicate itself and continually respawn on a new address or live on a dark sites or on clients only, then a dex isnt really a dex.
At the end of the day, its the centralised and undistributed custody that's our problem right? so that's the sticky bit that needs to be solved, so solve that bit, utilise a blockchain and have a decentralised custody solution that handles deposits and withdrawals and have that linked to a centralised exchange with a super fast matching and trade engine that then clears the trades and communicates with a decentralised custody solution. The custody aspect could even in fact be shared by other exchanges too.
This way we get the benefit of the DEX that we WANT and NEED, and then the rest of it which in fact a blockchain would make more clunky and slower and less efficient, we already have perfectly good technology to deal wth all other technical aspects of an exchange, and why would we want all of that crap immortalised in a bloated blockchain, for the sake of it?
However we also get the added bonus of integrating with the real world, banks, and financial institutions and businesses and funds and market makers and liquidity providers etc etc.... which is where the HUGE money aspect of it comes in that I was talking about , and integrating with RL business now, not at some airy fairy wouldn't it be nice time in the future.
Fact is it will be difficult for any entity that cares about or has a responsibility to regulators, or clients or shareholders to be able to interact in any meaningful way with a pure 100% DEX even if such a thing were to exist. Unless the DEX is fully compliant, and then you have lost the use case for DEXs , and actually you can build a better exchange that is not fully decentralised.
(TL/DR) Therefore in conclusion dexs have a smaller potential (at this moment in time) to integrate and tap into the HUGE money flows that are incoming to the cryptocurrency space... and without the ability to remain anonymous they lose their edge, in terms of tech, the best solution is decentralise the parts of an exchange that need it (custody aspects) and the rest of it be centralised as this is faster, easier, more secure, easier to integrate with the rest of the world, have fiat on/off ramps, etc etc etc - because regulations
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