Yup, we'll probably be stuck with only 2-4 exchanges that are able to afford the regulatory burden and then the regulators will claim a victory for "helping the little guy."
Since the MtGox fiasco, I've never bothered trying to liquidate any more of my Bitcoin, and instead just occasionally use it to pay for things which accept direct Bitcoin payment.
I'd be a lot happier with a trustworthy, audited exchange.
If there are smaller exchanges that couldn't deal with the regulation, they probably also can't deal with security, keeping enough secure reserves to be able to pay out in the case of losses, auditing both their security and finances to ensure that they stay healthy and liquidate gracefully if they ever run into financial trouble.
Would all of this not also remove the ability to create those 'free exchanges'?
You will still have the ability to start an anonymous exchange, it just wont necessarily be legal in all countries.