DeFi protocols don't have KYC/AML systems. All they know about is your wallet, and from that wallet you can buy any token, borrow/lend, add liquidity to a market-maker pool, etc.
Defi protocols (at least on eth) are open source, so I can verify that they are doing what they are supposed to be doing and use those products. It would be far from ideal if some regulator decided that we can't use it because reasons x,y,z.
They don't stop innovative financial products from being built, they might stop them from being used for a particular purpose or even at all depending on how a particular development impinges on the list of items for which they regulate.
Amongst others, and depending on where you live your local regulators may add or subtract from this list considerably:
- fairness
- transparency
- stability
- anti money laundering
- anti terrorism financing
- tracking of ultimate beneficiary owners
The company I work for is owned by a huge French bank. Even though I am in tech I still need to do some mandatory (legally required) training, and one of the courses is Treating Customers Fairly.
The FCA say "Treating customers fairly is a requirement for all regulated firms, no matter their size or the nature of the activities they undertake".
Not for you to say. Society as whole decides which regulations are ideal.