That is the catch-22: these sort of software projects cannot implement KYC/AML without destroying their decentralization. In effect, this case will determine whether KYC/AML laws can constitutionally prohibit someone from releasing certain kinds of code.

So, I guess this is about the code afterall, and it is a 1st Amendment issue. The Tornado Cash devs should mount a 1st Amendment defence. Perhaps the EFF could help.