This is not a technology problem, this is a legal problem. To change it, we need to change the laws, not the technology. Sure, they can use crypto now to skirt those regulations, but clearly crypto payments will be regulated exactly as fiat payments very soon. Then, you're back at square one but have burned the planet and enabled ransomware and scammers along the way.
I understand that with decent regulation illegal goods can't just fly under the radar anymore, I'm just saying that in the current ecosystem there is a use case for this fake money where real money simply cannot be exchanged reliably. In an ideal world we wouldn't need fake underground value transfers but the world is far from ideal.
How is it not a legal problem, when it's apparently possible to solve it entirely by having a different legislation?
This is also where I see the cryptocurrencies going: regulatory bodies putting more and more resources and restrictions to align them with other monetary systems, to a point where them being based on blockchain will just be an implementation detail.
Private payments can easily solved without a blockchain. For private payments you don't need a completely trust-less system. Taler[1] solves this quite elegantly: they provide completetly anonymous payments for the customer but still require the merchant to be 'on-record' to make money laundering harder/impossible. For that they rely on a regulated and trusted party as you would with a regular payment provider or bank. No proof of work needed, no value volatility, just an online representation of cash with accountability for the merchant built-in.
Of course, this also means that your second point is still valid for Taler: The involved trusted parties could collectively decide that they want to discriminate against certain merchants, in the same way the current payment providers did.
Payment providers also discriminate against certain aspects of society, such as sex work. The fees an adult content provider needs to pay are astronomical if they can even get a contract with any payment provider at all. Furthermore, the USA has a severe problem that stems from companies like Equifax deciding what you can and cannot afford with no way to protest their decisions.
I suppose the only useful use case for blockchain is close to money laundering, but there are definitely legitimate use cases for it. It's the closest thing we have to cash in the online world.
While I'm all for regulating shitcoins and the gambling ("speculation") that accompanies them, it's an alternative that will need to exist as long as the normal payment system continues to force their own arbitrary, corrupt ideologies on everyone.