>The Gox situation is unfortunate but I think it stems from the weaknesses and corruptability of centralized systems (in this case the Mt Gox Bitcoin Exchange) rather than flaws within Bitcoin.

Mt. Gox has been a poorly run company as long as it has existed; it didn't help that its custom bitcoin wallet implementation didn't take transaction malleability into account, even though it's been known about since 2011: https://bitcoinfoundation.org/blog/?p=418

Remember that Mt. Gox has about 20% (down from 80% back in the day) of Bitcoin's trade volume; the other major exchanges properly addressed malleability and didn't have the same problems.

assuming exchanging bitcoin with usd becomes illegal with big enough penalties for both sides, what value would a decentralized exchange have, except for illegal businesses?

A distributed exchange would have even more value if USD to BTC transactions were criminalized since there would be no central agency or person to strike at and shut the exchange down.

That's a fairly large assumption.

There is a lot of value in illegal businesses.

There are other currencies besides USD.