It's as much fraud control as legislative compliance. From the perspective of consumers, considering a payment network as 'secure' requires fraud control - by ability to reverse fraudulent transactions and/or making it hard or expensive for fraudulent recipients to sustain operations.
In terms of fraud protection, the bitcoin network is only responsible for ensuring a double spend will not happen. I don't think it should be the 1st layer protocol's responsibility to also handle chargebacks and fraud claims... these issues need to be settled by intermediaries who are willing and able to deal with these customer issues.
KYC has zero to do with information security, and there's a legitimate argument that much of the regulation is anti-competitive regulatory capture with the primary goal of preventing new entrants in the market, with "security" being a secondary concern.
KYC isn't some conspiracy to keep Bitcoin firms out - it's a vital protection against money laundering, terrorist financing and checking for identity theft.
There are very real consequences in the real world when these checks get skipped or overlooked.
That's not true. KYC is for preventing money laundering and terrorist financing. You do NOT want the RCMP/FBI asking why you permitted terrorists to use your platform.