Cryptocurrency regulation remains a complex and evolving challenge as jurisdictions adopt divergent legal frameworks to balance financial innovation and risk mitigation, leading to inconsistencies in enforcement effectiveness and compliance mechanisms. This study examines the impact of these varying regulatory approaches, from strict prohibitions to legal integration, on illicit cryptocurrency transactions and financial stability. We employ a rigorous multi-method research approach, integrating comparative legal analysis of 47 national regulatory frameworks with a novel computational model. This model utilizes data from blockchain transaction tracking (1.2 million transactions), case studies, industry surveys, and expert interviews to empirically assess regulatory impact on compliance effectiveness. Findings show that China’s strict ban led to the highest reduction in illicit transactions (65.4%), while Switzerland’s flexible regulatory framework achieved a significant 56.8% decrease. The United States and European Union displayed similar effectiveness ($\sim 58\%$), though regulatory fragmentation remains a challenge. We conclude that a balanced regulatory approach, combining robust AML/KYC enforcement with adaptable legal structures, proves most effective in mitigating financial crime while fostering cryptocurrency market development.