How would they know a customer is domestic or foreign without some level of identification on everyone?

Bingo. They'll have to KYC everyone to avoid liability of missing a faking foreigner.

Then surely all the good actors have to do KYC, and all the bad actors can just pretend to be American entities.

I don't agree with this on principle, but even just from a practical perspective it seems like they are leaving the door completely open by doing that. What's even the point?

Yet.