Mixers are seen to be used for illegal activities but the money in banks are not seeing to be used for money laundering and terrorism financing. Among the most fiats used for illegal activities, only little do the government and regulators know about. If there is no bitcoin or other coins and tokens, there will be illegal activities both online and offline and their scam fiat will be used for it.
They are against mixers because the mixers are known to increase privacy of the coins and they don't want the coins to have high privacy. They mostly favor the centralized exchanges because those exchanges share user details with them and that's will help them to speculate those users.
Fiat is more likely to be used for illegal activities than Bitcoin or any other crypto-currency because fiat is available in digital form as well and can be transferred to anyone without any question.
Fiat is also available in physical form and people tend to do more illegal activities with fiat in physical form which we call as cash, and fortunately Bitcoin isn't a physical thing and that's good for everyone.
It's a fact that completely halt down of Bitcoin and other crypto-currencies won't stop the people from doing their illegal activities. Those people will do their illegal activities even without Bitcoin and they have been doing such illegal activities for so many centuries when even Bitcoin wasn't there.
Mind you, it's not only Bitcoin or crypto currency or fiat that is used for doing illegal activities.
Other forms of exchange medium besides regular fiat or cryptocurrencies exist, it is just fortunate that BTC is still not widely understood and grasped by the major populace and it's only recently more persons are even summoning up the courage to buy crypto assets even as the price of BTC has hit nearly $40k as anticipated it would before December.
Mixers sure encourage anonymity for money launderers, but even those government agencies who are fighting to track and prevent criminals from taking advantage of the decentralized network somehow have investment in them as experiment to learn more about it.