What if all the txs inside tornado cash were executed from KYC verified users? 

Private transactions but with KYC guarantee.

Would it solve the legal controversy behind Tornado cash?

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What benefit does that give when withdrawing? Or do you mean only KYC’d addresses can be depositors?

BDFL of Quilibrium, Eng @ Farcaster, ex-Coinbase, always opinionated, never hydrated

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The downside is it would only really enable anon withdrawals, with no way to bring the funds back from anon projects to KYC'd users short of relying on exchanges.

yes exactly. basically from the outside you cannot match a withdrawing with a deposit but you know for sure that all the depositors are KYC'd. 

Technically it is possible to implement. I'm just not sure if it would bring any benefit