Distribution is not exactly my point - the key element is that the bad guys win both ways - they get to use strong cryptography (because they are the bad guys who don't follow the law) AND they get to attack weak legal crypto to defraud legitimate citizens.

I can't see how this could possibly work. Strong encryption methods are public knowledge. There's nothing to prevent independent implementations of strong encryption. The only people affected will be those that use off the shelf software - who'd be using weaker 'legal' encryption. That'd be the majority of users - who would then be more at risk of malicious software doing bad things. The only winners here are the bad guys.