yes, you're absolutely right!
but the problem is, we don't have enough people that know (enough) about encryption, and networking (and programming, etc).
it IS very possible to emulate a live server (a hell lot of work, but possible)
but we just need more people.
btw, if you read the XDK documentation, you find out a LOT about live!
it uses DES (and 3DES for login) as encryption, and (for live) XK(Xbox Kerberos).
(system link uses diffie-hellman)...