Anyone with a modified console needs a new one to connect to the Live service. Modifying a console can include adding new chips to it or using software hacks. Microsoft isn't commenting on how their detection works.
Rumour has it that there will soon be a new mod to get around the newest MS roadblock. Some users defend using modified consoles by saying discs are too fragile and you should be allowed a backup. All Live accounts will still be fine to use.