Not really a surprise. The TOS for the extension marketplace has been clear that it's only to be used for VS Code, that's why VSCodium doesn't use it. Cursor devs undoubtedly knew better, but kept breaking TOS and licenses, MS just chose a strategic moment to enforce the rules already in place.
Cursor not being an extension from the start seemed odd to me, and they wouldn't be in this rough spot if they had done that.
While also the TOS of their extensions like C/C++ also prohibit their usage with forks. It is not about using marketplace endpoint, it is about using the extension itself even if the user installed the vsix manually. At least this is what this submission about.