And that is what should have been done. Steam and Itch should have blocked content that is illegal in Australia from being seen or sold in Australia.

The problem is that they didn't properly identify which content it is. "Does it involve a school girl outfit giving the indication of youth?" isn't something that they can filter on.

I could see something in the future where when someone puts up phonographic, they can't select all for the countries it can be sold in and instead need to specifically affirm that it is content that is legal in each of the checked countries.

However, Steam and Itch don't currently do that. So when pressure by Collective Shout was moved from Steam and Itch to Mastercard and Visa, Mastercard and Visa almost immediately put pressure on their downstream processors which in turn put pressure Steam and Itch. Since Steam and Itch couldn't filter the "just illegal in Australia stuff needs to be removed from being available in Australia" they appear to have removed all NSFW content until it could be reviewed.

I believe the key thing in this chain is that Visa and Mastercard are very risk adverse. While they do make a lot of money, on a per transaction basis any merchant that is a problem is a very small drop in the bucket compared to the legal consequences they could (and have) face.