As a private business Apple should be able to set whatever rules they see fit for their platform. However, they should, and in some respects, legally need to be consistent in their application of these rules. And this decisions is not consistent at all and their reasoning would apply to a large number of apps and services: Safari, Air Drop, Mail, FaceTime, Messages. Pedophiles will use the Camera app to make child pornography, so Apple needs to either moderate content or ban the Camera app.
How often was the phone app on an iPhone "used to plan, coordinate, and facilitate the illegal activities"? And it certainly "also appears to continue to be used to plan and facilitate yet further illegal and dangerous activities." "Our investigation has found that Apple is not effectively moderating and removing content that encourages illegal activity and poses a serious risk to the health and safety of users in direct violation of your own terms of service". Apple better submit an update to the iPhone app with a "moderation improvement plan". Phrases in quotes are directly from Apple.