First, anyone with the tiniest modicum of common sense can tell that these pretend Flash sites are absolutely not in the slightest way legitimate content.
Second, providing services in any way, shape or form is, in fact, hosting. Providing DNS? It's hosting. Providing a cached version of the site? Hosting.
So if they want to be in the business of pretending to be not-hosting, then they have to stop providing services that without which web sites would cease to function. Are they now going to claim that they're not providing meaningful services to domains registered through them, and therefore they should not be responsible for people who are doing illegal things?
Probably.
Turning off your domain name is a different story. You are sunk until you can regain control of it.
It seems reasonable to put a lid on that.
I do see the moral dilemma though.
Building a keyboard is one thing. Providing ongoing services for illegal activity is something entirely different. You're being disingenuous by trying to conflate those two things.
If someone hosts illegal / abusive content, then anyone that person pays to facilitate that content should be obligated to do something about that content when that party is made aware.
Cheap trick, don't use it.