‘Still retaining functionality’ would require assuming permissive access to images as the default, which is what has got a Google into this mess in the first place. The whole point of this is that, for sites and rights holders that don’t explicitly allow access, Google cannot assume they grant it. They have to assume the most restrictive grant of rights, and adoption of metadata to indicate more permissive access is so poorly adopted it’s just irrelevant in practice.

Try the advanced image search options, just like many other modern image search engines, as a user, you can filter for permissive licenses. I'm not sure how they gather that metadata, but the results I'm getting, it's not poorly adopted at all.

So they could in fact retain the functionality for images with the right license.