I hope you're right, and I'd agree that would qualify as a "hardware disconnect". It's a little confusing given the mention of the T2 chip; they do differentiate some specific models which are "hardware alone", and at least imply that the T2 chip does not flip the off-switch on those. I'll have to go dig into iFixit's tear-downs to see if they found anything. For the 2020 iPad, they specifically mention "MFI compliant cases", so we can be fairly certain that one's done with magnets.
It's the same sensor that's used to detect if the lid is open in general. Triggering it will prevent the display from turning on, and will make the computer go to sleep if it isn't running in "clamshell mode" (running on AC power with an external display attached).
Why is that? Any case, including not "MFI", could put a magnet at the location if that was the case. Doesn't "MFI" mean that they make it only work with cases that are identified via the software to have paid their certification to Apple?
I don't see why you assert that is has to be electro-magnetic based, as long as the gating is down by a 'dumb' fixed transistor rather than a programmable chip, then it's a hardware disconnect.