https://github.com/home-assistant/plugin-dns/issues/22 seems to cover the arguments and I see it ends with the software maintainers writing "We are open to contributions that adds features to improve this".

The discussion has since been carried to reddit and now HN.

GDPR violation might be happening here. I think it will be hard to convince a local regulartory body to act. The software itself isn't collecting/storing and I think one needs to argue first if Cloudflare's data protection is not suffienct enough. As I understand doing a quick read "Your DNS Resolver Information is anonymized at our [Cloudflare's] edge data centers.". If it's always edge data centers it's not clear if data is leaving the EU, etc.