I think the concern was that some organizations were considering big low-altitude constellations. Once you go below 400km or so the drag increases quite a bit so the idea would be to use near-constant thrust similar to GOCE or SLATS.

And there was at least one vendor (Apollo Fusion) proposing a mercury thruster, although I think they have backed off on that. It would have had about 3x the impulse per volume and 2x the impulse per mass of xenon.

I think banning it now is wise, if any small operators had started using it it would have been hard to block it for a megaconstellation and it was very clear that anything release in VLEO would be coming back into the atmosphere. Right now there are no users so you aren't really penalizing anyone.