1. Reporting systems have not worked fine on countless numbers of games, as evidenced the massive controversies across almost every multiplayer genre from RTS to FPS in esports communities.
2. If people could distinguish the difference between hate speech and regular speech to any type of regular consensus we probably would have had world peace by now. This is an incredibly silly and indefensible argument.
3/4. Taleworlds may make official server rules according to Turkish standards, and if you think censorship is exclusive to China and the Asian region as a whole you are in for a very rude awakening. Also, once Taleworlds begins to censor any type of speech they become a "publisher" for any speech on their game instead of a "platform". When one becomes a "publisher" as opposed to a "platform" they are responsible for any speech on their platform according to US law. When this occurs Taleworlds will probably be responsible for ALL SPEECH including on the custom servers they allow to be hosted (probably, this becomes a pretty big legal grey area)... If you cannot see the repercussions that would occur from this type of occurrence then I do not know how to explain it in a way you can understand, to put it shortly, people make their own rules on custom servers, as they can range in anything from some form of angsty teenager medieval roleplay from a type of roast-like comedy club. If Taleworlds makes the decision to ban people from custom servers by allowing them to be reported and building this into the game, they WILL be killing their entire NA custom server community, probably also snuffing out the possibility for any mods similar to PW until this foolish policy would be changed.
Here is a solution: add a mute button where people can permanently choose not to participate in the speech of others.