Attached pictures demonstrate only a specific example ("Sappho", the name of a Greek poet), but it is not an edge case.
I was not able to test other common words considered "offensive" only by bigots because I changed my account name before the thought occurred to check on more than that one. Any real human looking through the list of "offensive" words should easily be able to identify and remove the homophobic (or otherwise hateful) nonsense put in as prohibited names.
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I would like to confirm that "Sappho" is currently considered an offensive string. "Sappho" is a greek name that refers to the legend of [Sappho of Lesbos|https://en.wikipedia.org/wiki/Sappho,] a figure identified as a lesbian poet, and an LGBTQ+ icon in modern times. It is also still a popular name for children and pets. Please consider removing this string from your banlist of approved strings for usernames.
I would like to add that the following strings were tried and are not considered offensive: Sapphic, Lesbos, Gay, Lesbian, Bisexual, Biromantic, Queer, Intersex, Asexual, Aromantic, Pansexual, Omnisexual, Polyamorous, Polyamory, Dyke, Agender, Demisexual, Cisgender, Nonbinary, Genderfluid, Transsexual, Transvestite
All these terms, with the possible exception of Transsexual, Transvestite, & Dyke, represent wholesome, valid, accurate, & child-appropriate identities and terminologies in LGBTQ+ culture. In accordance with Mojang & Microsoft's standards, I would like to ask that these words NOT be added to the banlist for approved username strings.
I would like to add the following hate speech and slurs are NOT currently considered offensive: Tranny, Transphobia, Transphobic, Transphobe, Straggot. Please consider adding these and others to your banlist, as they have no other use than to spread hate and toxicity, and are inherently harmful to members of the queer community. Some of these terms are identifiers for people who spread this hate; I do not believe that anyone should be able to identify themselves by these terms in Minecraft's community.
I, and many more members of the LGBTQ+ community, appreciate whatever discourse and discussion that this bug report and comment brings to your team. Please discuss and consider these and similar terms to add or remove to the banlist in the spirit of inclusion and diversity.