NewPipe works by fetching the required data from the official API (e.g. PeerTube) of the service you’re using. If the official API is restricted (e.g. YouTube) for our purposes, or is proprietary, the app parses the website or uses an internal API instead. This means that you don’t need an account on any service to use NewPipe.
So NewPipe doesn’t use yt API and it never accepted its terms, so NewPipe is safe (from my understanding)
I believe it it were illegal, it wouldn’t be so popular and people would have to hide it more. Illegality would bring more barriers to use it and since people are lazy less poeple would be interested.
But personally I think the solution is for people to stop being so sensitive to nudity. If someone would post naked pictures of me I wouldn’t be happy, but either devastated. And if it were AI generated I could simply avoid it by saying that ain’t me.