If the validation fails, the device will function mostly fine, although with Touch ID disabled. However, the device will be prevented from restoring or updating to a new version. Restoring from backup still works. I'm not too sure why restoring or updating is blocked, but my guess is that they want to prevent malicious software from being uploaded in this process.
From the Daily Dot article, if a user encounters this error, Apple's current resolution is a full device replacement. It may be overkill I don't think Apple expected many people to encounter this issue, so it seems reasonable why they chose this option.
This is a great security feature for users, and I'm really glad Apple engineers considered this situation. Unfortunately the media is blowing this and leaving crucial details about what's happening and the reasoning behind it.
Here is Apple's statement on the matter:
We take customer security very seriously and Error 53 is the result of security checks designed to protect our customers. iOS checks that the Touch ID sensor in your iPhone or iPad correctly matches your device's other components. If iOS finds a mismatch, the check fails and Touch ID, including for Apple Pay use, is disabled. This security measure is necessary to protect your device and prevent a fraudulent Touch ID sensor from being used. If a customer encounters Error 53, we encourage them to contact Apple Support.