Ah, I've read it again and it seems to be something between the two.
Let's start how the system works at the moment: tweets that are "in reply to" another tweet are:
1) collapsed under the original by default, unless viewed by someone who follows both parties
2) shown below the original when expanded (a "thread", although not as sophisticated as USENET)
3) not shown to followers of the person who posted the tweet in their timelines (but are visible when you look at "tweets and replies"
- beyond that, if you have blocked someone, you don't see any of their tweets unless you choose to.
Bloomberg say "tweets from blocked users should no longer appear in the replies to a tweet", but of course blocked is a transitive verb: blocked by whom? If I've blocked people then when I'm looking at a thread they don't appear. At the moment, when others are looking at it, they do.
It sounds like they're suggesting a change to (2) so that if the originator of a thread has blocked a reply that's then invisible to other people viewing the thread (although not to people specifically viewing the blocked profile)? So if Alice has blocked Bob and Charlie views the thread, Charlie doesn't see the tweet unless they follow Bob?
Actually I think the downside of this is that it leaks information about Alice's blocklist! Currently it's not possible for third parties to tell if A has blocked B, and it's completely impossible for even B to tell if A has muted them.
Really the solution to harassment has to be a more functional reporting system; if Bob is actually systematically harassing Alice or posting hate speech, ban them from the platform entirely. Unfortunately there's a big problem with both false positives and false negatives.