This isn't the only solution to this problem. We shouldn't be jumping to this end immediately.
In my 25+ years if gaming, I have only seen it (mostly) solved in smaller/niche games where the community is small and healthy already (usually targeting “older” gamers), and when server admins are actively doing “their job”.
… or, with a similar system as is being utilized (Battlebits Remastered)
But I am telling you that monitoring and surveillance is not the first, second, or even tenth potential choice available to start tackling this problem.
My best understanding is; this is human nature, and cannot be solved, only mitigated. Smaller scale and niche games do this with human intervention (server admins) and if the community is small enough, shame can work.
At a certain scale, it breaks apart. Toxicity unpunished leads us to the “toxic gaming culture” we have today.
Like you, I am horrified of the surveillance society being built around us. I genuinely wish there were a better way. Your OP gave me the impression that maybe you had an idea for solution, hence my follow-ups.
Barring that, in the context of gaming — where kids and teens spent a significant part of their lives these days — I’d rather see a non-optimal, opt-out solution that removes the toxic elements, so we don’t grow yet another generation of casual racists and sexists.