This was so fun to read, and reminded me of Virtual Magic Kingdom (VMK), Disney’s other popular mmo at the time which was basically a Disney-fied Habbo Hotel [1].
It ran for about 3 years, but what I found interesting is the chat took the initial approach that the creators here dismissed: a whitelisted vocab list of safe words that you could type, and anything not on it would preclude the message from being sent.
There were definitely ways around it, but I also presume active monitoring of the slang, because eventually words like “dam” or phrases “what the shell” were banned too. Another thing that I recall is that case-sensitive spelling mattered, and there was no word bank, so in a way it enforced better spelling.