Schwab offers that cashout feature to its accounts. Of course it can take action in case of fraud. There was no fraud here. There was no claim by Schwab of fraud.
If Schwab wants to limit the redemption feature, it should state the limits. Instead, it offers supposedly unlimited redemptions--and then closes accounts when customers do too large redemptions or redemptions too fast or redemptions that make the account unprofitable by Schwab's metrics. There is no provision in its contract for closing accounts that are unprofitable.
Oh, I know that Schwab somewhere has some boilerplate clause saying it can close accounts at any time for any reason or no reason. So, sure, I grant your point--doing so probably isn't illegal. But it sure is unfair. By doing so, it makes its claims that redemptions are unlimited a lie. That's false advertising and deception--and I don't have to be a lawyer to call that illegal.
Banks would not want to wait until fraud happens. They have the risk department to monitor potential and possible risk to happen. This is risk prevention. That is clearly a risky behavior.
Also, what normal people can accumulate millions of MRs and bring them to the bank to cash out??