Laws are almost as arbitrary as moderation guidelines. And while they are democratically legitimised in principle, they are rather static by nature and absurdly unchanging due to current political dysfunction. The chaotic system of the current "court of public opinion" probably leads to an outcome that is far closer to the actual desires of a plurality of people.
The law also tend to divide content into sharp legal/illegal categories, whereas the more chaotic practice of differing moderation policies allows for a gray area. And that area is where some meaningful discourse could possibly happen.
Logically, moderational discretion happens only within the space of legal content. It is therefore, indeed, smaller than the maximum allowed by law.
But that is no different from any other group we participate in offline. At work, Thanksgiving with the family, or in some random store, we do not insist on being allowed to use the full spectrum of what's legal. If someone starts screaming obscenities in the theatre row behind you, they'll hopefully be escorted out.