It's MUCH more difficult for people who pirate games to play when they're connected to XBL. The #1 piece of advise when dealing with modded consoles is stay off of XBL whenever possible. Now, if you're getting into JTAG/RGH territory then connecting to XBL is flat-out impossible as far as I'm aware.
I think, though, it's arrogant for MS to think that the hackers aren't going to find a way around this like they do around everything else. Eventually they find a way around everything. It's only a matter of time.
There's a way to just flash your DVD drive right now and you can game on. You just have to re-flash each patch but no biggie. Buddy of mine plays on live all the time as well as others I know. JTAG is definitely bad though, you'll get the banhammer fast.