This option is to prevent users from uploading specific file types when they sync their OneDrive files. It means that specific file types of files cannot be synced by OneDrive from SharePoint to local. Users still can upload specific file types of files into SharePoint.
There are currently no known types of files that cannot be uploaded into SharePoint. And there is no OOTB way to restrict specific file types in the SharePoint Online.
As a workaround, you could create a flow which auto-runs on each file uploaded and if it matches the given specific file types, auto-delete that document and send email to the author who uploaded it.
Reference flow: https://learn.microsoft.com/en-us/answers/questions/1061411/restrict-file-type(-exe-dll-files)-upload-to-docum
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