I would go with the latter of your deductions that something is not right with Webflow's BG video uploader at the moment.
This file I uploaded a few days ago in a site, as with all my BG videos used in Webflow I use Adobe Stock so something is definitely up with the 'flow' Can you report it as a bug for me, please?
I very much appreciate your help as well and in the short term, I will use your workaround but would really like this fixed going forward.
I hear you loud and clear regards the file size too, thanks.