Cloudbet hasn't mentioned anything about the usage of VPN in their terms, but it is better to avoid the usage of VPN in a licensed casino where some country restrictions are placed.
The problem arises when you use a VPN with an IP address from a restricted country. If that happens, the casino can ask why you are doing that and if you have something to hide. You might just be interested in protecting your own privacy (a legit reason), or you could be using multiple accounts or be located in a country banned from the casino. So you are using the VPN to get around that ban.
I don't find normal to hide behind the KYC requirements for something as small as 0.005BTC, especially since OP didn't play with the money and he was asking for the account get closed and refunded exactly because of KYC.
I don't like it either under normal circumstances. In this particular case, OP used a VPN from a restricted location. That can always be a reason for a second look by Cloudbet. He also said that "one" of his accounts got suspended. He didn't play with the money deposited in that suspended account, but what if he has multiple accounts and played with some of the other accounts?
This case has many whats and ifs. Both parties are like two opposing armies who have each other at gunpoint. But no one is shooting or negotiating the terms to lay down the weapons.