Please validate this information with hard facts
"No, its obviously uses MSN messenger as its platform"
It does not use MSN Messenger as its platform. Thats suggesting that its a plugin or uses an MSN SDK released by MS which is doesn't. It is a standalone application, that from what I can see uses winpcap as the only additional SDK (used for the packet capturing / encapsulation). It uses the same _idea_ as MSN messenger but it in no way uses it as its platform, it is just similar in appearance.
Could YerDaddy please post information about the development of the application (if its not giving too much away) just to verify that this is not based on some form of MSN SDK.
I suggest you install it and take a look for yourself, its not MSN in any way shape or form. Also if you are worried about your xbox being seen by others.. you don't even need to plug it in to test the app and see how it operates.
As for who hosts it, id say the database of users is probably kept on a mysql webserver of xboxlink.co.uk and is accessed through http transactions from the messenger using php scripts to access the information (no direct database connection). The messenger is tied very close to the web services, although im sure it switches to a direct tcp connection when chatting with someone. All game information is exchanged encapsulated in UDP packets.
PLEASE NOTE: I am suggesting that this is how it _may_ work and its from my experience with the application, not from seeing a few screenshots and saying "this is obviously based on messenger". This is an interim answer until YerDaddy posts 100% fact.
On top of your paranoia, last time I checked enapsulating network traffic over IP was not against the law. Infact if you look back through your history books WON did this for Doom and created an entire application around the idea.
At what point using the application is it trading illegal or copyrighted content which you seem to compare it to?