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As political theater goes, it's unique. And harrowing in its foolishness.
All of this because Twitter (a private company) had the gall to tag a misleading statement and threat of violence on their own platform.

With multiple racially related killings of black Americans in so many weeks, it is ridiculous that conservative lawmakers are standing by doing this instead of creating policing reforms and leading from the top with respect to racism. President Trump's statement on the murder of George Floyd was:

"I feel very, very badly. That's a very, very bad thing that I saw. I saw it last night and I didn't like it... what I saw was not good. Very bad"

It is equally ridiculous that conservative CEOs equivocate and wait to see which way the wind is blowing, for fear of being branded liberal or leftist. Twitter is making itself a real legal bellwether right now.
What really stands out to me is that what Twitter did to Trump's tweets wasn't even nearly censorship. If anything, it was exactly in line with the concept of free speech, and a model I think could be expanded upon. But in retaliation, Trump is imposing actual censorship, and claiming that it is the necessary fix for the so-called social network censorship.

It really makes my head spin trying to work out the logic and expected beneficial result.

You're assuming the free speech argument is in good faith. It isn't. Trump is upset because he expects everyone to utterly capitulate to him, and Twitter won't kiss the ring.
To me it is immediately fascinating. I am ignoring the political component to focus on something else.

Sanctions in US can be amazingly broad, if enforced. The only reasons most people are not aware of them even existing is the banks did a relatively decent job of ensuring general public is rarely inconvenienced by them. And here the hammer hits pretty hard too ( Twitter may actually end up bowing to that pressure ) . There is a reason Github blocked a lot of Iranian accounts[1].

[1]https://techcrunch.com/2019/07/29/github-ban-sanctioned-coun...