The reduced textures look so much better than Square's, it's at least enough to make a first release for the PC version, even if this is still a WIP.
When the Birth By Sleep modding scene was active, they had a similar problem, because they couldn't replace textures or models in the game with larger ones, only with ones of lesser or equal size. For in order to insert something larger, they'd need to know how the game's LBA works (I'm pretty sure LBA means folder structure and file-hash system). I don't know if the issue with the FFVIII dat repacker is anything like this, but it's a possibility.
Anyway, a LD release wouldn't look as pretty, but at least the FF8 community could mod the characters into more than bland models with vague features.