You don’t sound like an asshole at all. I realize people have different cultural norms, but in my family, grandparents can’t impose their will on how our kids are raised by us and that’s a strict matter of principle. They’re free to opine, they’re free to disagree, but the buck stops there. Ego power trips are frowned upon :)

I’d say your FIL is making a big mistake with such an ultimatum and should be encouraged to reconsider.

If it’s just about the jewelry issue, it might seem like avoiding confrontation might be worth it depending on the family situation, but if it’s about the expectation of control, as it seems it might be, then it’s worth setting the boundaries right then and there.

If FIL’s concern is for the well-being and safety of his grandchild, then ask him to explain how cutting off ties with the family isn’t detrimental to the child. Either he’ll come to his senses or might make it more clear that it’s less about the child and more about control and seniority between him and your family, at which point you can discuss that directly.