What problem does this address?

The Categories List block (core/categories) can display a list of categories in various formats.

This block currently only supports built-in category taxonomy, so we cannot display a list of terms from custom taxonomies.

However, this block uses wp_dropdown_categories() function internally, and the wp_dropdown_categories() function supports taxonomy parameter, so we should be able to support custom taxonomies.

What is your proposed solution?

The approach I propose is to automatically register registered public taxonomies as variations, similar to the implementation in the Post Terms block.