Nothing changed in that code recently (meaning for the last few major releases). Is the key actually configured to be grabbed in the prefs?

If so, then a g-s-d debug log would be appreciated.

Yes, it is configured in the keybinding capplet. I'll see about getting you a log later

It gets tripped up by this code:

       for (i = 0; i < HANDLED_KEYS; i++) {
                if (match_key (keys[i].key, xev)) {
                        switch (keys[i].key_type) {
                        case VOLUME_DOWN_KEY:
                        case VOLUME_UP_KEY:
                                /* auto-repeatable keys */
                                if (xev->type != KeyPress) {
                                        return GDK_FILTER_CONTINUE;
                                }
                                break;
                        default:
                                if (xev->type != KeyRelease) {
                                        return GDK_FILTER_CONTINUE;
                                }
                        }

We are ignoring the KeyPress, and then we never see a key release. 
This is likely fallout from csw even handling changes, I think.

Moving over to X for now

Moving back to X, after figuring out that this is just interference from different g-s-d plugins: the locate-pointer feature is blindly ungrabbing the keyboard, making us loose the key release events.

I think the only way to fix this is to move the locate-pointer feature out of the g-s-d process, or at least open a dedicated X connection for it.

I've moved the locate-pointer feature to a separate process, and media-keys can happily coexist with it now.