I've just read an update on this, and they are, in fact, proposing having the gender flag on passports as "optional" rather than insisting on M-F-X. This is a very sensible idea. For people who want or need documentary support for their gender (including some trans people travelling abroad) there is the option to show it, and for people who don't want it on there, there is also that option.
Let's hope this actually happens, without getting watered down to something more pointless.