Hi, someone's using my assets for an NFT game, which is strictly against the license terms I set out on the product pages and include with the downloads. The person responsible is pointing to a part of the itch TOS that they claim lets them ignore the license. 

This is the section they're referring to:

• To Users, a non-exclusive, perpetual license to access the content and to use, reproduce, distribute, display and perform such content as permitted through the functionality of the Service. Users shall retain a license to this content even after the content is removed from the Service.

Surely my license is what they should be following, or else everyone's content uploaded here would be open to all kinds of abuses of copyright?

This clause is referring to you (the publisher) licensing your content to itch.io. You’ve pasted it without the context of the paragraph it is located in, so it may be confusing by itself.

This clause is so that itchio can operate by distributing the intellectual property you upload onto our services. This is not a license between publishers on our platform and end-users. We do not provide a license for publishers to end-users with regards to redistribution (eg. You can not buy someone’s game on itch.io then try to resell it). All content is “all rights reserved” by default. A publisher can opt to provide a license for re-use if that’s appropriate for what they’re selling (eg. game assets).