My thoughts are that Squarespace needs to take this seriously, or else people may jump ship to another web builder. Since we have absolutely no control over these things to optimize performance, this may push people to start looking elsewhere. Hopefully they are planning on addressing this in a new version of Squarespace, such as 7.2 or 8. It's frustrating because for all of the great features within Squarespace, the beautiful templates and user-friendliness of the platform, there are several areas Squarespace ignores or drops the ball. In the years I've been using the platform, as an example, I don't remember any updates to the Form block functionality, even after other platforms such as TypeForm revolutionized web forms. But Core Web Vitals is the type of "con" to weigh so heavily, with no solution for optimizing performance, it may push even the most ardent supporters of Squarespace to look at other platforms. The first competitor to address this could see a lot of new subscribers, so hopefully it's something Squarespace doesn't just ignore, as there is a huge opportunity for them to steal people away from their competitors, rather than lose them.
Although Google is giving us Core Web Vitals stats now, we theoretically have until May 2021 until this starts to affect rankings:
So for now I'd be surprised if you're being penalised for not hitting the CWV targets.
It might be worth considering whether there were any significant changes to your content, backlink profile etc. that could have resulted in a dip in rankings? It could also be that your competitors upped their SEO game recently too.
Another thing might be the fact that mobile-first indexing is due to be complete this month: https://www.seroundtable.com/google-mobile-first-indexing-deadline-march-2021-30974.html#:~:text=Google's revised mobile-first indexing,September 2020 to March 2021.
There have also been a few (unconfirmed) Google algorithm updates lately, which may also be affecting things.
Loads of variables to consider!
I do hope Squarespace give us some clarity on the Core Web Vitals issue before May though, as all Squarespace site owners stand to be negatively affected it. Good luck sorting the SEO issues out.