Is this an Xcode bug or somehow related to SPM?

This is a known issue and has been there from the start of Xcode integration. At least now Xcode doesn't crash anymore when you try to set it to Do Not Embed. Seriously, it used to do that.

A workaround I am using is to actually modify the xcodeproj file manually with a text-editor and remove the embed phase. That's what @Aciid recommended and it works.

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